Diebold Nixdorf Incorporated Common stock

Good morning. My name is Victoria and I will be your conference operator today. At this time, I would like to welcome everyone to the default next door first quarter 2022 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, press the pound key Thank you. Ms. Marczewska, you may begin your conference.

Thank you. Hello, everyone, and welcome to our first quarter 2022 earnings call. I'm Christine Marczewska, Vice President of Investor Relations for Diebold Nixdorf. To accompany our prepared remarks, we have posted our press release and 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, a replay of this webcast will be available on the investor relations section of our website. Before we begin, I will remind all participants that during this call, you will hear forward-looking statements, including related to guidance. These statements reflect the expectations and beliefs of our management team as of the time on 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 Participants should be mindful that subsequent events may render this information to be out of date.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 tables of today's earnings press release. And now, I'll hand the call over to Octavio.

Thank you, Christine. I'm pleased to be joining all of you for my first earnings call as CEO. First, I want to acknowledge that the last two years have been anything but easy. from the global pandemic and the war in Ukraine to rising inflation in most countries and uncertainty around financial markets and global supply chains. We've had to change many facets on how we work. We are concerned about the humanitarian crisis unfolding in Europe and as a result of the war and are continuing to support our employees in these effective areas. Change and disruption are inevitable. But in times of uncertainty and an ever evolving global landscape, we must remain focused on serving our customers and delivering solutions that help them transform their business. But in today's uncertain environment, we also have to transform and are working hard to continue to improve our systems and processes, streamline our operations, and ultimately create a more productive work environment for our employees around the globe. While supply chain challenges have put additional pressure on our business, we have a committed team, a leading solutions portfolio, and a customer base that wants us to succeed and wants us to help them succeed. Market demand for our products is strong, as evidenced by our growing order entry, which increased 23% first quarter year over year. I am confident we will get through this time of global volatility and come out stronger and more agile as we focus on the key priorities I will outline today. Over the past 60 days, I have spent my time talking with employees, customers, and the investment community, and they have reinforced and confirmed the following. We play a vital role in supporting two of the world's most competitive and demanding industries, banking and retail. Our innovative solutions delight our customers and help them thrive. We are fortunate to have a team that is committed to increasing our operational rigor, focusing on our customers, and delivering on shareholder value. Our investors believe in our financial model and strategy, and they believe we can grow in a profitable way. But even the best companies evolve and continuously improve, and there are clearly areas we need to strengthen and make more efficient. Customers are always first, but I'm also passionate about increasing our operational rigor and better managing costs as a company. To this end, today we are announcing a plan to simplify our operating model by focusing on the areas that provide extraordinary value to our customers and shareholders. We will accomplish this by streamlining our operations to move the organization closer to the customer, drive efficiency, and digitize processes where possible. This will result in significant cost savings of greater than $150 million over the next 12 to 18 months, according to our roadmap. Let me take a few minutes to explain how we will achieve this. First, I am very focused on being more efficient by reducing redundancies and increasing accountability in key areas close to the customer. We will simplify our organizational structure as well as standardize practices across our different subsidiaries. The world has changed permanently, and we will organize ourselves to be more proactive and agile. This means continuing our transformation journey with a strong focus on aligning our resources closer to the customer and improving our processes and using technology to streamline our operations. The world has evolved post-pandemic, and employees value the opportunity to work where they choose. This flexibility has proven to be efficient as our teams continue to go above and beyond to deliver for customers and ultimately our shareholders. whether they're working in a Diebold-Nixdorf office or remotely. It also increases our ability to attract a more diverse talent by being location agnostic. Based on that, we will be re-evaluating our global real estate footprint and closing or consolidating offices where appropriate. Next, we will focus on solidifying our supply chain to achieve stability. Like many companies, this has been a strong headwind for us. I have initiated a full analysis of our end-to-end supply chain to see where we can improve our processes and geographic inefficiencies. Our work in this area has already begun to show progress. As we produce 19% more systems in Q1 2022, as compared to the prior year addition, our manufacturing facilities are scheduled to increase production of ATMs by 17%, and self-checkout by 100% in Q2 of 2022 as compared to a year ago. As noted earlier, there is no lack of demand for our products, especially for our DM series, which is now live in 80 countries with over 500 certifications, and our self-checkout business, which keeps gaining new customers globally. We continue to see a shift away from our legacy devices with our new DM series recyclers, In North America, we now have 87% of all new orders coming from VN series. We expect continued volatility with our supply chain and logistics for the remainder of the year. And we are focused on gaining velocity to accelerate revenue conversion on the 1.2 billion product backlog that we currently have, including banking and retail. We are also evaluating how our global manufacturing footprint needs to evolve. As we have shared previously, we continue to invest in our Ohio manufacturing, which by the end of the year will be capable of fulfilling most of the demand for recyclers generated in North America. So taken together, improving our operational efficiencies. and optimizing our supply chain and manufacturing footprint we will reach our original financial targets for growth profitability and free cash flow by 2024 as outlined in our three-year model overall my leadership approach is very straightforward i will focus on strengthening our core offerings where customers see great value in the end while also instilling a mind will help us capture emerging opportunities and increase shareholder value. For example, we continue to see strong momentum in the EV charging space. Since Q4 2021, we intensified our partnership with Alpetronic in several European countries as we expand to 10,000 of their charging points across Europe this year. In addition, We signed a contract for global service desk capabilities with a leading European electric charging station manufacturer for more than 10,000 of their chargers, as well as started a pilot in mid-March to service more than 7,000 chargers in the US with another manufacturer. We continue to track to our plan to service 30,000 or more charging stations by end of 2022. For 2024, we are targeting revenue growth of 2% to 4%, greater than 13% adjusted EBITDA margin, and 50% or greater adjusted EBITDA to free cash flow conversion. Jeff will provide more detail on our financials. But before I turn it over to him, let me reiterate my focus. We will provide leading solutions to our customer base to help them better serve their customers. As we execute on our financial model, we will unlock the intrinsic value inherent in our three-year targets. Thank you. And now I would like to turn it over to Jeff.

