Diebold Nixdorf Incorporated Common stock

Good morning. My name is Adam and I'll be your conference operator today. At this time, I would like to welcome everyone to the D-Build Next Door's fourth quarter and full year 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. Ms. Machuska, you may begin your conference.

Hello, everyone, and welcome to our fourth quarter and full year 2021 earnings call. I'm Christine Marchuska, Vice President of Investor Relations for Diebold Nixdorf. To accompany our prepared remarks, we have posted our press release, earnings presentation, and a new shareholder letter to the Investor Relations section of our corporate website. I would encourage investors to review the shareholder letter as it contains additional information regarding the progress of the company. Later this morning, we will host a replay of this webcast. We also made an announcement today regarding our upcoming CEO transition. In a moment, we will share remarks from Gerard Schmidt, President and Chief Executive Officer, as well as Octavio Marquez, who will be succeeding Gerard at Diebold Mixed Source next CEO. In his message, Gerard will provide commentary on the business environment, our accomplishments in 2021, and then introduce Octavio. Finally, Jeff Rutherford, Chief Financial Officer, will discuss the company's financial performance, including highlights from the quarter and year, along with our guidance for 2022. Then take your questions. Before we begin, I will remind all participants that during this call, you will hear forward-looking statements, including guidance we will be providing for full year 2022. 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 SEC. Participants should be mindful that subsequent events may render this information to be out of date.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 good morning, everyone. It's a pleasure to speak with you today. In 2021, we faced unprecedented challenges brought on by the second year of the pandemic. And I'm pleased to report that in the fourth quarter, we delivered on our objectives. Our work over the last few months of 2021 was painstaking and meticulous, requiring us to look at every area of opportunity, from logistics and supply chain to prepayments and payables. What seemed impossible to those outside our company was in fact possible, and we've once again shown that we're resilient and strong. While supply chain and logistics challenges were two of the bigger themes in 2021, it is still noteworthy to share that in 2021, we shipped more ATMs, more self-checkout devices, and more point-of-sale devices than we did in 2020, a testament to the resilience of our model. While the pandemic has disrupted our world and caused us to rethink what the future might look like, We have time and again proven our ability to build an agile company that challenges the status quo and goes the extra mile to execute well. The environment we've been in for nearly two years has brought to the forefront the rapidly changing demands of consumers and the need for self-service solutions wherever possible. We are well positioned to offer these solutions plus growth opportunities for our customers. whether at a bank, a grocery store, or retailer, to help them deliver more digital, flexible, and effective consumer journeys. In retail, the evolution of consumer behavior, along with the rapidly changing labor dynamics, have led to increased demand for self-service and automation, and growth is being driven by customer momentum for our self-service solutions. In 2021, we saw growth above market rates in Europe for our self-service hardware, services, and software. We also continue to make inroads into other markets, such as the United States and Australia. In banking, we continue to see strength in demand for cash recyclers as banks rethink their branch footprint and move more towards automation and efficiency around their real estate. We've also seen a shift in market share thanks to our best in class DN series devices as our share with large US customers has increased. In 2021, our America's order levels were 16% higher than 2020 and 17% higher than pre-pandemic levels in 2019. On this note, Throughout last year, we expanded our relationship with a top five U.S. financial institution to deploy DN series cash recyclers. Let me now turn to highlight our world-class services organization. We, as well as our customers, consider this to be one of our best assets. And in many cases, it is a major contributor to DN winning new business and expanding our current relationships. It also provides opportunities for new horizontals, like electric vehicle or EV charging stations, which I will comment on later. In 2021, we continued our journey of delivering superior service by reaching a milestone with connected devices for our AllConnect data engine. With approximately 150,000 banking self-service devices connected to the solution, which represents approximately 122% year-on-year growth in connected devices. Our engine leverages real-time Internet of Things capability to support our predictive maintenance offering, which has been reducing customer downtime significantly. Equally, in retail, we continue to deliver value in services to our customers. I would be remiss to not mention an ongoing success story we achieved with one of our key customers, a major UK-based retailer. This customer relies on us for flawless execution and service excellence and has over 25,000 checkout lanes. I'm pleased to report that