Diebold Nixdorf Incorporated Common stock

Good morning, good afternoon all. My name is Adam and I will be your conference operator today. At this time, I would like to welcome everyone to the Deep World Next Talk third quarter 2021 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad. To withdraw, please press star two. Ms. Machuska, you may begin your conference.

Great. Thank you, Adam. Hello, everyone, and welcome to our third quarter 2021 earnings call. I'm Christine Marchesco, Vice President of Investor Relations for Diebold Nixor. And on the call with me today is President and Chief Executive Officer and Jeff Rutherford, Chief Financial Officer. To accompany our prepared remarks, we have posted our press release and earnings presentation to the Investor Relations section of our corporate website. Later this morning, we will post a replay of this webcast. Before we begin, I will remind all participants that during this call, you will hear forward-looking statements, including the guidance we will be providing for full year 2021. These statements reflect the expectations and beliefs of our management team as of the time of this call, but they are subject to risks and uncertainties that could cause actual results to differ materially from these statements. Additional information on these factors can be found in the company's periodic and annual filings with the FCC. Participants should be mindful that subsequent events may render this information to be out of date. We will also be discussing certain non-GAAP financial measures on today's call. A reconciliation between GAAP and non-GAAP measures can be found in the supplemental schedules of our earnings presentation slides, as well as in the tables of today's earnings release. And now I'll hand the call over to Gerard.