Thank you, Octavio. My prepared remarks will include references to certain non-GAAP metrics, such as adjusted EBITDA. Included in our first quarter non-GAAP adjustments to EBITDA were two impairment charges. $38.4 million related to our North America cloud-based ERP implementation, which was indefinitely suspended as we transition our implementation plan to the distribution subsidiaries. And $16.8 million for assets in Russia and Ukraine. As a reminder, please see our Form 10-Q and shareholder letter for additional financial details from the quarter. Here I will highlight a few of our key performance metrics. Despite seeing very strong demand from customers for our devices and solutions, evidenced by strong order entry data, which Octavio noted, in the first quarter of 22, total revenue was $830 million. A decrease over the first quarter of 2021 of approximately 12% as reported, and a decrease of approximately 7%, excluding a foreign currency impact of $36 million and a $14 million impact from divested businesses in Russia and Ukraine. Adjusted for foreign currency and divestitures, product revenue decreased approximately 10%, services revenue decreased approximately 5%, and software revenue decreased approximately 9%, as compared to the first quarter of 21. Product revenue decreased as a result of continued supply chain challenges, which has unfavorably impacted our ability to convert backlog to revenue. The product revenue decline subsequently led to a reduction in attached services and software in the first quarter. In addition, as noted previously, the company exited certain low-margin non-core service contracts. We originally planned for a 5% increase in product cost. However, in the first quarter of 22, we experienced approximately double that rate, and the majority of backlog converted to revenue was ordered prior to the price increases. This resulted in a material decline in product margin during the quarter. We will continue to increase prices until the inflationary period subsides. For the first quarter operating expenses were flat to the previous period a year ago. We reported adjusted EBITDA of 9 million and adjusted EBITDA margin of 1%. Free cash flow for the quarter, first quarter of 22 was $230 million usage compared to a $70 million usage in the first quarter of 21. which is largely the result of lower adjusted EBITDA and supply chain challenges resulting in higher inventory investment coupled with lower accounts payable leverage. As we are announcing today and as Octavio mentioned, we have initiated a plan to streamline our operations to focus the organization on our customers, drive efficiencies, and automate processes. which will result in cost savings of greater than $150 million over the next 12 to 18 months. Based on the continued supply chain challenges and the macroeconomic environmental conditions, we are revising our 2022 financial outlook. Our revenue guidance for the full year 2022 is now $3.7 to $3.9 billion, which reflects the elimination of approximately $80 million in revenue from Russia and Ukraine, approximately $160 million in revenue from unfavorable effects and supply chain impacts. We see sequential improvement in gross profit throughout the remainder of 2022. As we begin to realize price increases and improve backlog to revenue conversion, and expect adjusted sgna to remain relatively flat at approximately 160 million dollars per quarter our adjusted ebit outlook is 320 to 350 million dollars reflecting revenue margin drop through plus higher inflation rate and duration net of incremental cost savings a revised free cash flow outlook is break even which is directly correlated with the decline in expected adjusted EBITDA as well as working capital normalization. This revised guidance is prior to any cash restructuring charges. Despite these headwinds in 2022, our long-term adjusted EBITDA outlook considers more timely conversion of our orders to revenue, the normalization between pricing and inflation, and the aforementioned cost savings. Collectively, These will allow for us to return to our previously communicated three-year financial targets, delayed by one year due to the uncertain macro climate that we and countless other companies have experienced over the last two years. As Octavio mentioned, for 2024, we are targeting revenue growth of 2% to 4%, greater than 13% adjusted EBITDA margin, and 50% or greater adjusted EBITDA to free cash flow conversion. I look forward to updating you on our progress in the upcoming quarters. Finally, I'd like to provide an update on our debt refinancing initiative. As communicated in March, we secured covenant relief through 2022 with the support of our lenders, which will provide access to adequate liquidity and covenant headroom through early 2023. As you know, we have debt maturities beginning in the second half of 2023. Management is working with Evercore and Sullivan and Cromwell to assist in our refinancing efforts and we will provide an update when appropriate. Now I will turn the call over to the operator for Q&A.