this past year we delivered 100% availability of point of sale and self-checkout estates on their two most demanding shopping days of the year. We helped this retailer improve their end customer satisfaction with shorter queues, shorter wait times, while increasing their sales for this period year over year. This is now the 10th consecutive year that we have achieved this performance goal and a testament to our services capability. We also implemented this program with another large European retailer with the same success, proving this is a repeatable model for retailers. We believe delivering or exceeding on the service expectations of our customers is one of the best foundations for putting additional technology into the field. And both of these retailers placed additional self-checkout orders with us in December. We were glad to see the trust our retailers have in us to continue to deliver quality services for them and their customers. Further augmenting our strength in services, I'd like to comment briefly now about the strides we made in the fourth quarter into EV charging stations, especially in Europe. Today, the EV charging value chain is fragmented. Multiple players, including startups, mid-sized companies, and large electronics conglomerates are competing in the space. Additionally, there are multiple roles along the value chain that are inconsistent. This is a large and growing market with significant demand. By 2026, the number of public EV charging stations in Europe and the United States will be greater than the number of ATM devices. With more EV drivers, especially in Europe where there are less likely to have home charging opportunities and rental and fleet cars and public transportation moving to more electric vehicles, there will be a need for more public charging stations. Currently, there are over 40 relevant OEM or charge point operators globally, and we are working or in talks with many of them. Our global service capability, including our technicians and our skills in global spare parts logistics management and multilingual help desks, have resonated with several market participants that lack access to these skills as they look to scale their own businesses. As of Q4 2021, we are contracted for several thousand charging stations in Europe and the U.S., with a short-term pipeline of three times the size of our current base. The team has set a target to service over 50,000 charging stations by the end of 2022. One notable recent win that I would like to pull out is with Compleo, one of the leading full-service providers of charging technology in Europe. With this partnership, DN will provide a full range of managed services for initially over 1,000 of Compleo's DC fast charging stations in public locations across Germany with the potential for expansion. Lastly, as you know, diversity and sustainability have been an important focus for us as a company. I'm proud to note that in 2021, females accounted for over 60% of our senior hires at the vice president and above level. And we made important strides environmentally, reducing our scope one and two carbon emissions by 6%. Our shareholder letter details further accomplishments on this front. And I want to emphasize how grateful I am to our teams for their work and dedication in this important area. As Christine mentioned earlier, we've also announced this morning that Octavia Markins will be the next CEO of Devo Mixed-Off. Over the past four years, we have undertaken a comprehensive restructuring and transformation efforts. The company has made significant strategic and operational progress. We have grown profitability, gained market share through our DN series and self-checkout solutions, and entered new growth markets. And I'm proud that we've achieved these goals while also delivering four years of consecutive improvements in customer satisfaction. We entered 2022 with a strong backlog, a seasoned executive team, and operations that have proven to be resilient despite the pandemic and a challenging macroeconomic backdrop. As we look ahead, to move past the pandemic and build further momentum in growth areas like EV charging services and payments. While continuing to optimize our core businesses in retail and banking, it is the right time for Octavio to assume the CEO role. Octavio needs no introduction to many of our customers and to our employees. He has been leading our global banking segment with responsibility for approximately 70% of the company's revenues and is deeply passionate about our customers and our business. He has a deep understanding of our business and is the right person to lead Diebold Nixdorf into the future. I will remain a member of Diebold Nixdorf's board of directors until my term expires at the 2022 shareholder meeting. I will also be working closely with Octavio and the rest of the leadership team as an advisor for a few months to ensure a smooth transition. It has been a tremendous privilege serving as CEO of Deval Nextoff, and I believe that we have materially advanced the operational and strategic direction of the organization. I'd like to thank my colleagues on the executive team, the board, and all of the employees at Deval NextOff for their support through this journey and to congratulate Octavio on his appointment. As this will also be my last earnings call, I would like to also thank the investment community for your support and ongoing interest in the company. I'd like to now hand the call over to Octavio for a brief introduction.

