Diebold Nixdorf, Incorporated (DBD) on Q3 2022 Results - Earnings Call Transcript
Operator: Good morning. My name is Charlie, and Iâll be your conference operator today. At this time, I would like to welcome everybody to the Diebold Nixdorf Third Quarter 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakersâ remarks, thereâll be a question-and-answer session. Thank you. Ms. Marchuska, your conference now may begin.
Christine Marchuska: Hello, everyone and welcome to our third quarter 2022 earnings call. Iâm Christine Marchuska, 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 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 an update on our outlook. These statements reflect the expectations and beliefs of our management team at 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 companyâs 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 Participants should be mindful that subsequent events may render this information to be out of date.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 todayâs call. A reconciliation between GAAP and non-GAAP measures can be found in the tables of todayâs earnings release. And now, Iâll hand the call over to Octavio.
Octavio Marquez: Thank you, Christine. And thanks to all of you for joining us today. Today, Iâd like to cover some main points, including our recent Transaction Support Agreement. But before that, I want to spend some time talking about the consistent market demand for our banking and retail solutions during the quarter and how our backlog is positioning us for success. Next, weâll discuss our operating model, progress on our savings plan and our three-year financial model. And then before I hand it over to Jeff, to discuss financials and details, weâll share a brief update on the transaction contemplated by the TSA. As we said throughout the year, our banking and retail solutions continue to generate consistent demand in the market, as evidenced by the backlog trends. Backlog remains near historic highs at approximately $1.4 billion in the third quarter, and we will subsequently work its way down in Q4, given our product delivery expectations. We also see continued strong demand for DN Series as the shift from legacy devices continues, and that DN Series cash recyclers continue to comprise the vast majority of our new banking orders in North America. Momentum in our retail solution also remain strong, and our self-checkout business is continuing to grow as we start to see results from our market expansion efforts in the US and outside of Europe. We are also seeing tangible benefits from our new streamlined operating model. During the past two quarters, our company has taken deliberate and strategic steps to become more lean, agile, customer-focused and better equipped to deliver our solutions to the market. We are continuing to focus on our operational rigor. We have significantly improved our cost management by eliminating redundancies, we are creating more efficient processes globally and are considerably decreasing our indirect spend. To-date, we have executed on approximately $170 million of savings through these efforts and are modeling an additional $25 million of savings, which we are implementing as quickly and efficiently as possible. In addition, we are taking deliberate steps to further improve key aspects of our operations, such as, regionalizing our manufacturing footprint and normalizing and wrapping up our supply chain to drive unit growth and revenue conversion. From a financial modeling perspective, moving forward, we will reference unit economics to discuss our performance as it reflects how we measure the business. We believe unit economics provides a strong correlation to our product revenue, and allows us to better highlight the relationship between volume and mix. We have solid fundamentals as we have consistently seen stable demand for our product solution set. As provided in our current report from Form 8-K filed and updated on October 20th, given our elevated backlog, we have 100% coverage for product revenue in 2022 and we expect to shift 52,000 ATMs 25,000 self-checkout units and 127 points of sale terminals this year. This is the basis for the model we disclosed in October. As Jeff will discuss, we still have work to do in the coming months to achieve this target. A few weeks ago, as part of our TSA disclosures, we provided our full 2023 forecast for units. From our backlog and the demand weâre seeing to what Iâm hearing from customers, I am confident in our product revenues as we enter the next year. By year end 2022, we expect our backlog to be approximately $1.3 billion, which secures approximately 80% of our 2023 product revenue. As we disclosed, we are forecasting unit sales of 60,000 ATMs with the majority being our industry-leading DN Series recyclers. Weâre also forecasting 35,000 self-checkouts and 134,000 point of sale devices for 2023. These numbers include product revenue deferral of approximately 2,500 ATMs, 2,000 self-checkouts and 7,000 ePOS units, which will be recognized in 2023 versus 2022 due to supply chain velocity issues. Looking further out to full year 2024, we provided a forecast to deliver 63,000 ATMs, 40,000 self-checkouts and 134 point of sales units. As you know, services is also core to our business. And thatâs shown in our operating forecast in 2023, we expect to generate approximately $2.1 billion in revenue from this business by the end of this year. And we have already secured approximately $1.4 billion, roughly 70% of our service revenue through existing contract coverage. Additionally, we expect another 10% or $200 million from product-related installations. And we have professional service work executed through the year that generates another 10% with the remainder of our service revenue coming from billed work. Given this insight into our expectation over the next two years, we are confident in our multiyear strategic operating model and financial forecasts, especially considering the demand for our solutions. And finally, as I mentioned earlier, we announced a few weeks ago that we entered into a Transaction Support Agreement or TSA, to help us extend our near-term debt maturities and obtain additional liquidity. We conducted a rigorous due diligence process with our lenders and noteholders to reach this milestone, and firmly believe that the productive conversations we had with our lenders and noteholders, especially around the execution of our savings