Thank you. We will now start our Q&A session. At this time, if you would like to ask a question, please press start, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And our first question comes from Matt Somerville at DA Davidson. Please go ahead. Your line is open.

Thanks. A couple of questions. First, Jeff, just on the bet side of things, I mean, the stock's looking like $3 pre-market right now. Is there anything you can tell us to give your equity investors confidence that you do actually have a path towards refinancing? Can you talk about where you're at with that path? You know, you discussed standing up in ABL at some point. Just any other detail you can provide would be helpful beyond the prepared remarks where you just stated you're kind of working on it.

Yeah. Yeah, Matt, and I understand the question. And it's a fluid situation, right, with the changing environment. And as I stated, we have engaged Evercore and Sullivan and Cromwell to help with this. And let's just talk about the position. So first of all, we have adequate liquidity and no maturities through – the first quarter, effectively the first quarter of 23. And then if you look at the maturity schedule, it's the revolver in July of 23, the term Bs in the fourth quarter of 23, and then the N secured in the second quarter of 24. So that's what we're solving for, right? And as I said on earlier calls, our company, with the receivables and inventory assets that we have, is better suited from a revolver position to be with an ABL. And I don't think we've found anybody who would disagree with that. The issue we're solving for are the maturities I just mentioned, and the fact that today, under our current structure, the ABL, the term Bs in the secured notes are very pursuant to security. So that's why we have a the partners that we're working with to help us maneuver through that issue, along with addressing the pending maturity schedule in 23 and 24 to get us where we need to be to provide adequate liquidity for operations and also a longer duration of maturities. So there is a path to get there. It's not as straight a path as we would have planned for in late 21 and then early 22. It's changed. The model has taken on incremental inflation. We continue to see incremental inflation. supply chain issues. But there's a path to get there with the help we have and working with our debt holders to get us where we need to be. Because the model is, as we stated today, we do have a clear path with the cost we're going to be able to take out of the model to get back to our target. My point to answer your question, Matt, is there is a path to get there. It's not a straight line like it was, but there is certainly a path to get there anchored by an ABL.

Got it. And maybe a couple other questions. Does increased asset optionality mean become part of this process? Is that part of the discussion? Is kind of anything and everything on the table at this point? Is that kind of where we're at, number one? And then, what do you anticipate the cash cost of the restructuring being? Thank you.

Octavio Garcia- So, Matt, this is Octavio. Thank you for your question. So I strongly believe in our three-year model. I think that as you look into our model, we have a pathway for the company to get to the targets that we've established. Obviously, with this ever-changing environment, we will evaluate any option that presents itself, but we still believe firmly in the model, and I'm committed to making the model work for our shareholders. Again, as far as the cost for restructuring, I will turn that over to Jeff to

Yeah, Matt, so it's still early days. My estimate would be around $75 million in cash costs. But it's early days, and what I would say is we haven't modeled it into cash flow yet because we're still working through the details. But it'll be in that approximately $75 million range from a cash perspective.