Thank you, Gerard. It has been a pleasure being part of our journey under your leadership. I am truly excited to lead Diebold Nixdorp going forward. I have been with Diebold Nixdorp since 2014 and have thoroughly enjoyed contributing to our evolution to a leader of self-service banking and retail technology. I have had the distinct pleasure of working closely with our customers across the globe, When I initially joined DM, I worked closely with our Latin America customers and then managed our American banking customer segment. And for the past 18 months, I've been working closely with our global banking customers. I have seen firsthand how critical a role we play for our customers and how we can continue to innovate to serve them with a broader range of solutions. We have a passionate and talented employee base that have been instrumental to the progress of the company. I am also energized by our growth opportunities, like our strong self-checkout growth in retail, our managed services efforts in banking and retail, along with our newer but We have been rigorous in execution on improving our efficiency at the company, and I look forward to further enhancing our execution. Thank you, and I will now turn it over to Jeff.

Thank you, Octavio, and I look forward to our continued work together. I also want to thank Gerard for his leadership during the past four years, which were crucial in helping transform People Next Door's operating model to what it is today. The team and I appreciate your contributions and wish you well on your future endeavors. In the year ahead, we look forward to moving past the global macro challenges we have experienced by leveraging our mitigation strategies and delivering for our customers and shareholders. Diebold NixDark is well positioned to capitalize on the strong demand for our products and solutions as customers continue to desire our market-leading devices, services, and software, and as the market moves toward a self-service automation focus driven by consumers. My prepared remarks will include references to certain non-GAAP metrics, such as adjusted EBITDA. As a reminder, please see our shareholder letter for the full financial details from the quarter and full year. Here I will highlight a few of our key performance metrics. In the fourth quarter, total revenue was $1.06 billion, a decrease over fourth quarter 2020 of approximately 4% as reported, and a decrease of approximately 1% excluding the foreign currency impact of $22 million last year. and a $13 million impact from divested businesses. Adjusted for foreign currency and divestitures, product revenue increased approximately 4%, services revenue decreased approximately 6%, and software revenue increased approximately 3% over fourth quarter 2020. During the quarter, we experienced delayed revenue due to extended outbound transport times and inbound component delays. This primarily impacted the U.S., Latin America, and certain APAC countries and increased our revenue deferral to 2022 by $30 million to a total of $150 million. On a sequential basis, total revenue increased approximately 11%. Full-year 2020 revenue was $3.905 billion and was driven by demand for our DN series ATMs especially our cash recyclers, our self-checkout devices, and the tax services offset by approximately $150 million of deferred revenue due to supply chain and logistics challenges. On a year-over-year basis, 2021 revenue was approximately flat as compared to 2020, as reported, and also flat, excluding a foreign currency benefit of $74 million and a $60 million impact from divested businesses. Adjusted for foreign currency and divestitures, product revenue increased approximately 4%, services revenue decreased approximately 4%, and software revenue increased approximately 2% over the full year 2020. For the fourth quarter, we reported adjusted EBITDA of $126 million and adjusted EBITDA margin of 11.9%. Fourth quarter adjusted EBITDA results reflected reduction in operating expenses fully offset by the decline in gross profit due to the revenue deferral and non-billable inflation of approximately $30 million. Full year 2021 adjusted EBITDA was $415 million, the lower end of our guidance range, primarily due to supply chain challenges, which increased the deferral of revenue, as I mentioned earlier, to approximately $150 million. Non-billable inflation for the year was approximately $50 million. Lastly, we delivered free cash flow of $407 million for the fourth quarter, resulting in $101 million for the fiscal year 2021. This record fourth quarter free cash flow was achieved through tremendous efforts of our sales, operation, and finance organizations. The fourth quarter marks the conclusion of the D&L Transformation and Restructuring Program. As a reminder going forward, we will not present non-GAAP adjustments to earnings except for the amortization of intangible purchase accounting assets and, when appropriate, non-recurring items such as M&A activities. Our revenue guidance for the full year 2022 is $4 to $4.2 billion, which reflects approximately $150 million in revenue deferral from 2022 and organic growth and pricing growth partially offset by model divestitures and terminated low-profit service contracts and the potential ongoing logistics and supply chain disruptions. While we are very encouraged by the demand environment for our solutions, our guidance range also reflects caution regarding the timing of global logistics and supply chain environments. Our adjusted EBITDA outlook is $440 to $460 million, taking into account gross profit growth due to increased revenue and a model gross margin expansion of approximately 100 basis points, partially offset by an increase in operating expenses. Adjusted EBITDA will likely be weighted towards the second half of 2022 as our pricing and incremental cost management actions begin to take hold and volume builds throughout the year. Our free cash flow outlook is $130 to $150 million, reflecting our EBITDA outlook, normalization of working capital, and culmination of the D&L transformation and restructuring program and related payments. It should be noted that our free cash flow guidance does not reflect any benefit from a potential debt refinancing margin to be comparable to the fourth quarter 2021 due to the continuation of non-billable inflation. Additionally, we will experience an increase in first quarter operating expenses due to wage inflation and growth in infrastructure investments. As such, we expect the first quarter to be the low point for 2022 operating profit and margin. That concludes my review of the results. With our transition to a new CEO just being announced, Gerard and Octavio are now communicating with employees and key customers this morning, and so I will be happy to take your questions. Operator, over to you.