Thank you, Christine, and welcome to the team. Good morning, everyone. Thank you for joining our third quarter 2021 earnings call. I am pleased to say that customer demand for our solutions remained robust in Q3, despite supply chain constraints, logistics, and inflationary headwinds. I'm encouraged by the support of our customers and the innovative spirit of our workforce as we navigate ongoing supply chain challenges. Most of all, I'm encouraged by how our company is positioned to offer solutions and growth opportunities for our customers who are addressing rapidly changing consumer demands and difficult competitive landscapes. More than ever, consumers are not only embracing but expecting self-service solutions, whether it's at a bank, grocery store, or retailer. And more than ever, we are committed to helping our customers deliver more digital, flexible, and effective consumer journeys. In banking, consumer preferences are shifting away from the traditional teller window towards ATMs with more omnichannel functionality. At the same time, banks are looking for more self-service options to meet consumer needs with fewer tellers and fewer branch locations. This ongoing shift towards reducing the branch footprint and optimizing their real estate is crucial, and our ATMs are helping our banking customers to continue providing the same level of customer service. including customer outreach through marketing, while at the same time making better use of their available space. In retail, the pandemic resulted in more focused shopping experiences and growth in e-commerce, while at the same time, as cited by recent studies, 75% or more of consumer purchases globally are still happening in the physical store. It's important to understand, however, that while consumers prefer physical shopping, they also prefer lower-touch options during the purchase process. Our self-checkout offerings create a safe, convenient, and lower-friction shopping experience, providing theft protection, produce scanning, and market-leading camera technology to assist in age-restricted purchases. In short, what we're seeing is that consumers and retailers alike are embracing self-checkout. according to rbr the self-checkout install base will reach nearly 1.6 million terminals by 2026 almost tripling the global install base as on the end of 2020 indeed we believe automation provides much needed cost efficiencies for the retailer and a more efficient shopping experience for the consumer at the last mile of the store we believe the accelerating demand for self-service and automation signals a structural change to the way business will be done going forward and gives us a long runway of opportunity. I'd like to now provide remarks around our third quarter performance. Although demand remains strong in Q3, fulfillment of product orders shifted from Q3 to Q4 and from Q4 to 2022 as we continue to work through supply constraints and logistics challenges. Our order entry continues to exceed our original models, and our backlog increased approximately 19% versus the same period last year. Revenue for the quarter was down 4% as a portion of revenue has shifted out to future quarters due to the temporary supply constraints and logistics challenges we're currently facing. Our retail segment continues to perform well with growth in revenue of 10% as compared to third quarter 2020. Moving on to our business highlights, starting with Bank AIM. Momentum for our BN series ATMs continued in Q3 as a growing percentage of our total orders were for these next generation devices. And we see this trend continuing based on our orders for Q4 and early 2022. Additionally, the DN Series is now live and fully certified in over 60 countries globally, contributing to our market expansion in this space. I'd like to highlight some notable DN Series wins for the third quarter. We secured a contract for over $12 million with Banco Azteca in Mexico, including our DN Series cash recyclers, a new service contract, and software licenses. expanding across 500 branches. With this win, over 75% of Banco Azteca's fleet is now composed of DN devices. In Greece, we displaced a competitor and doubled our presence at Piraeus Bank. Approximately 200 branches and 40 off-premise locations will be equipped with our modern technology, including our DN series cash recyclers. The introduction of cash recycling is a significant change for this market, which had not previously had recycling capabilities by branch ATMs. We earned this win based on the higher mechanical reliability of our hardware, the higher capacity of our ATMs, and our greener, more environmentally sustainable profile. This win also includes a five-year maintenance coverage contract. And lastly, we built a competitive win with Standard Chartered Bank Malaysia upgrading all of their legacy devices to our DN series, increasing their fleet to consist of 100% DN series ATMs. We continue to see growth in demand for our AllConnect data engine with a number of connected ATMs increasing approximately 23% sequentially in Q3 2021. This is a significant milestone for us as more than 100,000 banking self-service devices are connected to this solution, which leverages real-time Internet of Things connections from our deployed devices and has consistently reduced customer downtime by as much as 50%, resulting in greater than 99% uptime. This drives multiple business benefits, such as higher end-user satisfaction, lower total cost of ownership, and increased operational efficiencies. I'm proud to share that we also were awarded Technology and Service Industry Association's 2021 Star Award for Best Practices in the Delivery of Field Services for our AllConnect data engine. We believe that demand for our differentiated market reading solutions that meet the needs of today's consumer will remain solid. This is especially evident in our robust pipeline, our healthy backlog, the main successes of our sales team in Q3, and the growth in our AllConnect data engine. Moving on to our retail business. We continue to see strong demand for our self-checkout products as retailers look to default next door. for comprehensive solutions that provide favorable consumer experiences and cost efficiency as they face staffing challenges and tough performance comparisons. We secured a competitive takeaway with an Italian retailer who replaced a competitor's advices with our DN series self-checkout solutions, along with our full self-checkout suite and other offerings from our retailer solution portfolio. we also expanded an important customer relationship with a large multi-country retailer in europe which included a competitive takeaway with scope devices this wind secures a strategic rollout of self-checkout devices beginning with two stores before expanding to 300 stores in 13 countries and an eventual full row rollout of 2 500 stores in 15 countries over the span of two to three years additionally this retailer signed a three-year services and maintenance contract we're well positioned for growth in retail services in the third quarter we want a contract renewal with a large global petal convenience store