Understood. Thank you. I'll get back to you.

Thank you so much, Matt, for your question. Our next question comes from Jeff Holip at Barclays. Please go ahead. Your line is open.

Hi. Good morning. So, Jeff, can you talk a little bit about the visibility on being able to push through the backlog and where you stand with your suppliers getting the components? What are the additional headwinds obviously you know you missed the revenue guidance by a lot your orders are strong but uh maybe you can talk about uh that a little bit and um and then also if you can provide some um a bridge on uh so you did it on revenues but on your adjusted ebitda sort of a bridge as you see it now to bridge from um you know the last year to current or probably guidance to current

Yes, so let me take the first part of the question on what we're doing to address the velocity of converting our backlog. So clearly, you know, since we last spoke in February, we've seen, you know, different macroeconomic events like the closure of ports in China with their serial COVID policy affecting our ability to source materials and also affecting our ability to ship finished product out of that region. With that said, We keep investing in our Ohio manufacturing facility, which will now be ready by end of year to supply most of the demand for the North American market. This will undoubtedly shorten the time from order placement manufacturing to revenue conversion. I think an important factor to consider is demand remains strong for our products, and some of the headwinds that we have receiving components are starting to subside as evidenced by our factories manufacturing a lot more units during Q1 of this quarter than the prior year. Now we're trying to solve for how do we get those products into the hands of customers faster. Again, that reiterates the importance of rethinking our manufacturing footprint and making sure that our Ohio manufacturing is up and running as quickly as possible at full speed. So again, Q2, we're seeing a similar trend. Our factories are fully loaded with significantly higher volumes than what we had last year. We now just need to expedite how we get all those products into the hands of our customers. We are working with our customers, and our customers understand the global challenges we're experiencing and are working with us to make sure that we can deliver in the most appropriate and cost-effective way to them. So, Jeff, can you take this part of that question?

Yeah. So, Jeff, as we communicated in both the release and in the script, it was the $300 million reduction. A $300 million reduction in revenue at margin would generate approximately $80 million of of reduction in gross product. And then the balance to get to the revised EBITDA numbers are effectively inflation. Incremental inflation. Higher inflation, in particular in the first quarter than we had originally modeled. And then a longer duration of inflation. We had originally said we expected some normalization, especially in logistics costs post the Lunar New Year. That has not happened. So there is incremental inflation. inflation in the model. So between the reduction in revenue and inflation is how we branch from EBITDA to the original outlook to the revised outlook.

Okay. And how are you looking at the linearity of that based on your current view in terms of the build in 2Q, 3Q to 4Q?

yeah one of the factors involved in that is is the the nature of the backlog as as we stated that the backlog that we converted the revenue in the first quarter was primarily prior to price increases and we honored the the contractual pricing of those uh orders now we're getting into a mix where we're going to be experiencing price increased conversion So the progression will be margin improvement in the second quarter and then a more normalized margin in the third and fourth quarter.

Okay, great. Thank you.

Perfect. Thank you so much for your question. Our next question comes from Paul Chung from JP Morgan. Please go ahead.

Hi, thanks for taking my question. So just a follow up on, you know, your portfolio of assets today, you know, where could you see opportunities to kind of monetize assets? Sounds like you're, you know, saving costs on real estate. You know, how committed are you as well to your retail business?

Thank you, Paul. I'll take that. So as you've seen, our retail business has tremendous momentum, particularly around self-checkout. Orders grew 100% on a year-over-year basis. So it is an accretive business to us, and it's one that we're committed to. But as I mentioned earlier, we see our model being able to perform once we normalize the speed of backlog conversion and take the appropriate cost actions over the coming quarters. With that, we see our model getting back to performance. But as I mentioned, we are always evaluating if there are opportunities to accelerate shareholder value. So as of today, we believe in our model, and we believe that by accelerating backlog conversion and taking the cost out, the incremental cost out, we will have a performing model. So I'll just leave it at that. But we are always evaluating what the best way to unlock shareholder value is.

Okay, great. And then, you know, self-checkout was the bright spot in the quarter, you know. So how big was that contribution? What's your visibility into the year? And, you know, are you making more progress in North America beyond the kind of airport wins?