Thank you. As a reminder, if you'd like to ask a question today, please press star followed by one on your telephone keypad now. We're preparing to ask a question. Please ensure your headset is fully plugged in and unmuted locally. That's star followed by one on your telephone keypad. Our first question today comes from Matt Somerville of DA Davidson. Matt, please go ahead. Your line is open.

Yep. Hey, Jeff. So a couple questions. First, maybe we can start with free cash flow. If we look at the 100 million you did in 21 and simply add back, say, 50 million of cash restructuring related costs that you would have encountered in 21, we're at 150. So help me understand what the pluses and minuses are that might be weighing on the cash flow outlook and where upside levers may be therein.

Yeah, Matt, that's a good question. Let's look at what happened in 21 because the answer is related to normalization of working capital. We are carrying... uh access inventory into 2022 out of 2021 and it's directly related to that 150 million dollars of deferred revenue much of that inventory associated with that 150 million dollars is on our balance sheet at your end so we need to normalize our inventory investment And with that comes a normalization of accounts payable relative to terms. So those are two pieces of it. The third piece is working with our customers, and Octavio's group did a really good job doing this, is we had certain customers that would prepay for the inventory we were carrying for their purchase orders. So if they had ATMs in the pipeline but we couldn't get it to revenue recognition because of supply chain and logistics delays, there were certain customers that prepaid. And you're going to see that on our balance sheet in the deferred revenue number. So that will unwind to some extent. The net effect of that – We are currently modeling that's the variable in the free cash flow. So that's why we're giving the guidance we're providing. It's how does that wash out through free cash flow.

Got it. And then in the fourth quarter, OPEX seemed to be quite low. So maybe help me understand the pluses and minuses there. And then I want to maybe get a little more detailed, Jeff, as to how we should be thinking about kind of the first half, second half cadence. relative to your prepared remarks. In the past, people have seemingly been willing to give, you know, percentages on revenue and EBITDA by half, and I was hoping maybe you would do that again today. Thank you.