for the malaysia sites this was a significant renewal totaling over 16 million dollars for our systems and services including point of sale, help desk support, software, and other solutions. Overall, we feel confident in the strength of our retail business as our large global retail customers have reconfirmed their commitment to their store formats. While some retailers are considering fewer locations, they all remain focused on increasing the level of automation and technology investment per store. Additionally, in 2021, we're seeing growth in the absolute number of our self-checkout devices on a year-on-a-year basis, and we anticipate that our retail business will end the year above our pre-pandemic levels witnessed in 2019. Our core portfolio continues to benefit from the industry trends I discussed earlier around consumers' desire for more self-service options in banking and retail resulting in our customers' needs for more automation and greater cost efficiencies. It also lends itself to layering on additional offerings with large addressable markets, such as managed services, software, our dynamic payments platform, and other adjacencies that provide a trajectory for sustainable growth for the future of our business. We are particularly proud of the progress we have made with our retail and banking customers. We recently received the results from our annual customer satisfaction survey, and I am delighted that our customers are awarding us some of the highest levels of Net Promoter Scores we've seen, reinforcing what has now been a multi-year trend of improving results. Turning now to our growth initiatives. In managed services, we continue to move forward on securing more new business and remain in productive discussions with multiple financial institutions. We also see a promising pipeline for managed services in 2022. In Q3 in North America, we were awarded a large managed services agreement with a Tier 1 financial institution, including a large order of DN series ATMs. We continue to scale our debit and credit platforms with our dynamic payments offering at a top 10 global bank across more than 17,000 ATMs. As we continue to implement and scale our existing customers on our payments platform, our go-to-market team is growing a strong, qualified sales pipeline for 2022. Additionally, I'm pleased to announce our entry into a new horizontal electric vehicle charging stations this is a natural fit for our services business with our global network of 8 000 experienced service technicians and the similarities between atms and ev charging stations there are an estimated one and a half to two million public charging stations needed in the united states and europe by 2025 And this is an approximate increase of over 200% from roughly 500,000 charging stations today, split between about 300,000 in Europe and 200,000 in the U.S. We are currently in discussions with the top EV charging station hardware companies and have already secured contracts for our solution with some of the key players in this space. This is a promising and rapidly growing market. and we look forward to sharing more on this new offering in future quarters. Now turning to another important area of our business, sustainability. Not only do we focus on attaining sustainable growth for our shareholders, we also focus on environmental sustainability of our facilities, practices, and processes. I'm proud to say that we were recently awarded Germany's Best Energy Scouts 2021, a German government initiative that encourages energy-saving opportunities. We installed a green roof constructed of regional grasses to improve energy savings at our Paderborn facility. Additionally, we included a solar panel system and added 36 charging ports for cars and e-bikes in parking areas. We consistently are working on initiatives that drive sustainable programs with the goal to have no adverse effects on public health or the communities where we operate. We look to upgrade our other facilities around the globe in sustainable green ways as part of our focus on our environmental, social, and governance commitments. Looking ahead to Q4, we remain confident in our market leadership and ability to close out the year strong on a year-over-year basis. As of today, our orders are 100% confirmed with customers committed to our products. We see negligible risk of lost sales with strong strength in demand for America's banking and retail business segments. Additionally, in Q4, for our banking segment, we are starting the quarter with a backlog of approximately $205 million higher than at the beginning of Q4 2020. Specifically for America's banking, we're seeing over a 50% increase in our backlog as we enter the fourth quarter 2021 as compared to the same time last year. We're working with all of our customers on a continuous basis to fulfill the high level of orders we're receiving on a timely basis. As part of this focus, we've taken steps to increase our stock of key components as well as pre-book vessels further in advance to accelerate revenue conversion from our backlog. Furthermore, on a year-over-year basis, our outlook remains robust as our confirmed orders for the first half of 2022 are above the levels for the first half of 2021 as of this same time last year. This forward-looking indicator affirms the demand we continue to receive from our growing customer base. While we continue to see significant opportunity in the market and in our ability to meet our customers' needs, we, like many global companies, are navigating inflationary pressures and supply chain logistics that continue to impact our business. As I discussed earlier, delays in delivering or in delivery of our products will cause some revenue to shift to future quarters thus we are revising our guidance for year end 2021 however i believe it is important to note that we see q3 broadly as a peak inflection point in supply chain disruptions our visibility into semiconductor chip markets has increased meaningfully providing us with a line of sight to many of the chip providers through the first half of 2022. Additionally, we have deployed other strategic tactics internally, such as shifting our production capacity, which will ease some of the dependencies we've previously had on logistics and shipping. I'm extremely proud of the work of our DN team to mitigate these issues. Before I turn the call over to Jeff to discuss the financial results around our performance and outlook, let me close by reinforcing my optimism around the robust demand we're experiencing for our solutions for the remainder of 2021 and the upcoming year while supply chain improvements take hold. We are squarely positioned to meet the needs of our customers and expand our base of banks and retailers as consumers continue to demand more access, more convenience, and more innovation through automation and self-service. Although supply chain challenges have led to a temporary pullback in performance, it's important to understand that we are doing everything possible to mitigate these challenges, and delivering for our customers remains a top priority. Thank you. And at this time, I'd