Yes, so as mentioned, orders are up 100%, and our manufacturing facilities are scheduled to almost double the amount of self-checkout that will be shipped. A good portion of that will be tied to some important links in North America that you will see starting to fall out in the coming quarters. So we are making progress in the North America business with important

retailers and you will start seeing that in the coming quarters okay and then last question just on the ev charging business you mentioned 27 you know thousand signed contracts um how do we think about the the revenue and margin contribution kind of per charging station um is the cash paid up front and you know how material can this business be over time you mentioned i think 30 um 30 000 by end of year um and then the North America opportunity. Thank you.

Yes, thank you, Paul. The EV charging business is one that's constantly evolving. I've had multiple conversations with fuel companies starting large deployments in Europe, charge point operators, and there's one commonality. everybody is looking for a global service provider that can help them maintain and operate a global fleet i think we're in the early stages of how this market will will evolve but we do see it as some something where our service infrastructure can be leveraged and and and we will be updating you on on what that looks financially once we're done with all the pilots that we have ongoing right now but we do see that and years. I would say that it's still an industry that's trying to figure out what the appropriate service model is. As you saw, some of the wins that we have have been on our service desk or our capability to take calls and dispatch service to locations. So there's, I would say, a confluence of events that will make this business continue to grow, and we want to be a company that's helping shape how the service is provided in that market.

Thank you.

Perfect. Thank you so much for your question, Paul. Our next question comes from Anna Goschka, Bank of America. Please go ahead.

Hi. Thanks very much. So I'd like to get some additional color, if we could, on the restructuring plan. So obviously, you had a multi-year, very thorough restructuring process that you completed at the end of 21. And it appears that the vast majority of the challenges you're facing right now are from exogenous factors, so obviously supply chain and cost inflation. So wondering, this next phase of restructuring, what areas, geography and products, How do you feel that there's still room to go? And, you know, if it wasn't for this, the exogenous factors and challenges that you're facing right now, are these operational moves a reaction to that? Or are there kind of things you left unfinished with regard to the prior programs?

So thank you, and you are right. Some of the actions that we're taking are in response of a changing environment, one that we couldn't have predicted just three to four months ago. With that said, when you think of our company, the value that we bring to customers, both in banking and retail, is that we have leading hardware and software technologies. that coupled with a tremendous service capability provides a very unique value proposition to our customers that's what our customers value our great technology and the great service that we have attached to that so what are we doing right now we're doubling down our efforts to make sure that those two areas building the best technologies whether it's our self checkout or our atms that as you've seen continues to have very strong demand in the market We reinforce those areas. We reinforce our service capabilities as service is the main driver of customer satisfaction. And then we keep streamlining the periphery around those areas, but making sure that we strengthen our core offerings, that we're focused on growing those core offerings. And then, you know, taking an approach where everything else in support of those areas needs to be streamlined through digitization, through process improvement globally. Jeff, anything else you would like to add?

Yeah, I would say that the DNI initiative was much more focused on a top-down approach to restructuring. I think that the unique view that Octavio has from running the banking organization and determining where inefficiencies lie within those support structures This is real-time. We're not going to get into a lot of detail because we have internal communications and internal factors involved. But I think the difference is it's not targeted on enablement function so much in top-down. It's a view of the world from an operator's perspective and eliminating the inefficiencies that are in the model.

Okay. And then so the cash restructuring costs, which, you know, appear to be coming back. So those are largely going to be for things like severance and lease breakage on facilities. Are you bringing any kind of consultants in to work on this project? And are those kinds of fees included?

Yeah, any consulting fees to support us with the projects are included in those numbers that Jeff provided. However, we feel that we have a strong team internally to drive some of these changes, and the team has been working on that with me for the past couple of weeks on making sure we execute against that in a very timely manner.

Okay. And then, you know, just on the EBITDA guide for the year, so any of these, I'm assuming that costs related to the restructuring are not included in the EBITDA guide, so those would be kind of on top of the EBITDA guide. Is that right?

That's correct.

Okay. Okay. Thank you.

Sure.

Perfect. Thank you. Our next question comes from Matt Bison at Wedbush Securities Equity Research. Please go ahead. Your line is open.