Yeah, thanks, Ben. So, yeah, OpEx was low in the fourth quarter. If you go back to where we were Modeling 21, our expectation for OpEx was somewhere in the $770 to $780 million range, with about $640 million of it to $50 million of it being SG&A. The reduction, you'll see that there's approximately a $35 million reduction of actual compared to that model. That difference is variable incentive compensation relative to the results of the organization. So as we look at 2022, those programs will – reset bringing our base back up to that 770 to 780. uh and then we'll we'll experience uh wage inflation and sgna in 22 and then we have certain investments we're making in in the growth projects that gerard not cavio touched on and also uh incremental infrastructure investments mainly related to our distribution subsidiary network where we need to optimize the efficiency of the model. We need to upgrade and standardize processes in our 60 owned distribution subs. And so we've modeled that into 2022. It's a It's not a permanent cost, but it is a project cost that we're going to begin realizing in 2022. We no longer, as I mentioned earlier, we no longer are going to adjust for those types of non-GAAP adjustments, so it will be in our results and our operating results for 2022. So the other question was, a cadence relative to revenue. We have not provided that. I would say this, because of supply chain, when we look at our revenue cadence, it's going to be back-end loaded to some extent. I would say that the front half of the year, let me just, let me do the quick math just to verify the number. it's going to be just slightly less, around 45% to 46% of total revenue. So it's not extraordinary because, remember, we have $150 million of deferred revenue coming in in the 22 from 21. The difference from an EBITDA perspective is going to be the front end of the year, especially the first quarter, is much of that revenue coming out of backlog does not have price increase into it. As you recall, we made a business decision that we were not going to go back and reprice approved purchase orders from our customers, especially if they were scheduled purchase orders. So they were already scheduled into the manufacturing process. So the first quarter is going to get hit. by a similar non-billable inflationary effect that the fourth quarter. That will obviously change as we work through that backlog, and we feel comfortable, and we said today, that we anticipate a 100 basis point improvement in gross margin for the year. We will have an unfavorable comparison in the first quarter. Remember, we had a very good first quarter in 21. So from a revenue perspective, we'll be good in the first quarter. But from a margin perspective... we're going to experience a decline in margin. That's why we said we were going to be closer to the fourth quarter margin in the first quarter of 22. That will improve as we go forward, and we'll get back to a more normalized margin, in particular in the second half of the year. For OpEx, and you already asked the OpEx question, but we will start seeing that wage inflation and those incremental investments in growth and infrastructure beginning in the first quarter. That's why we believe that the first quarter operating income will be the low point for the year and then build throughout the year.

Got it. Thanks, Jeff. I'll get back to you.

The next question is from Karthik Mehta from North Coast Research. Karthik, your line is open.

Hey, good morning, Jeff. Jeff, I wanted to go back to what you said about the price increases and those going in the second half. I know on the service side, both you and others are trying to put through price increases. And I'm wondering how the banks are reacting and how successful you have been to get the price increases off the inflation pressures you're seeing.

Yeah, you know, and for us, and this is every year for us, we've always had wage inflation. And services obviously are wage intensive. So we and our competitors that provide services are always experiencing wage inflation. The pricing increase for services, and this is an annual event, those service contracts renew every year, or if they're long-term, they have a provision relative to inflation adjustment for every year. So every year in the fourth quarter, we go through and adjust service pricing for inflation. And it's generally, you know, every contract's a little different, but they're generally tied to wage inflation. So that has happened. The non-billable Inflation effect that we experienced in 21 and that we will experience in the first quarter of 22 isn't from services wage inflation. It's from raw material inflation and increased logistics costs. And so it goes directly back to product pricing. So product pricing for us, we did put through price increases. It happened in the third quarter and continues to happen. And there's some level of pricing pressure within the marketplace depending on market and competition, and we all know who the aggressive pricing competitors are. So it varies by region. And, again, we did not go back. So if you had an approved PO at the beginning of the second quarter into the third quarter and had agreed upon pricing, we did not go back and demand a pricing adjustment to our customer base. So that backlog, and you know our backlog is pretty large. So we're going to move into 22 with a backlog of just under, and we'll disclose it to 10K, but it's going to be somewhere just under $1.1 billion for product backlog. And that backlog, our backlog is really based on an 18-month cycle. So at any point in time, you know, it's really dependent upon when it's scheduled for installation. So we are still burning through the backlog that existed during the third quarter. So, again, the first quarter is going to get hard because the product that we'll be recognizing, have revenue recognition in the first quarter, a large percentage of that is not going to have – a price increase. And as we move through the year and we turn over that backlog, we'll see those price increases come through in products. We're also going to get to the point, quite frankly, we'll have a more favorable comparison. In fact, we think that as we move into the back half of the year, we're going to see some logistics deflation costs as the logistics pipeline and supply chain clear out. The range in our revenue recognition, quite frankly, is worst case that things continue as they are in the back half of 2021 to a point where we think that there's a break in logistics backlog and the higher end of revenue can be recognized. So we just have a very – that was a long answer to a simple question, Carter, but it's really related to the first quarter inflation and where we're at in the pricing cycle for products.

No, that was helpful, Jeff. Thank you. And the second question, I just wanted to understand, I know everybody out there is having a hard time finding labor, and I'm wondering on the service side, if you've been able to find labor you need and meet SLAs for the banks and retailers.