like to turn it over to Jeff. Thank you, Gerard, and good morning, everyone. My prepared remarks will include references to certain non-GAAP metrics, such as gross profit, gross margin, and the justice of the debt. Total revenue for the third quarter of 2021 was $958 million, a decrease over third quarter 2020 of approximately 4%, as reported, and a decrease of 5%, excluding foreign currency benefit of $16 million, and an $8 million impact from divested businesses. Adjusted for foreign currency and divestitures, product revenue decreased 3%, services revenue decreased 6%, and software revenue decreased 3% compared to Q3 2020. During the quarter, approximately $90 million of revenue was delayed due to extended transport times and inbound technology component delays. This primarily impacted the U.S., Latin America, and certain APAC countries and reduced total revenue by approximately 900 basis points. On a sequential basis, total revenue increased approximately 2%. Non-GAAP gross profit for the third quarter was $263 million for a decrease of approximately $22 million versus the prior year period on lower gross margins of 27.4%. The deferral of revenue and non-billable inflation resulted in a reduction to third quarter gross margin of approximately $33 million. Service margins increased 40 basis points versus the prior year period, and we're in line with our expectations. Product gross margins were down approximately 180 basis points versus the prior year period, primarily due to $10 million as a result of inflationary pressures in supply chain logistics, partially offset by a favorable DM series versus legacy ATM and geographic costs from our mix. Software gross margins declined 500 basis points versus the prior year period. Excluding the impact of a prior year cost benefit of approximately $5 million that did not recur in 2021, software gross margins were down approximately 40 basis points due to unfavorable mix. Operating expense of $182 million for the quarter decreased approximately $14 million versus the prior year period and decreased $17 million sequentially. When compared with the prior year, key variances include reductions in variable compensation, partially offset by unfavorable effects, and investment and growth projects. When compared with our second quarter, operating expense decreased due to reductions in variable compensation. The net result was operating profit of $81 million and operating margin of 8.5% in the quarter. The same trends drove adjusted EBITDA of $103 million and adjusted EBITDA margin of 10.7% in the quarter. I will discuss our segment highlights. Eurasian banking revenue of $323 million decreased approximately 11% versus the prior period and 12% after adjusting to foreign currency benefits of $7 million and a $3 million impact from the festers. Lower revenue was primarily due to supply chain delays impacting timing of deliveries and installations of products with collateral impact to services and software revenue plus the termination of expired service contracts. As expected, following a strong order entry in Q2 and several non-recurring large orders in the prior year, segment product order growth decreased 35%. We are forecasting a strong order entry in Q4. Gross profit for the segment decreased to $98 million year-over-year and included favorable foreign currency benefits of $4 million and an unbearable divestiture impact of $1 million. Gross margin at 30.3% was down 50 basis points. The decrease was primarily due to inflationary pressures offset by our focus on cost management. America's banking revenue decreased $22 million, or approximately 6% to $347 million, primarily due to declines in software and services revenue due to the negative collateral impacts of unfavorable geographic mix of installations from North America to Latin America. America's banking continues to be disproportionately affected due to the location of our customers in our primary manufacturing facilities for DM series ATMs, which are located in Europe and Asia. However, we are working on mitigation strategies in our America's manufacturing operations to assist in manufacturing certain of the higher value cash recycling DM series ATMs. Backlog in America's banking grew 54% year-over-year as prior daughter growth saw another solid quarter and increased approximately 23% versus the prior year, led by market share gains via series APMs. Second, gross profit of $86 million was down $17 million due to lower revenues. Gross margin percentage declined due to impact of supply chain inflation and unfavorable geographic mix. as I previously noted. Our retail segment had another quarter of strong performance. Retail revenue of $288 million increased 10% year-over-year, as reported, and 8% after adjusting for $6 million currency benefit and an investor headline of $2 million. Demand for our point-of-sale and self-checkout continued to increase versus the prior year period, with product order growth of approximately 23%. Retail gross profit increased 15% to $79 million, driven by revenue growth. Gross margin expanded by 110 basis points, directly attributable to growth in self-checkout revenue. As we continue to look to optimize our portfolio and focus our core business segments, We made the decision to enter a share purchase agreement to sell our reverse vending business with an approximate deal close date targeted for year end. This business is less than 2% of our total annual retail revenues and no longer was a strategic fit for the segment going forward. Turning to our capital structure metrics. Unlevered free cash flow used in the quarter increased $121 million versus the prior year, primarily due to increases in inventory, which are necessary to support both Q4 production and delivery targets, as well as increases in critical components for 2022 orders. Company ended the quarter with $325 million of total liquidity. including $230 million of cash and short-term investments. The company's cash balance as of September 30th reflects increased inventory levels and interest payments made during the quarter. At the end of the quarter, the company's leverage ratio was 5.4 times, which continues to be below our covenant maximum of 6 times. In our presentation, we updated our gross debt levels as of September 30th. Turning to our updated outlook for 2021. We are revising our revenue range to 3.9 to 3.95 billion, which reflects approximately 120 million in revenue deferral from 2021 to 2022 due to the current supply chain challenges. Accordingly, we are revising our adjusted EBITDA outlook by approximately $40 million to a range of $415 to $435 million, taking into account the gross margin associated with the aforementioned revenue deferral and an incremental $20 million of supply chain related inflation over previous estimates. The total estimated impact of supply chain-related inflation is now approximately $45 million. Our free cash flow outlook is now $80 to $100 million, reflecting our revised EBITDA outlook and the net incremental working capital timing impact of the revenue deferral. I will now hand the call back to the operator for our Q&A session. Operator?