Hey, good morning. Thanks for taking my question. I've got one question, one follow-up. Octavio, I think you talked to production of systems increasing, yet obviously shipments were a bit disappointing. I guess I just want to understand What exactly is the delta between you guys producing the system versus getting in the hands of the customer and booking the revenue? Is it logistics now that's the primary bottleneck or is there something else? And then I guess the second part of that question is when we do think about backlog, in terms of your revenue projection, Is there an implicit understanding that as you get to the end of the year that you're going to be able to capitalize on some of that backlog growth and don't bring backlog down? Or is that not part of your revenue assumptions that we should assume you're still going to exit this year with heightened backlog? Thanks.

Yes, so first let me address the production cycle and the difficulties of getting products to our customers. If you remember, for the past couple of quarters, we've been talking about material challenges in our supply chain and getting our manufacturing facilities up and running. Not to say that there aren't still component shortages and difficulties getting material into our factories, But I would say that the team has done a fairly good job of mitigating those effects. Now, the main challenge is how do we get those products from our factories both in Germany and China into the hands of our customers globally? There, the logistic challenge has proven to be greater than what we had expected. As Jeff mentioned, we have planned for the year with normalization of shipping after the Chinese lunar year. new year in February, something that clearly has not happened, and we're not forecasting that to improve any time soon. So to us, it's important to accelerate the manufacturing of those devices, ship them as quickly as possible, and remember, that's the reason why we're standing up our Ohio manufacturing facility to reduce that cycle time that in today's world or from Asia to the Americas or Europe can take in order of 40 days. So we have, so that's why we need to shorten that cycle. And that's the expectation that we have, that as we keep planning for this, we will be able to take those machines schedule their installation with customers, or if necessary, amend our contracts so customers take ownership of those devices once they leave our factory. And those are all things that we're working on to try to accelerate our revenue conversions.

And then the backlog question, we are still forecasting higher order entry than revenue. So we would expect a backlog increase year over year when we get to the end of the year. So order entry has been really good, obviously, in the first quarter, and we're forecasting that to continue throughout the year.

Awesome. Thanks. And then I guess for my follow-up, When I'm looking at software gross margins, I tend to think about those gross margins being somewhat more stable, more predictable. The quarter over quarter delta, what's the primary factor there? I know it's a lot of customization work, so is it underutilization of software engineers? Obviously, you don't have the same input cost challenges that you do in that business as in the product side of things. If you could talk to the gross margin of the client so much.

Yeah, that's just a one-quarter issue that, you know, because one contract can swing that margin fairly materially, but we don't anticipate that happening in the rest of the year and we'll get back to the normalized software margin. That's a one-time contract hit in the first quarter.

Thanks, Jeff.

Thank you for your question. Our next question comes from Rob Joss at Invesco LTV. Please go ahead.

Hi, thanks. Jeff, I wanted to ask about how you can respond. I don't know if there's an industry-wide change here, but You know, NCR talked about being much more aggressive about taking costs and setting themselves up to protect themselves against the kind of environment we've just gone through. What can you say about what you can do to do the same? You mean from an operating cost perspective? Is that the question, Rob? Yes. Exactly, yeah. Yeah, and I think that what we're doing was what we need to do from a model perspective. We're looking at the model for inefficiencies and taking out excess or inefficient costs and announce that 150-plus of savings. Are you talking about something beyond that? More on driving price increases and getting the customers on board with the environment that we're in where everything's more expensive now.

And so as a result, you know, prices have to go up.

Yes. So let me take that, Jeff. So clearly we are discussing with customers, you know, the new cost associated with delivering both the product and the services associated. Customers are open to those discussions. and we're being you know i would say that all new orders we we are we have now implemented price increases we are we started that profit in the back half of last year we're we are continuing to increase prices as we see input costs go up so you should and that's why we're forecasting a normalization of margins towards you know margins improving sequentially over the coming periods So customers are open to that. They understand the challenges that we're facing, so they're open to these discussions. We're actually approaching customers to, in some cases, to reprice backlog that has long duration in some long-term contracts or asking them for the prepayment of that to maintain the current pricing. Another important thing that we're doing in our service business with fuel price increasing significantly, implemented a fuel surcharge in all our contracts in North America, which is now helping us offset some of those increases in the coming periods as well.

And that fuel surcharge... I'm sorry. Go ahead.

I'm sorry. Go ahead, please.

