Good day, and welcome to the Diebold Nixdorf Hosted Fourth Quarter 2019 Earnings Call. At this time, I would like to turn the conference over to Mr. Steve Virostek. Please go ahead, sir.

Thank you, Britney, and welcome to all our listeners. This is the Diebold's fourth quarter earnings call for 2019. Joining me today are Gerrard Schmid, President and Chief Executive Officer; and Jeff Rutherford, our Chief Financial Officer.For your benefit, we posted slides which will accompany our discussion today. And our slides are available on investor relations page of dieboldnixdorf.com. Later today, we will post a replay of our webcast to this IR website.On slide 2 of the presentation, we are reminding all listeners that today's comments will include non-GAAP financial information, which we believe is helpful in assessing the company's performance. In the supplemental schedules of our slides, we have reconciled each non-GAAP metric to its most directly comparable GAAP metric.Over on slide 3, we remind all participants that certain comments may be characterized as forward-looking statements and there are a number of factors which could cause actual results to differ materially from these statements. Additional information on these factors can be found in the company's SEC filings. Please keep in mind that our forward-looking information is current as of today, and subsequent events may render this information out of date.And now, I'll pass the mike to Gerrard.

Thanks Steve. Good morning and thank you to everyone for joining our fourth quarter earnings call. 2019 was a good year for the company as we executed on our DN Now transformation initiatives and delivered financial results which were in-line or better than our expectations.To set the stage a bit, I want to reflect for a moment on way were one year ago. We were in the early stages of streamlining our operating model and simplifying our portfolio. And we had clear goals for strengthening our balance sheet. Fast forward today, after year one of DN Now and we have met or exceeded on every commitments we made and on track for future targets.As shown on slide 3, we reported total revenue of just over 4.4 billion, which was within our initial range and our results also included substantial currency headwinds of approximately $150 million. We delivered adjusted EBITDA of $401 million which was within our initial outlook from February of 2019 and which represents a 25% increase over 2018, and also included a foreign exchange impact of approximately $7 million. Most importantly, we exceeded our free cash flow target generating $93 million versus our initial expectation of breakeven.In line with our focus, these results demonstrate meaningful improvements in profitability and cash flow. We increased our non-GAAP gross margin by 280 basis points to 25.2% with strong margin expansion in all three segments and business lines. A progress enabled DN to boost its adjusted EBITDA margin by 210 basis points to 9.1%. Free cash flow increased by $256 million, and unlevered free cash flow jumped by $315 million reflecting our company-wide focus on driving both operating and networking capital efficiencies, while delivering these against a backdrop of significantly stronger customer satisfaction levels.Our progress reduced our leverage ratio by more than…

Thank you, Gerrard. And good morning, everyone. 2019 was a very strong year as we took major steps forward in our journey to value creation and are looking forward to building on that success in 2020. As I discussed our financial results for the fourth quarter and 2019, please keep in mind that my comments will focus on non-GAAP metrics unless otherwise noted.Slide 9 contains our fourth-quarter financial highlights, which are squarely in line with the company's outlook. Excluding the impact from foreign currency headwinds and our divestiture, revenue declined 8.1% to $1.15 billion for the quarter. Many of you should recall that we reported exceptional strength in our product revenue in the fourth quarter of 2018, which is approximately $50 million more than we would typically expect resulting in an unfavorable comparison. In the fourth quarter and throughout 2019, we have focused on higher quality revenue and that have been proactively reducing our exposure to load margin business which had a fourth quarter revenue impact of approximately $40 million.As a result the year-over-year comps for the fourth quarter are not indicative of our 2020 revenue expectations. These efforts coupled with our DNR progress are producing tangible and sustainable gains to gross profit, operating margin and adjusted EBITDA margin. We increased gross margins by 300 basis points to 26.3% % which translates to higher gross profit of $3 million. Higher gross profit coupled with lower operating expenses enables the company to boost operating profit by 20% from $83 million to $100 million, correspondingly, our operating margin increased by 230 basis points, 8.7% while the adjusted EBITDA margin improved 180 basis points to 11.4%.Return on invested capital was approximately 10% in 2019 much better than our mid-single digit result in 2018. Going forward, we will continue to be selective about how…

Thank you, Jeff. In closing, following a successful year of execution in 2019, we enter the New Year in a stronger financial position with solid execution momentum and a more efficient core operation. We will advance our strategy as we expand our differentiation with DN Series, the AllConnect Data Engine, more sophisticated self-checkout solutions and the strength of our services organization. Secondly, by laying the groundwork for future revenue growth opportunities, by making targeted investments in services and software.And thirdly, by continuing to streamline the business, embrace standard processes and operate as efficiently as possible. And fourthly, by continually strengthening our balance sheet. This is our path forward toward long-term, sustainable value creation. To learn more about Diebold Nixdorf and our plans for value creation, I'd like to invite investors to join the management team for a discussion of our strategy, market opportunities and financials on Thursday, May 21st in New York. Please mark your calendars and be on the lookout for registration information from Steve Virostek.This concludes our prepared remarks. And we are ready to begin the Q&A session. Thank you.