Yeah. You know, we and everybody else obviously have challenges. Our Our recruiting people have done a really good job. You know, talent retention is a primary key for us in the model going into 22. So far we've been able to do it. I would say that overtime is up, and, you know, You know, you can only do that so long to your workforce, but they've done a really good job. The service organization has done a really good job of managing through that. But it is a challenge, and it is a risk factor as we look into 22, but so far we've been able to manage through it.

Perfect, Jeff. Hey, thank you so much. I appreciate it.

Sure, Craig. Thanks.

The next question is from Matt Bryson of Wedbush. Matt, please go ahead.

Hey, thanks for taking my question. Jeff, I really want to drill down on the revenue outlook. If I step back to early 2021, I know it was a long time ago, but you guys were looking for $3.9 billion to $4.1 billion in revenues, and it sounded like prior to the supply chain disruptions that, if anything, you were tracking to the higher end of that target. Now for 2022, you're guiding for $4 to $4.2 billion, and part of that is a benefit from $150 million in product that's been pushed into the current year. And what I'm really trying to get at is I know there are some divestitures that are impacting revenue, but it sounds like you're going to see higher pricing, which I think would be a bigger tailwind than any revenue headwinds from the divestitures. So how do I think about that guide in the context of your previous outlook for 2% to 4% revenue growth where the implied guide, unless I'm assuming steadier or higher backlog exiting the year, you wouldn't get any growth. If anything, the midpoint would suggest that there's a slight decline in revenues.

Yeah, yeah, that's a good question, and obviously one that we've talked about internally. Are we being too circumspect relative to guidance? I think that's what the question is. So when we look at – let me give you some numbers. So it is $150 million deferred. So we have a big backlog of product, right? Pretty steady in services. We do see some, especially in Eurasia and especially in Asia, Some contracts, some very low profit contracts are going to come off that is highly likely that we will not renew those because it doesn't meet profitability standards if it's profitable at all. And we think that that number, we've modeled that number at somewhere from $40 to $50 million. The small divestitures that we have planned and will happen are a similar number. $40 million to $50 million. So that's the headwind. And I understand what you're doing. So you take that net of $50 million, you add it to $3.9 million, and it looks rather light on our revenue guidance. I will say this, that just like what we experienced in 2021, If we hadn't experienced that deferred, we'd have been at the high end of the range. So when we built a range for 22, I guess what I would say is that we hedged relative to supply chain. If we experience the same kind of issues that were experienced in the back half of 21, we'll be at the low end of the range. I will say this. Internally and what we are being measured on is at the higher end of the range. So there is some level of a hedge in the range for supply chain disruptions.

Thanks. That's really helpful. And just one more quick one for me. Taxes were relatively high in the quarter. Can you just talk about that and give us some insight to how we should be thinking about taxes moving forward?

Yeah. You know, we concentrate on cash taxes. We get some odd, because of the restructuring charges, we get some odd provision numbers. From a cash tax perspective, our cash taxes, because of what is going on globally, the statutory rates are going to go off for everybody. Here's what we need to do relative to controlling our cash taxes, and it's related to our capital structure. And I think, Matt, we probably talked about this, but I will say it again. Our capital structure is not conducive to being interest deductibility efficient. Too much of our debt and interest payments are in the U.S. The restrictions relative to the U.S. tax code makes them non-deductible. We have approximately a $400 million interest carry forward and probably build a little bit off of that. When we refinance in 2022, one of our goals is to rebalance the interest payments between the two tax principles of the U.S. and Germany, maximizing deductibility and efficiency of interest from a tax perspective. When we do that, we believe that we can hold taxes at a 30% to 35% provision rate. Now, our tax payments will go up when we run out of foreign tax credits, and that's going to be in 2023. But be assured that we continue to work. We have some very good tax people working on this, and right now we are very concentrated on cash taxes. We're very close now that we got out of the restructuring transformation business. And the adjustments, you know, we're very close to being on a gap basis profitable, and the provision numbers will mean more. So here's what I would say, that as we move into 2022, we're going to see some slight increase in cash taxes because of the statutory rate increases that we're seeing globally. But then we should be able to level that out with the refinancing measures But we will see an increase in 2023 as we run out of foreign tax credits. You know, we're going to be profitable. We're modeling to be at a much higher profitability level, right, in 2023. And so we'll have a more normalized tax provision in 2023 than we have historically as we've gone through restructuring.