Thank you. As a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad now. We'll pause for just a moment to compile the Q&A roster. Our first question today is from Matt Somerville of DA Davidson. Matt, please go ahead.

Thanks. A couple questions. First, Jeff, with respect to the cash flow outlook for the full year, I'm just using round numbers, but your guidance is basically assuming you generate $400 million in the fourth quarter. In my long history of covering the company, I don't think Diebold has ever turned in a number anywhere near that. So help me walk through, help me get comfortable with how you're going to accomplish that this year.

Yeah. That's a good question, Matt. And as you can imagine, it all primarily comes from working capital. And everything else is fairly fixed in our direct cash flow model. So here's what we need to happen in order to achieve that. We need accounts payable DPOs in the mid-'70s, and we need... DSOs, revenue DSOs in the mid to low 50s. So, you know, that's what's going to drive fourth quarter free cash flow, especially based on where we're at today. You know, based on a DPL number of around 75, what happens after 75 days in a DSO of approximately let's say 55 days, What happens, you know, revenue recognition after November 15th impacts next year's free cash flow. Inventory purchasing as of probably today impacts next year's free cash flow. So we need to make that number. We need DSOs to drop to, you know, the mid-50s. They're in the low 60s now. And we need DPOs to increase to the numbers I referenced, and that's about a five-day increase from what we have right now. So there's a path to get there. Now it requires execution.

With respect to the pressures you've seen in the P&L this year and the roughly $75 million EBITDA takedown from where you were to where you are now at the beginning of the year to where you are right now, Should we be thinking about any of this stuff becoming more of a permanent part of Diebold's cost structure? And really the genesis of my question is, does anything you're experiencing now impact the 2023 targets you've put out there several times now? Thank you.

Yeah, it's going to impact 2023 targets, and we're not confirming those until we provide guidance for the for 2022 and 2023. And we're still working through all the modeling impacts, but here's what I would say. If you look at what we've experienced year to date, which if you go back and you add up the numbers from the prior quarter and this quarter, you're going to see that it's around $20 million impact in operating margin from inflation. That To date, that is all logistics costs. What's changed for us as we move into the fourth quarter is we're going to experience not only logistics increase, but raw material and source component parts increases. The $25 million, $26 million we're going to experience in the fourth quarter is is still approximately $14 million in logistics. The rest is component parts inflation. And portions of that inflation are going to get caught up in the inventory, both logistics and raw materials, and going to carry into 2022. So we anticipate that we're not going to see any lessening of logistics, supply chain constraints, and we've talked about it until probably the second half of next year. That's going to drag some costs into the third quarter as inventory turns. So this is going to affect 2022, and we need to look at that from a pricing perspective and what we can do from a pricing perspective. And then We need to measure, and we are measuring, what the reductions are, especially in outbound and inbound logistics, and when it's going to impact the model post the normalization of supply chain. So Matt, maybe you'll be able to add, if I may, as well, to give us some additional color. We made some comments in our prepared remarks that we saw Q3 as a peak inflection point, and I just wanted to add some more substance around that. Moving through Q2, we started to see an extreme tightening of visibility to critical components like semiconductor chips. As we went through Q3, that visibility has improved substantially. And our safety stock and our access to semiconductor chips is now down well through the first half of 2022. So we're feeling like we've moved over the hump as it relates to access to semiconductor chips. However, the spot price that we were paying for raw materials in Q3 flows through to our Q4 P&L as we recognize revenue on those ATMs. So the timing effect uh will be felt most noticeably in q4 but as we take a look at forward spot prices for various raw materials whether it's steel resin semiconductor chips you know there's already evidence of it starting to peak and starting to subside somewhat so you know we don't see those raw material costs as being structurally impermanent in our model As Jeff said, I think there'll be some lumpiness as we move through 2022, but we do see those abating. And as Jeff rightly said, the other key driver of inflation right now for us are the logistics pieces. And we think that that's still going to be a factor in the first half of 2022. We've also taken other actions to mitigate the impact of inflation. Jeff referenced that we're building up our manufacturing capacity in the U.S., That will certainly ease some of the pressure we've seen from a logistics cost perspective as we need to rely less on shipping from Europe to the Americas. And second of all, we've been moving pretty decisively from a pricing perspective across products, services, and software. And obviously there's a timing lag as we're still building products that were priced in prior quarters. But we're seeing some pretty good traction with those pricing initiatives take hold. So, you know, while we're not going to give guidance right now, you know, I think there's a number of mitigating factors that are in play that will impact 2022.