[Operator Instructions]Our first question comes from Paul Coster with JP Morgan.

Yes. Thanks for taking my question. Gerrard, you mentioned as we roll into the New Year that some of the larger banks of, it sounded like they've kind of concluded their upgrade process. And can you sort of just elaborate a little bit? Can you talk about the smaller and regional banks in North America? And for that matter in Europe and how they may kind of play out over the course of the end, how to reconcile all of the above with this sense that you're conveying that there's a pending kind of backlog associated with the new DN Series equipment that's been certified at the moment.

Yes. Good morning, Paul. Thanks for your question. So let me try and hit the different aspect to your question. As you rightfully put it, we're expecting some of the larger North American banks to wrap up some of their upgrade activity through the back end of 2019. So we don't expect that same level of volume through 2020. That being said, we continue to see very solid buying activity from the regional banks and community banks, as well as the larger banks in Latin America. Don't forget that those banks often operated fleet substantially larger than the large US banks. As relates to Eurasia, as we've discussed in the past Eurasia has been experiencing a slower ramp in the refresh cycle versus North American banks.And we're seeing decent buying activity through 2020 across multiple regions in Eurasia notably Southern Africa, the Middle East, Eastern Europe; parts of Western Europe and those ties to our broader observations that we're seeing a high degree of interest from multiple banks across the world for DN Series. And clearly that's what's causing us to feel fairly bullish about the back half of the year. And once we're through the certification processes that these banks are currently executing against.

Okay. One quick follow-up, sort of turning back to growth in 2021 and some of that growth will originate in things that are new to the world. Is it the DN Series product that you think fuel the growth? Is it software? Is it services? Is it stuff yet to be introduced over the course of the year?

Paul, I think it's going to be driven by three different factors. And obviously at 2021 still a ways out and our focus is on 2020, but when we think about medium-term drivers, it really will be from the DN Series program. We think that there's a lot of runway ahead of us for that in part because of just how competitively differentiated is. The second core driver will come from growth in our software business and the third core driver will come from, our comment I touched on briefly where we're seeing more and more banks showing interest in broader managed services, where banks will be looking to outsource broader parts of their value chain to players like Diebold Nixdorf and we think that that is an area and a trend that's going to continue to expand as we look out through 2021.

Just a quick question there, in which context? Why did you let go of the Portalis operations since it seems like it's contiguous with that managed service business.

No. It's actually not. That particular asset was focused on managing the data centers for certain smaller institutions in Germany. It wasn't a business that was particularly scalable for us. And as we've commented in the past, our broad focus is building replicable, scalable platforms globally. In that particular asset, it didn't meet any of those criteria. So it's not contiguous with the strategy that we're executing against.

Our next question comes from Matt Summerville with D.A. Davidson.

Thanks. Couple questions. First is to follow up on divestitures. Gerrard with these two transactions that you're discussing this morning, will this effectively conclude what you're looking to do divestiture wise? And maybe talk through that in a bit more detail in terms of what we can expect going forward.

Yes. Sure, Matt. So ultimately as Jeff alluded to in his prepared remarks, the divestitures that completed through 2019 in the first quarter accounted for roughly 4% of our revenues. And we continue to look at a couple of other assets, I'm not going to get into any specifics around timing, but they will be of a similar nature to one that you've seen us execute against in 2019 and we'll obviously report on those as and when they get concluded.

And then just to follow up just to the ATM market, you spoke a bit to North America and with respect to EMEA. What is your market outlook for Latin America for 2020? And what expectation should we be thinking about? Is it pertains to your business in Asia? I guess what I'm trying to get at is there still a drag on the top line in Asia or we effectively anniversaried that and maybe if you can work in some comments on what you're seeing globally with respect to recycling uptake that would be helpful as well.

Sure, Matt. Thanks so three different questions. As you're well aware we have very strong market position in Latin America. We're expecting solid activity in large markets like Brazil and Mexico. I think the one area we're mindful of is where the Mexican economy is headed. So that's an area for watch out for us but that aside we continue to expect decent activity across the big Latin American markets. Asia Pacific, I think you're spot on that we should have anniversary the more challenging quarters that we experienced in the past. And consistent with our strategy last year we continue to be very focused on markets where there is a sustainable profit pool.Part of the action that we undertook to deconsolidate our China joint venture will further allow us to have an easier compare going forward, but from end market demand perspective I think things are settling down somewhat in Asia-Pacific. And on your last comment related to rate cycling. We continue to see an evolving and growing trend as banks increasingly look towards recycling, but this has been a steady and consistent trend for us that we believe continue to work in our favor given our distinctive recycling capability.