Thanks for the explanation, Jeffrey.

Sure.

The next question comes from Rob Jost from Investigo. Rob, your line is open. Please go ahead.

Hi, thanks. Hey, Rob. I wanted to go back to your comments around the back. I think you said you had about $1.1 billion in backlog. You talked about not putting through price increases right away. So first quarter, margins are going to be a bit lower today. But when I think about product for first quarter, that's only a fraction of that billion one. How should we think about that burning off in terms of maybe the price increases coming in? And then also, if you could offer some commentary around where you think we are with the supply chain issues and the logistics costs.

Yeah. Yeah, so the backlog – by the way, and I will add, we continue to see very strong order entry as we moved into the first quarter of 22. So we are experiencing a lot of – from our customers and a lot of interest in both our, especially our cash recycling ATMs and our self-checkout units. So the backlog has built, you know, over a period of time. So if you look at a billion won, if you look at our order entry, and you look at how we burn off backlog, We burn off backlog. I think our definition of backlog, and you see it in the 10-K, is an 18-month expected delivery date because we have some fairly long lead times on purchase orders. They put in a purchase order and then they schedule installation, which is primarily the trigger for revenue recognition. It could be over 18 months. So our backlog will burn off in any given year somewhere in the you know, 50% range. So we're probably, if you look at just backlog, we're probably covered on revenue for 2022, about 70%. For scheduled backlog at this point in time, it's probably 50% that we're covered. So I would say that from a margin perspective, we will work through most of that in the first quarter we should we should expect uh higher product margins in the second quarter and then normalization in the third and fourth quarter the the first quarter is going to be the difficult because it's going to have a higher percentage of pre-price increase backlogs going to roll through in the first quarter does that does that make sense that's great yeah and

Yeah, it does. And so it sounds like just based on the commentary, you're... Yeah. Go ahead. No, I was just going to say, so it sounds like you don't expect things to get worse.

No, no. I don't expect... We're not modeling for things to get worse. But they haven't gotten significantly better from a cost perspective, logistics cost. We are very interested in what happens now that we've gone through the Lunar New Year of what happens relative to – to the backlog and logistics and the high cost. Now, there are, you know, the good news of when you have extremely high costs like we're having, there are alternatives. For example, Amazon has opened up the ability to utilize their backhaul capabilities and they're even, I think they're buying ships and we do have a relationship with them and and so there are some mitigating factors relative to alternative logistics channels uh and also as we've talked about previously we are building dn series um capabilities into our north canton plant which will relieve some of the backlog of finished goods coming out of padaborn and with destination to the customers on that long logistics path. But as we build the DN series capabilities in North Canton, it's going to relieve some of that last mile distribution costs. But the expectation, like everybody's expectation, is everybody's guardedly optimistic that in the back half we'll see some relief in these high logistics costs. In fact, you know, again, part of our variable in our guidance is whether we get that or not. But we do expect that we, you know, from our own, what we can control from our own Gross margin perspective, we will see us be able to burn through the backlog of the lower-priced product and see better margins as we move into the back half of the year. Again, we anticipate that we'll start seeing relief on costs by the fourth quarter.

Got it. Okay, great. Thank you. That's helpful. My other question was around this new venture with the charging stations. How much – I don't know if you can quantify, or I don't know that you have, but, you know, thinking about the investment in this business, can you give us some sense of what that's going to look like? And is that an add-back to EBITDA, or is that not in your guidance?