No, I was just... I guess what I'm looking for too is for some, you know, just something that will You know, it seems like what you're talking about is our actions taken in response to what's happening around you. Is there, you know, the fuel surcharge, is this the kind of thing where once it's in place, the next time there's a fuel increase that you are protected, or is it just based on current levels? I'm just trying to understand kind of the structure of what you're putting in place with these new contracts.

So again, the example of the fuel surcharge, we're basing it on X percentage of fuel movement. So next time that there's an upward boom, we will be protected in that respect to the contract. Clearly on the hardware part of our business, we need to monitor input costs more closely. That's part of the supply chain reengineering that we're doing to be more proactive around our material procurement and making sure that we're passing those in our list prices and in our selling prices to customers. So what we've done is we've adjusted our thinking to be a lot more proactive. To your point, start getting ahead of the future challenges that might appear and have the mechanisms in place so that it's not a reaction, but in a proactive manner be able to address those future changes.

Okay, that's helpful. My second question is just around the outlook. Given the pricing increases, given the backlog, the top line growth seems low, given that that's probably even under what inflation, you know, is currently. And I know it's probably not expected to go on at that level. But I'm just wondering, is there, are we, you know, looking at a mix of ongoing churn and unprofitable contracts on the services side that are going to offset some of this natural growth?

growth that we would just get from what we're seeing today?

Yeah, so maybe it'd be good for me to walk you through a bridge from from 21 to the outlook for 22. And there's a couple of factors that we need to take into consideration. So first of all, in 21, the Ukraine-Russia revenue was approximately $80 million. So that's coming out of the model. And FX now, year over year, we originally had modeled FX to be Now we're looking at and modeling it to be approximately $130 million unfavorable year over year from the strengthening of the U.S. dollar. And we have divestitures. We have small divestitures from 21. That's going to affect this $40 million. So if you take those into consideration, you're going to get something in the mid-2040s. $3.6 billion, and then we're guiding, obviously, at the low end, a modest growth at the upper end, a more robust growth. So that range is really around supply chain and the ability to deliver product and convert from backlog to revenue. At the same time, as Octavio mentioned, we have pricing increases that are coming through. So it's a combination. That growth is the combination of pricing adjusted for supply chain. I mean, it's fairly straightforward.

I appreciate the detail there.

Perfect. Thank you so much for your question. Our next question comes from Aaron Sashadi from Credit Suisse. Please go ahead.

Hi, Ottilio and Jeff. Thanks for taking my questions. A couple from me. First, just to understand the magnitude of the margin improvement in Q2 and Q3, is there a way to sort of quantify and say if Q1 you know, if the Q1 revenue was delivered at a sort of normalized margin, what would that, what would that, what would, you know, gross profit have been? Just to get a sense for, I guess, broadly the risk to your, your full year forecast.

Yeah, we haven't get, we didn't get that number, but I could tell you that it's, that the product side of it is approximately 100 million dollars on product revenue and so so you take that as margin and right and there's going to be there's going to be attachments associated with that in services and software so so it's it was material material got it understood thank you for that jeff and then

As far as the repricing of the backlog goes, is that contractually written into your prior backlog, or is it dependent on customers basically wanting to preserve their position in the line and therefore agreeing to reprice?

It is the latter. We're approaching each customer, and each customer has an individual situation. and being very transparent and open with our customers on what has changed the need for us to reprice but also giving them the option if they want to prepay for that backlog and maintain their their current pricing also doing that to improve our our cash position so the good news and i like you know or remember every machine that we build every single atm or self checkout device half the customer attached to it. We don't build inventory without having a customer attached to it. So we know who ordered the machine, when they ordered it, and when they need it. So we're approaching every customer individually and tailoring a plan to each specific client and trying to find the best solution for them and for us.

Got it. Thank you for that. Last thing from me, I guess a couple of smaller things. One is the restructuring charge. I understand it's not fully set in stone, the cash restructuring. Can we just assume it's distributed between 22 and 23 or in any color at this point you can provide in terms of the mix in 22 versus 23 of that $75 million in cash restructuring?

Yeah, we haven't provided that. I would say this, that there is a sense of urgency on our part, and we have to take care of our internal communications and work, but we're committed to this, and it's going to be faster than... It's not something that we're going to delay. We're going to do this as fast as... while maintaining the proper controls and harvest these savings quickly.