And then one last one for, Jeff, in your prepared remarks towards the end you talk about some things you're potentially looking to do with your debt structure, balance sheet. Can you maybe provide sort of a two-year overview on what the broader balance sheet game plan is for Diebold, Jeff?

Yes. What I would say relative to the long term is we are looking at debt markets and opportunities within debt markets continually. So it would be premature for me at this point to say what it's going to look like in two years, but obviously we have the term A and the term A1 maturity is coming in 2022. So that's the top of mind, what we are asking for today from our secured lenders is the ability to use other sources of secured debt other than just term loans. So that the -- we're trying to expand the field relative to opportunities for us in capital structure and at this point in time, I could speculate what it's going to be in two years, but I'm not really prepared to do that as we continue to evaluate the debt markets and what the opportunities are for us.

Our next question comes from Kartik Mehta with Northcoast Research.

Jeff, just a little bit more on the balance sheet. You talked about I think you have $388 million of cash on the balance sheet. I'm wondering what's the optimal amount of cash you'd like to have on the balance sheet.

Yes. Hopefully our treasurer you guys are listening, optimal number is zero right but we do have certain places where we have cash locked up because of currency restrictions and so forth. And we do have some operating cash. As we move forward in improving our financial performance and liquidity and so forth, it opens up some opportunities for us to continue to harvest cash. I would say a good target for us and there's some year end flow. Year end for us is a pretty significant collection period. So there's a level of float. I would say a very good target for us is in the mid 200s. Short term, I am telling, our treasury guys, it's much lower than mid 200. So if they are -- what -- since I know they are listening.

And then, Gerrard, maybe you alluded to this there a little bit in some of the comments you were making for 2021, but I was wondering almost every bank talks about branch collapse and consolidation or reducing the footprint as branch traffic kind of slows. I am wondering what the opportunities or risk are for Diebold as that takes shape over the next few years?

Yes. Kartik. I know that's been a theme that some folks are focused on and well what we see globally is very different postures across very different banks. And when we take a look at the absolute number of machines that are required, it's pretty darn stable. And as we see it growing shift towards banks replacing existing machines with recyclers that naturally dries a higher revenue point for us and a higher margin for us as well. So notwithstanding some of the things you might hear from one or two banks, we just don't see that unfolding in any material way to the downside.

And then just one last question, Jeff. Well, I know you've done a fantastic job on networking capital and as you move forward what do you think is a good percentage of revenue for networking capital?

Yes. And by the way it's the total company did it an outstanding on networking capital. And we can't be broader or the organization to work together in operations and treasury and procurement and throughout the company. I would say we are --we have additional opportunity. It's not a 100 basis points, but it's somewhere between 50 and 100 basis points.

Over the next couple years obviously, Jeff.

Yes. I am sorry.

No. That's correct. Over the next few years.

Our next question comes from Justin Bergner with G. Research.

Good morning. Yes. Thank you for taking my questions. I guess for starters you had a very strong service gross margin in 4Q, I guess, over 28%. Is there a seasonal aspect to that or are you actually sort of based on the fourth quarter tracking ahead of your goals for 28% -29% service gross margin?

Yes. Justin, if you go back and take a look at our historical financials, you'll see that Q4 always generate stronger services margin than the other quarters primarily because of the loading utilization of our service technicians. So it always generally is a high point for us in the quarter. That being said consistent with my earlier comments, we couldn't be more pleased with the momentum we're building in our service of modernization program and at 28.2% gross margin in 2020, you focus that great jump off point as we enter 2020.

Okay. Thank you. That's helpful and then on the service base, the growth in 2020, is that primarily a function of the strong upgrade activity that you saw in 2019 in North America or is it broader than that?

No. It's definitely a broader than that, Justin. There is a specific initiative that we have underway in each of our various markets related to our overall services contract base. What the Americas activity adds a little bit to that, but it's actually related to broader initiatives.

As well as we're coming to the end of some of that meaningful work to harvest the low margin contract.

Okay. Great. That's helpful. Maybe just on the cost and margin side and cash flow. The $45 million in cash taxes are you seeing -- it seems like you're seeing some reduction there as more of the earnings base shifts to the Americas versus the rest of the world? Is that accurate?

How much time we have. I'll try to -- I'll go in this --

Gerrard signal to me to give you previous version of this.