Got it. Thank you, guys. I'll get back to you.

Our next question is from Karthik Mehta from North Coast. Karthik, please go ahead.

Thank you, Chris. Jeff, just to continue your conversation about kind of free cash flow as you look out to 2022, how do you think this impacts your ability to refinance some of the debt that you had spoken about before? Yeah, yeah. And, you know, the variable is reaction to our performance and what the market's doing, right? And we continually monitor that. We'll still have opportunity. We're going to be measuring as we move forward what the potential pricing could be. Now remember, we have a no-call provision in our secured notes that really makes it more attractive to refinance as you approach mid-22. So I would say there is no maturity. gone through our head relative to refinancing. The immediacy is relative to the cost of the debt, and particularly the secured notes. So this is, you know, our performance and the impact of what's going on in the global supply chain are another piece of the algorithm relative to when we should refinance. So we will continue to monitor, even as soon as this afternoon, what the impact is on our debt trading and with our advisors' work between now and mid-22 relative to refinancing. Again, and I'll continue to say this, There is a point in time where it's going to make sense for us to refinance between now and I would say the third quarter of 22. And, again, that no-call provision expires in July of 22. So that will continue. This will just become part of the algorithm. I don't think it will. We're going to still generate cash flow. When we get to guidance, we'll be generating free cash flow in 22. I'm not giving you the number today, but there will be free cash flow generation in 22. There will be growth in revenue. And so I don't believe it prevents us from refinancing. The question is going to be what's the impact on the cost. And then, George, just to all these supply chain issues, is there any risk of losing orders where maybe your customers say, hey, it's taking too long, we'll just wait it out until things get better? Cardiff, we're not seeing any evidence of that, of any material note whatsoever. Clearly, we're not alone. This is a global issue facing every company. We're in active dialogue with our customers. Quite frankly, and this is why I made reference to our Net Promoter Score customer satisfaction levels, they're at all-time highs. And if customers were frustrated or wanted to go somewhere else, we would have seen evidence of that in our NPS scores. So we're not seeing evidence of it there, nor are we seeing it in any material change to our order entry. And as I said in my prepared remarks, Cardi, our order entry is tracking higher than our original plan when we went to 2021. So we're feeling very, very good that our product and our value proposition is holding up well. And our customers, we continue to work very, very closely with them to get them what they need. In some cases, we're using expedited shipping. It's obviously exceptionally expensive, but in some cases we're relying on that when we need to. But we don't see that as a material risk whatsoever. Thank you, both of you. Thank you.

Our next question comes from Paul Chang of J.P. Morgan. Paul, please go ahead.

Hi, thanks for taking my question. So just to follow up on free cash flow and 4Q, you know, given such a material amount, is there, you know, potential for some to spill into 22? And, you know, how does such a large cash harvest in Q4 kind of impact 22 seasonality of cash flows? Are you in a good place on inventories kind of given the elevated investments or maybe less of a drag? in the first half of 22?

Yeah. So, you know, if you do something in 21, obviously, cash flow is fungible. It's going to affect future cash flow then. So we are, what we are doing is we're doing our jobs relative to collections. And we have a very good customer base, and they respond well to our requests for payments. So that's what we're counting on. On the cost payable side, it's a matter of we control the disbursement of cash. And, you know, we do that throughout the year. And we put off the gas at the end of last year, so we won't do that this year. So it's within our ability to generate that level of cash, but there's only, based on your revenues and your purchasing, there's only so much cash that can be generated. That's basically what EBITDA is meant to represent. and and so if you if you bring it forward right it's not available for next year i will say this we are pushing 120 million dollars of revenue out of 21 into 22. the revenue from from basically two weeks from today will move into collections in 22 so we will see a increase of collections in the 22 model from the deferred revenue that we talked about today. We also anticipate that we will not have the high level of inventory that we have today because we are unfavorable relative to our own modeling relative to inventory because we're carrying higher inventory. Basically, we're building those the inventory on the $120 million of deferred revenue, but we're not recognizing the revenue, so we're holding the inventory. So all that in effect is we're working on the cash flow effect on 22. The one thing I will remind everybody is $50 million of restructuring payments will go away after 21. So we will pick that up. The potential benefit in refinancing, and we wouldn't get it all in 2022, based on current markets, and that's what I talked to Karthik about, is approximately 200 basis points on something over $2 billion at that. So there are positives for free cash flow coming in 2022. But, again, we're not going to provide guidance today, but I will say that there's nothing fundamental wrong with the cash flow model of the company. This is a transitory bump caused by supply chain inefficiencies, and if you look at what's happening, and you take the numbers, and I probably didn't do a real good job of describing it, but Of our $45 million impact in 2021, 32 million of that is outbound logistics. There's 12 million of inbound purchasing inflation. There's a significant amount of that when you take semiconductor chips out of the equation. There's a significant amount of that that is inbound logistics from our suppliers. They have the same issue we have. So when the supply chain issues are mitigated, and we think it's going to be post-second quarter next year, expectations are that we're going to see some relief in these logistics costs. Now, there's probably a new normal in there somewhere. but it certainly isn't at the levels that we're experiencing with logistics today it's not sustainable and and uh and you know obviously capacity would expand if it kept at that level because investment would make sense so that's that's my opinion gotcha and then you know as we think about service contracts next year