plans and our operational initiatives for the business, demonstrates the financials communityâs confidence in our long-term strategic operating model and reflects the progress we have made despite the challenging macroeconomic environment. As noted in our current report on Form 8-K filed yesterday, I am pleased to say that the following the initial execution of the track â of the TSA, additional eligible creditors have executed joiners to the agreement, which increases the percentage of the companyâs term loan holders and the companyâs 2024 senior noteholders that are party to the TSA to approximately 97% and 87%, respectively. Please see our current report on Form 8-K filed with the SEC yesterday for more details. We are working towards completing that transaction contemplated by the TSA in December. And from there, we will work to normalize our business and continue to execute on our model. As always, we will remain focused on our goals and maintaining our position as a leader in banking and retail technology, automation and related services. To do so, we intend to accelerate market share growth in ATM products and terminal software, build momentum in self-checkout and next-generation cloud software for retailers and leap the industry evolution with our service solutions, while also pursuing opportunities to leverage our global services operations. I also want to reiterate what we said during our last earnings call to address questions we often receive from investors about mergers and acquisitions, including potential divestitures and other value-creating opportunities. We remain committed to delivering on our strategy, supporting our employees, customers and business partners and making strategic investments in the business. We also will continue to evaluate strategic alternatives that will benefit our shareholders as part of our constant efforts to maximize shareholder value. We look forward to capturing all opportunities that lie ahead with our enhanced financial flexibility. Before Jeff provides more detail on our Q3 financials, Iâd like to recognize our incredible employees for their hard work and dedication over the past quarters. And I want to thank our customers for their commitment and patience as we have worked through this process. As I have said before, we remain confident in our long-term strategic operating model, and we will continue to execute on our goals to remain a global leader in banking and retail technology. With that, I will now turn it over to Jeff.
Jeff Rutherford: Thank you, Octavio. My prepared remarks will include references to certain non-GAAP metrics such as adjusted EBITDA. For a discussion of our third quarter performance relative to prior periods, please see the financial summary included in our third quarter shareholder letter. Today, I will spend my time discussing the third quarter results relative to the full year 2022 operating forecast included in our current report on Form 8-K filed on October 20th relating to the TSA. Total revenue of $805 million and adjusted EBITDA of $76 million were largely in line with our third quarter operating forecast. As previously discussed by Octavio, our units and our unit economic model are revenue recognized units, which were in line with our forecast and were as follows. 1,823 ATMs, 2,632 self-checkout units and 32,060 point of sale units. In terms of services gross margin, we continue to see increased sequential improvement of 100 basis points to 31.3% in the third quarter. You will note that we did see a decline in third quarter product gross margin percentage as compared to the second quarter due to an unfavorable product mix in both banking and retail. In banking for the quarter, cash dispensers represented approximately 47% of ATM units versus approximately 42% in the second quarter. In retail, delays in delivery and self-checkout units resulted in overall lower product gross margin profile. Third quarter operating expenses dropped to approximately $139 million as we continue to harvest costs from our restructuring plan and from lower provisions for incentive compensation programs. We continue to believe that normalized quarterly operating expenses will be in the $155 million to $160 million range going forward. The forecasted revenue units for the fourth quarter, as per our full year 2022 operating forecasts are 22,000 ATMs, 9,750 self-checkout units and 34,500 point of sale units. Overall supply chain material availability and logistics are improving. However, our models assumed a quicker normalization of supplier relationships than we are currently experiencing. However, it is also worth noting that this is more of a short-term challenge as we seek to normalize our working capital management, including with respect to our supplier relationships. In the fourth quarter, the conversion of backlog to revenue recognition will continue to be challenging, and we could see as much as a 15% risk of unit to revenue conversion and its corresponding attached services and software. Noting 15% variance in units would equate to approximately $100 million in revenue and approximately $30 million in adjusted EBITDA, depending on geography, customer and product mix. We expect that units that are not revenue recognized in the fourth quarter will shift to 2023. Please see our shareholder letter for our operating forecast and strategic operating model. We included our three-year free cash flow and forecasted available liquidity in our previously mentioned October 20th current report on Form 8-K related to the TSA. And weâd like to take a moment to discuss the full year 2022 unlevered free cash flow use of $243 million provided in our operating forecast. This incremental use of cash is directly related to two main areas. First, the normalization of working capital. Under our previous debt capital structure, we needed to stringently manage working capital to assure certain covenant compliance, which resulted in less than favorable actions such as stretching supplier payments. Under the revised debt capital structure contemplated under the TSA, including the implementation of the ABL, we will normalize our supplier relationships which in turn sets us up for the best opportunity for supply chain success in 2023. The second area is the cash usage will be for the payment of approximately $62 million of fees associated with the transactions contemplated by the TSA. And with that, I will now turn the call over to the operator for Q&A.