Thank you, Jeff. By the way $8 million of that reduction is a refund a non-recurring refund. So we have seen a reduction in cash taxes, but what we need to do and I've said this before is that we need to -- we are paying taxes in two places. We're paying it in distribution subsidiaries so non-US and German countries where we sell product from Germany in the US to those countries, they resell it. So they're effectively owned distributors, although they do service on the ground there. So we need to optimize that relationship and like a distributor would do and maximize our profitability in Germany and the United States. The other issue we have and I've talked about this before is our capital structures not aligned with our tax structure. And we have all of our deductible third-party interest in the United States which drives the United States into a taxable law under current US taxable rules by tax laws that's not a good place to be.It's not a good place to be in a loss in your principal and profitable in the other countries and paying taxes because it limits what you can do relative to foreign tax credits. So we end up paying taxes in the US on a loss. So those things in combination, it's a combination of our relationship and with our distribution subs and their level of profitability and our capital structure relative to optimization where we should have the deductible third-party interest. Those things in concert can get us to a point where we could have a normal both book provision and cash tax.

Okay. Thank you. And then lastly the $25 million in growth investments against the DN Now savings, is there anything in particular that's targeted towards or is that just using some free cash flow flexibility to put much needed investment to the overall business?

So, Justin, this is very, very concrete actions that are underpinning those and as I said in my remarks, the specific initiatives in both our software and services areas.

Our next question comes from Ishfaque Faruk with Sidoti & Company.

Hi, guys. Gerrard, you briefly touched on this in the last question. And that's the components of the DN Now targets; it's increased from your prior goal post of $400 million. Other than software and services, is there anything else to read into in terms of the -- where are the source of savings is coming from on the DN Now initiatives?

Yes. Just to be clear, Ishfaque, the prior question related to $25 million of incremental investments in future growth initiatives. Those do not factor into the $440 million of DN Now savings. The underpinnings behind why we increased the range was primarily driven by our execution confidence in a number of initiatives that are shaping up very nicely, areas like our services modernization program plus the finance transformation that Jeff referred to and a couple of others. So that's really the primary driver behind why we feel confident upping our targets. Things that we talked about in the past, it's really just execution confidence at the stage.

Got it. Okay. And in terms of -- you commented about it briefly in your prepared remarks. And that is the sales pipeline of the DN Series. It looks like there's a lot more customers than previous, it's like 240 customers. Do you have a sense for like what some of the order trends might be after the certification process is completed?

Yes. We don't at this stage yet, Ishfaque, primarily because the certification processes are customer specific and country specific. And therefore have a range of duration patents related to them. So once we get further through the certification process, we'll be able to provide more commentary around it. What I would say though is, yes, there remains very strong interest, so that gives us the confidence to frame the remarks that we have.

Great. And Gerrard, any -- do you have any specific remarks regarding Brexit on your retail segment? I mean, like it was a little late, the retail revenues coming out of Europe?

Yes. We're not seeing any meaningful impact from Brexit, Ishfaque. The retail revenues that we talked about directly relates to a very difficult comparing Q4 of 2018 where there were some substantial point-of-sale deliveries in a couple of markets in Europe. When we take a look at the underlying forms of retail, we're very, very encouraged by the momentum we're seeing in our self-checkout business. Last year we grew self-checkout the units by 50% and we actually have to do substantially better than that in 2020. And that's offset by some moderation in-point-of-sale demand in Europe, but at this stage we don't see Brexit having a meaningful impact on our European patents.

Our final question comes from Todd Morgan from Jefferies.

Thank you and glad I could slip in. You guys have spoken about the managed services opportunity. I wanted to ask you to drill down a little bit more. I would assume for example that it's a long sales cycle and a fairly long implementation cycle. Can you give us any sense of where you are in the various sales cycles that I'm sure you're engaged in? And then if you win business, the kind of timeline it would take to really ramp that and for example do you have existing resources you can leverage or how many new staff would you need to hire and train?And lastly, is the margin profile that's similar to what you have currently in the services business or is there kind of a ramp as a new business comes on to get to that? Thanks.

Thanks Todd. There is a lot of granularity in your questions. Let me try and give you some high-level comments around those. This is --the good news is that managed services are not a new capability for the company. We are enhancing it, but it's not brand new and in fact when you take a look at some of our prepared remarks and we want to recently size the deal in Belgium for ATM as a service, managed services business. So the sales cycle it is somewhat longer than typical sales cycle. We're looking at depending on the size of the institution and a complexity of the transaction in the 6 to 12- month timeframe. Implementation is not materially more difficult than some of our existing services businesses and different aspects of the managed services proposition will have different implementation timelines.So we are adding some additional resources, part of the $25 million that I alluded to as incremental investments gets directed towards capabilities of that very nature that you just made reference to. And your last comment related to margins. From the transactions that we've secured to date, we're seeing higher margins coming out of our managed services business than we would see out of our broad services business, which points to an attractive profile for us, if we can build more momentum around that business.End of Q&A

Good. I would just want to thank everybody for joining us for today's fourth quarter earnings call. If you have follow-up questions, please contact me at Investor Relations. Thank you.

Thank you, everyone. This concludes today's call. Thank you for your participation. You may now disconnect.