You know, can we expect to see, you know, some uniform signings over the course of the year instead of in 4Q, at least in terms of cash, somewhat de-risking seasonality 4Q cash flow, kind of what your near peer is doing?

You're saying relative to contract-based billing. You know, our model and their model isn't that different. It's all based on install base, right? Now, they have moved certain revenue to other services, mainly other software, which is good for them from a free cash flow basis. Now, I think they've done a nice job on free cash flow. I would say this. What we need to happen, right, is – to grow services and software like they have, and that'll level out the lumpiness of free cash flow. Our free cash flow can be lumpy around installations of equipment. So, Paul, let me build on that. You know, I introduced to the investor community today the work that we're doing around EV charging stations, and I've got to tell you we're very, very energized by that because, you know, It has very similar attributes to servicing ATMs, both from a technological skill perspective and the effort it would take for us to cross-train our ATM technicians, plus the density and absolute number of units that are out there. And we anticipate that while this market is still early, that we'll start to see a services business build with an ideally comparable margin profile to what we see in the ATM business. So we think that will go some ways as well towards what you've been talking about. Obviously, it takes time to build, but that's what we're looking at doing as well.

Oh, I think it got cut off. Hello? Yeah, you were talking about the EV charging. I guess the follow-up question on – I got a bit of that commentary, but how competitive is that service market – You know, are the service contracts kind of recurring and longer term? And can you give us a sense of kind of the revenue potential per contract or even per charging unit would be helpful and margin profile? Thank you.

Well, the first thing I'd say is this is a new, new market, right, compared to, you know what you would have seen at our more mature businesses um yeah what i will tell you currently it's a highly fragmented landscape uh currently we would be one of the larger scale based players you know we like those attributes uh the revenue per unit is a little bit lower but not materially compared to what we would see in servicing an atm And we believe the margin profile will be comparable to what we've seen in our ATM business.

Great. Thank you. Our next question is from Justin Bergner from Gabelli Funds. Justin, please go ahead.

Good morning, Gerard. Good morning, Jeff.

Justin.

Hey, Justin.

Just first question. I just wanted to confirm sort of the guidance changes from the second quarter. So you've taken up your cost, non-billable sort of cost number from $25 million to $45 million, and then the entire revenue deferral, that $120 million, and then the drop-through, which I guess seems to be on the order of $15 million. That Revenue deferral was not expected in your earlier second quarter guide.

Are those – is that – Yeah, you can remember our previous guide was 4 to 4.1. So the movement of $120 million dropped us down to that 3.9 to 3.95 range. So you can probably back where an engineer in the world the number was. previously.

Okay. Um, and then on the cash flow, I mean the decline in free cash flow guide, the 40 million lower, I guess matches the 40 million lower EBITDA, but it would seem like you would have some extra inventory needs, um, associated with, you know, critical component stock and the like. Um, So I guess I'm somewhat surprised that the free cash flow guide is not coming down more than the adjusted EBITDA guide. Can you help me understand that? Are there positive offsets to keep those two adjustments sort of in line?