Operator: Thank you. Our first question comes from Matt Summerville of D.A. Davidson. Matt, your line is open. Please go ahead.
Matt Summerville: Thanks. Jeff, if I heard you right, in the fourth quarter, youâre looking to ship 22,000 ATMs, which seems to be a pretty big number. Again, we donât have a lot of unit history with you guys. Itâs newer disclosure, which, of course, we appreciate. But just help frame that up. What has to happen for you guys to ship 22,000 ATMs? And has there been a period in recent history where Diebold has shipped that many units in a given quarter?
Jeff Rutherford: There has been, Matt. And hereâs â and we havenât filed the 10-Q yet. But when we see the 10-Q, youâre going to see that weâre carrying a high number of relative to finished goods inventory. That â those are units and thereâs approximately 14,000 units that are waiting for delivery to customers at the end of the third quarter. So weâre high in inventory and finished goods inventory. So you begin with the fact that thereâs 14,000 units ready to be converted out of inventory into revenue recognition. So to answer your question, how do you hit 22,000? You convert a significant portion of that inventory thatâs already built, itâs waiting for delivery and you deliver it to the customers. And then you get back to a more normalized number of an incremental 8,000 that have to be produced and delivered. Now, one of the things about any shipments that are coming out of Germany, the window closes fairly soon. Thatâs why weâre talking about the potential for risk, is we have to have â when weâre shipping units out of Germany to North America, we have to have them in transit. Yeah, by very soon in order to hit those numbers. So the risk is associated with not being able to produce, but being able to revenue recognize those units. If the â if we miss in the fourth quarter, those revenue units, that means that those units are sitting and waiting for delivery and just didnât get to the point of revenue recognition. Many of our customers, the revenue recognition for our customers is installation. So thatâs always an area that is variable. Can we get them installed before the end of the year?
Matt Summerville: Okay, thank you. Thatâs helpful. And then maybe just a little bit more detail, Octavio maybe on what youâre seeing from an incoming order rate standpoint? And if you can dissect that a little bit by region and across both ATMs and retail, maybe just do a little bit of a deeper dive. That would be great. Thank you.
Octavio Marquez: Sure, Matt. So let me start with retail. So during Q3, and if you see the unit comparisons clearly Q3 and our deliveries for our self-checkout was you know below our expectation. However, order intake continues to be strong for self-checkout. So itâs once again a product of making sure we normalize supplier relationships as inflow from material is adequate. And to be honest, probably there as we were modeling the information that we disclosed that we were modeling, we were hoping for a faster normalization of our supplier relationships than what weâve had. But on the demand side, we still see ample opportunity in self-checkout. And I feel fairly confident that, as Iâve said before, regardless of macroeconomic environment, our self-checkout solution help retail improve customer journeys and minimize costs. So there will always be, I think, a good chance of us continuing to grow those self-checkout units. And as you know Europe has been very strong for us, but weâre now starting to have significant deployments in the US, which will also help us you know demonstrate how our solutions are capable in every â and probably the most challenging self-checkout market in the world, which is US groceries, and weâre making significant progress there. On the HCM side, I would tell you that demand across the Americas continues to be very strong. So the trend to install recyclers in the US is, I would say, is now common across all major financial institutions, all large financial institutions with the â and as you know, once the large banks start installing a technology that very quickly trickles down to the rest of the market. So we see the US entering this you know long-awaited cycle where recycling technology would become mainstream. Latin America, as you know, continues to be very strong and Brazil continues to be very strong. So from that perspective, the Americas remains strong and itâs our key market for multiple reasons, one of them being the strong service attach and the strong service profitability and volume that we have in the Americas. I would say that Europe, we are â you know Europe is clearly â we continue to see the trend of consolidation across fleets. Weâre now seeing the first instances of that in countries like France. So overall, we continue to see that Europe will remain a flattish market. We donât expect it to grow. Again, I also donât expect it to shrink. So it should remain a fairly flattish market. And as you know, Asia Pacific where we have less than 10% of our revenue is a market that is filled with opportunities. So itâs got more opportunity than what we can currently address. Thatâs one of the reasons why weâre you know redoubling some of our efforts in India, a market that we had exited four years ago and starting some contract manufacturing in India to really address that market and start producing some growth in that area. So thatâs where â thatâs, I would say, the general overview. But in general terms, the orders remain stable. Itâs now our ability to turn all that backlog into revenue that is really whatâs driving our view of the future.