Yeah, it's built into our guidance. It's not going to be material in 22. You know, we're early stages in EV charging. We have filled a void in the marketplace where there are plenty of manufacturers, there are plenty of organizations with service capabilities. What has not been determined within EV charging is, you know, you have two different chargers. You have AC and DC. The DC are more complicated. We just don't know what the – call rates are going to be right now it's uh time and materials it's a good extension of our service network it's a good horizontal uh we fill the void we're going to see some level of revenue you know modest margin contribution but so far the investment has been minimal What has to be determined, since we're not the manufacturer, is where the spare parts come from. And the contracts we have now, it's generally supplied by the manufacturer and a pass-through to the customer. So we're in early stages. It's extremely interesting. It's obviously going to be a growing business. It's yet to be determined. ultimately where it lands out. But many of our customers, especially in Europe, many of our retail customers, both in fuel convenience and in grocery retailing, are interested in it, obviously, for their own purposes. And so we have a leg in with many of them relative to the service we're already providing them in self-checkout and point of sale. We have remote monitoring capabilities that we've developed within retail that could apply. So there's a lot of good things and a lot of good possibilities. But for 22, it's going to be a relatively modest contributor.

Okay, thanks. Yes. Our final question today comes from Justin Bergner of G Research. Justin, please go ahead. Your line is open.

Good morning, James. Hello, Justin. Just to loop back to the revenue guide, I just wanted to make sure I understood. So $150 million of deferrals aiding revenue, $40 million to $50 million each of divestitures and exit of low-margin service business getting you sort of to something flattish. First of all, I guess just please verify that. And then secondly, what additional divestitures are being contemplated?

Yeah. You know, the divestitures we have built in are the non-strategic investors. We have a recycling business. in Germany that is a unit that you put into a facility and you can go in. We've all seen them, right? You put your glass in and it gives you cash for your recycle. That business has been in assets held for sale, and then we had some other small non-strategic services business that were going to be sold. And, again, it's only going to be – the impact is going to be in that $40 million to $50 million range. But that's it. as far as these non-strategic assets, we're coming to an end of what we're looking to sell. So after 22, we shouldn't see any headwind like that. As far as the terminated non-profitable contracts, We're tied into some contracts that we would have liked to have been out of. They don't qualify for discontinuance because of their nature. They're very low margin. So it's those contracts. And when we can exit, we do exit. We're always going to be in – uh especially in asia where there's where there's pricing competition we you know if if the contract's profitable we'll we'll pay you know we'll we'll attempt to retain it but where it doesn't make any sense we've walked away and that's the that's the 40 to 50 million dollars of terminated service contracts but but all that is basically coming to an end uh we we uh i i i don't believe we have when we look at the long-term model The three-year model, we don't have anything significant built in for that. In fact, we have growth through managed services built into that model. And I should mention that we mentioned that in our shareholder letter, that obviously we're not back on our strategic model yet. You know, we do feel good about our ability this year to offset the wage inflation and services with price increase. We already talked about the delay from a product price increase and the effect on product margin, especially in the first quarter and a little bit in the second quarter. 23, we feel good about. During 23, with the price increases increasing, With the normalization of supply chain costs, we'll get back on. By the end of 2023, we feel strongly that we're going to be back on our – our strategic model that we previously disclosed the targets to. With Octavio coming on, I think that I would anticipate that by the first quarter we'll have an update on that topic relative to the target and where we are from a strategic model perspective. Octavio is very much an operator and very interested in efficiencies. And if you look at his background and who he's worked for, you'll see he's got very good background and very good background relative to operations and efficient operations and revenue growth. So we're looking forward to that, and I look forward to working with him. You know, we've worked together. I've been here a little over three years. We have a very good working relationship, and that will continue. Debates, his win-win rate is probably going to go up a little bit on debates now that he's the CEO, but I anticipate that, you know, the management team is here to support him, and we'll get back on track. We'll get through this. logistics these logistics issues and these covet issues and uh and the model is performing and and it continues to perform and we see strong order entry in the first quarter we feel good about where we're heading uh in 22 and beyond so with that i'll thank everybody for their their questions and attention and uh turn it back to the operator thank you

This concludes today's Q&A, so I'll now turn the call back over to Christine Marczyska, VP of Investor Relations for Diebold Nextdorf.

Thank you again to everyone who joined us for today's call. We look forward to talking with you all at upcoming conferences and our next earnings release. And in turn, please do not hesitate to reach out to me or Investor Relations if you have any additional questions. Thank you again.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.