Thank you, Jeff. Last thing from me, the software margin to a prior question. Jeff, you talked a little bit about software margins being a little bit lower because of one or two specific contracts. Were these, so I assume these are sort of multi- multi-country sort of contracts because we did see the margin go down, you know, pretty much across all the businesses on the software side?

Yeah, they could be across the segments. It was just an occurrence in the first quarter. And as I said, we don't expect to see a recurrence of that low margin in the model going forward.

Got it. Thank you very much, and I appreciate the disclosure given all the sensitivities. Thanks.

Thank you so much, Aaron, for your question. And our final question comes from Matt Somerville. Please go ahead. Your line is open.

Yeah. a couple of questions. How much unbillable inflation is currently sitting in your backlog or how much uncovered inflation with respect to price is sitting in your backlog and how much of that do you feel you can recover by getting it repriced, if you will?

So very good question. Matt, we seem to admit, you know, remember that we have many long-term contracts that probably were signed middle of last year and probably run through the end of this year and some have even longer durations. So I would tell you that this will be done on an individual basis, customer by customer, trying to find the most appropriate solution. In some cases where customers have a big urgency to deliver equipment, we're talking with them about them paying for expedited breaks to meet their commitments. I would say that this is still work in progress, but the whole organization is very focused on how do we recover that unbillable inflation built into our backlog through multiple mechanisms. And unfortunately, it will be customer by customer how we approach this.

In the past, I think you provided what that number was, and I was wondering if you could update that. I guess I had like a $35 million number sitting in my head coming out of 21, and I'm curious as to if you guys have that number and would be willing to share it again.

And you're specifically saying the unbillable Let me understand the question. So what you're saying is the margin on backlog, how much inflation is non-billable? And I think the math answer is going to be this, is that we anticipate we will get halfway back to normal margins. in the second quarter, and then in the third quarter be back to a more normalized margin. So basically, you could take the basis difference between where we are in the first quarter and where we should be, and half of that would be in the second quarter. So it's 500 basis points on basically $400 million of revenue.

Okay. And then I want to be maybe a little more clear on something. So $9 million of EBITDA in Q1, how should we think about the cadence kind of moving forward from here to get to, you know, say the midpoint of the revised guidance?

Yeah. The fourth quarter will be basically comparable to the prior year fourth quarter, and then it'll be progressing from where we're at today to the fourth quarter, incrementally improving quarter by quarter. And then in light of – Accelerated. Go ahead. It's not completely linear from the second to third quarter. So, I mean, we don't give quarterly guidance, but what I would say is we'll get back to – fourth quarter we'll be back to prior year levels, and it's not going to be linear in the second and third quarter, but it's going to be progressive through the second and third quarters.

Got it. And then this year in general, I want to talk about free cash flow a bit. One, given kind of where your leverage profile is today, I guess, where are you going to get the $75 million to fund this restructuring? So I'd like to get comfortable with that, number one. Number two, I think towards the end of 21, for lack of a better term, you're kind of pulling forward some free cash flow with collections a bit. So maybe cannibalizing a little bit of 22 in that regard. So I want to think about how that factor plays into things this year. And then at the end of the day, I'm wondering, you know, in light of the first quarter burn, if you can do anything to drive better linearity in cash performance this year. Thank you.

Well, it won't happen this year. What's going to happen this year with what I just said relative to EBITDA is going to result in linear pre-cash flow. If you look at where we're at in – Obviously, we will again generate significant free cash flow in the fourth quarter. That's been our trend, right? So the liquidity comes from cash reserves and the modified covenant that we negotiated and continuing to monitor our cash usage. So we have a path for that. We're already in May of the second quarter, so what we're talking about is The spend will be in the back half of the year, and we'll have adequate liquidity to do that. Got it.

That's all for me. Thank you, guys.

Perfect. Thank you, Matt, for your question. There are no further questions at this time. I will now turn the call back over to Octavio Marquez, CA of Diebold and Ixdorf. Please go ahead.

Thank you, operator, and thank you everyone who listened and participated in today's call. Although we continue to live in uncertain times with a challenging macroeconomic environment, we believe we've laid out a strong plan for profitable growth over the coming quarters and years, as shown by our strong order entry and forward-looking pipeline. There is no shortage of demand for our solutions and services. We look forward to seeing you at our upcoming investor conference as well as our next earnings release. Thank you all again. Thank you.

Thank you, everybody, for joining today's call. You may now disconnect.