Matt Summerville: Octavio, if I can just squeeze in a follow-up there. To your point on reentering India, can you talk in a little bit more detail about the strategy? Is that â is the idea there that youâre going to make in India, for India or make in India for the broader Asia Pacific market. And if itâs more of the latter, what does that mean for your manufacturing base that this joint venture in China? Thank you.
Octavio Marquez: Yeah. So for the first step, Matt, and Iâll be very brief and we can probably take this offline later, if you want. But initially, weâre just going to build in India for India as you know is one of the biggest ATM markets in the world, and you do require a different cost structure and a different cost product. We believe that with some of the core components of DN Series, we can address some of those cost actions, but also manufacturing in India will be beneficial. So initially, weâre planning this to be a test of the Indian market and then who knows. And maybe we decide that this is something that we expand elsewhere. But for the short-term, itâs just â itâs building in India exclusively for the Indian market.
Matt Summerville: Got it. Thank you, guys.
Octavio Marquez: Sure, Matt.
Operator: Thank you. Our next question comes from Paul Chung of JPMorgan. Paul, your line is open. Please go ahead.
Paul Chung: Hi. Thanks for taking my question. So if you could expand you know kind of on the product mix impact youâre seeing. You mentioned you know some lower margin units here in North America and LatAm in the quarter. You know how do we think about the kind of product mix to kind of end the year and into next year? Is the backlog kind of made up of higher ASP mix as a result? And if you can also talk about the backlog or orders firm and non-cancelable and our margins kind of locked in the backlog?
Octavio Marquez: Yeah. So Kartik, thanks, thatâs â sorry, Paul. I was looking at the question queue. Sorry, Paul, about that. So, Paul I think that how you should think about our unit mix is over several quarters, the unit mix should stabilize itself and be appropriate in the appropriate ratios. In any given quarter, we might deliver more of one type of unit than the other, particularly in Q3 you know we have significant shipments of cash dispensers, both you know to differ just across the globe of cash dispensers versus recyclers that we turned into revenue. And again, this is a product of cash dispensers coming primarily from our Asian manufacturing and hitting the different markets during Q3 and our high-value recyclers coming basically from Germany that have a different cycle time you know being a little bit slower in converting into revenue. Again, over time, the mix should return to the you know what we think is the trend that weâre seeing where you know low-40s is cash dispensers high, low-50s you know mid-50s is cash recyclers. That is I think our goal you know the normalized mix. In any one quarter, it might go up or down one of those variables, but you should think about it in the long-term, you know itâs fairly stable. As far as the orders you know, remember, we donât manufacture anything without a firm customer PO. The biggest challenge that weâve had right now is working with our customers, thatâs why I wanted to thank all our customers at the end of my prepared remarks. Because, to be honest, theyâve been very patient with us, working as we normalize our supply chain and get units to them and accommodating towards their installation schedules, their delivery schedules. I think that everybody is very happy once they have our DN Series ATMs or our self-checkout devices. And again, you know Iâm thankful that our customers have continued to work with us adjusting their schedules to meet our delivery schedule. So could have â we havenât seen any order cancellations. We work â we continue working very closely with our customers adjusting our schedules, and we continue you know and we will continue doing that. But to-date, we have seen no cancellations in our backlog.
Jeff Rutherford: Yeah. Paul, I think itâs important just for me to reiterate that falls. So I just want to say that just the thing to remember is that, thereâs risk in the supply chain, not in the demand. So if we do not hit our unit projections for the fourth quarter. Itâs not because of demand. Itâs because we could not produce and get them to revenue recognition and time to recognize them in 2022. Theyâre still there. Theyâll end up in inventory and then in revenue in 2023, probably very early in 2023.