Yeah. Let me tell you, the key to that cash flow number is that we don't have disruptions in revenue recognition for the next two weeks. Because if we have revenue recognition, which means we're billing customers for deliveries over the next two weeks, then we're going to have a push for collection. So if you look at it from a direct perspective, that's key to the cash collections we'll make from our customers over the next two months. And once you get past that date, it becomes increasingly difficult to get collections because it's not due. So we've modeled that out. We feel strongly that the inventory billed post today does not affect cash flow because it's leveraged with accounts payable. We will have inventory that's going to be higher. You're going to see a higher inventory level, but you're also going to see a higher accounts payable. So of lower owned inventory. So this is about managing collections from now on on cash flow. Managing collections, managing disbursements, we have the processes in place to do that. And yes, it is a big number. And we're taking on that challenge, and we believe we have a good plan to do it. We also have clear visibility to other spend relative to capital spending, R&D, our decapitalization, and we have a clear model to execute. Now it's up to us to execute to that model.

Okay, great. That's helpful. And then lastly, on the retail side, is retail actually tracking better than your view coming into this year? And are there any margin headwinds of note on the retail side from some of these supply chain issues? that are preventing sort of the margin performance from being even better than what it was in the third quarter?

Justin, it's Gerard. I'll take that one. So on the retail side, we are performing well, and we're performing modestly better than our plan for 2021. We think we have a very, very competitive self-checkout solution, and as the industry demand for self-checkout grows, we think we're very, very well positioned to benefit from that for the next several quarters. Most of Jeff's comments from an inflationary perspective revolve around banking, primarily because of where our customers are based versus where our manufacturing facilities are based. At retail, we have some exposure there, but it's nowhere near as material because we're As you recall, most of our retail business is European-centric, and that's where we have some of our major manufacturing facilities, and therefore we have the benefit of using car, truck, rail, and other non-shipping-based forms of logistics. So there is some pressure there, but it's nowhere near as notable as it is in banking.

Great. Thank you for taking my questions.

As a reminder, if you'd like to ask a question, it's star 1 on your telephone keypad. Our next question is from Marla Backer from Sudeti. Marla, please go ahead.

Thank you. So I have two questions. One is to follow up something you said a little bit earlier, where you noted that the logistics challenges are impacting everyone across the board. That said, and you specifically were addressing of what's going on. But are there any instances in which you see the possibility of potentially accelerating market share gains because you're better positioned for delivery near term?

Yeah, so let me make a couple of comments on that, Marla. I will reinforce again that we see negligible risk to losing any contracts. We're just not seeing evidence on that today. um as relates to winning incremental market share you know hopefully it's become evident over the past few quarters that we believe we're exceptionally well positioned with our product differentiation especially around dn series atms and we're very very confident that we're gaining market share and at the expense of others on that front which ultimately supports our goal of building our services contract base over time Do we necessarily think that this supply chain disruption will give us a chance to accelerate market share gains? Quite frankly, I don't know that at this stage. I think we'll have to see what happens in the next several quarters. What I will say is I think we have a very, very good handle on our visibility to the supply chain access to raw materials over the next several quarters, especially around semiconductor chips, which seem to have been structurally some of the most difficult page points in the supply chain disruption. So while I can't comment on how others are managing that situation, we're feeling very confident that we've got that one almost in hand.

Okay, thanks. And then one other question, which is on the EV charging station initiative. Do you Since this is an emerging area, do you see any potential opportunities to perhaps cross-sell in this market? Are there any large retailers, let's say, that would install charging stations as an add-on, which would give you some bumbling opportunities?

Yeah, that's a great question, Marla, and I can tell you that when I made the comment that we're in discussions with multiple EV providers, that includes a number of our multinational retailers that see EV charging as a way to enhance their own consumer journeys and drive more idle time at their sites and hopefully drive up the size of their baskets. So there's no doubt that there's a strong intersection between our retail sector and EV charging. It's not an exclusive overlap. There are other independent plays outside of retail we're looking at, but we do think there's some interesting cross-sell opportunities, which is why our retail colleagues are working closely with us on this initiative as well.

Thank you.

This concludes today's Q&A session. I will now turn the call back over to Gerard Schmidt, CEO of dBuild Nextdoor, for some closing comments.

Thanks, Adam, and thank you to everyone who joined us for today's call. We're pleased with the continued demand we're seeing for our products and solutions as we continue to be a market leader in the bank and retail automation industry. Now, we look forward to the upcoming quarters and moving through the supply chain and inflationary challenges as we drive growth across our core businesses of products, software, and services, and into new areas like payments and EV charging. We look forward to talking with all of you at upcoming conferences and at our next earnings release. In the interim, please do not hesitate to reach out to Industrial Relations if you have additional questions. This brings the call to an end. Thank you, everyone.

This concludes today's conference call. You may now disconnect your lines.