Paul Chung: Got you. And then just a follow-up, just talking about where the firm can find some incremental areas for cost cuts here. I mean you know your cost-cutting initiatives have been quite aggressive over the past five years on a post-Wincor acquisition. So where are you kind of seeing lingering redundancies? And just any comments there? And then you know as we start to think about kind of the longer-term operating model youâve laid out you know whatâs the right level of absolute OpEx and also kind of normalized gross margins in the longer-term model.
JeffRutherford: Yeah. Let me start, and then Octavio can fill in. So on the OpEx side, I mean we always want to be looking for opportunities. And where weâre heading from an operational perspective, especially in transactional areas as being digital-first, get a digital solution versus outsourced manual processing. And thatâs going to significantly help us. And that relates back to what weâre doing for indirect spend. We have some â we put incremental rigor in relative to indirect spend, you know third-party spend, bid processes and looking at eliminating waste. So we have â we have continued opportunity in indirect spend. And then from a people person â you know people perspective, itâs about being efficient with the use of systems and process. So that all being said, where we think we will be when we reach our goal, our goal is a little more aggressive than our model in OpEx. We are targeting a $600 million OpEx number, annualized $150 million a quarter. We havenât identified that, so itâs not in that operating â strategic operating model, but thatâs our ultimate goal. And then once you get into those digital processes, right, you donât experience wage inflation. So thatâs important to us as we go forward. So to answer your question directly, weâre looking for $600 million of OpEx a year or a $150 million a quarter.
Paul Chung: Thanks. Thatâs really helpful. And then lastly you know free cash â go ahead.
Jeff Rutherford: Go ahead, Paul. Sorry. Go ahead.
Paul Chung: Okay. Just so yeah just on free cash flow outlook longer-term. I mean, where are you kind of finding efficiencies in working cap? I know you have a large backlog and conversion of that inventory is very key, but you have this big jump in unlevered free cash flow in â23. How do you get there? And what are some I know thereâs also some moving pieces on cap structure, but any estimates for levered free cash flow as well? Thanks.
JeffRutherford: Yeah. So Iâll start with unlevered. So when we get to â23, our goal is by mid-2023 to be done with restructuring transformation. We still have modeled about 78 â $80 million. You can see it in our disclosed information in our free cash flow in the cleansing documents, approximately $80 million of restructuring transformation are still modeled for 2023. That would be through midyear â23, the latest third quarter, then we want to be out of the restructuring transformation world and out of the GAAP to non-GAAP reconciliation world. Where that leaves us is, you know weâll pick up $80 million there when we get to $24 million. And then we want to be more normalized relative to working capital. We have, by necessity stressed accounts payable days, weâre going to get back to normalize in conjunction with finalizing the TSA, and thatâs whatâs hitting â22. So as we go into â23, we expect to be more normalized relative to working capital. You can see it in our disclosures. We will have a little bit of an increase in inventory in â23, but we believe that going into â24 will be normalized in working capital. Weâll be out of the restructuring transformation business and that gets us to an unlevered free cash flow as a percentage of EBITDA model at greater than 70%. From an interest payment perspective, obviously, rates are going up, and we are â weâll take on some level of incremental debt, including what the TSA. Weâre modeling somewhere in the interest payments as we move into â24.
Paul Chung: Thanks. Very helpful.
Operator: Thank you. Our next question comes from Kartik Mehta of Northcoast Research.
Jack Boyle: Good morning, everybody. This is Jack Boyle with Northcoast Research, calling on behalf of Kartik. I had some questions answered already for us, but I just had a question regarding back to that backlog, I believe you stated that by the end of the year, you planned on working through about $100 million of that. Could you give us a little bit more color about â around maybe kind of the future cadence of that? Is that kind of the rate you expect to work through that backlog going forward? Or you know how quickly do you expect to be working through that? Or how should we view that?
Octavio Marquez: Yeah. So let me try to â itâs an interesting question that you post, but let me walk you through how I want the business to be run. And why weâre making some of the changes and decisions that weâre making in the short-term in order to solidify the long-term of our company. If you think about what would be the ideal way for us to manufacture and deliver, if weâre planning 60,000 units next year, we should be manufacturing and delivering 15,000 units every quarter. That would be an ideal world, it would help with our cash flow, it would help with our â you know planning of installations, it makes life more predictable. The reality is that, based on our past capital structure, we were always a little constrained at working our inventories down at the end of the year, ramping up at the beginning of the year. So that made for slower starts to the year, and then I think you know somebody â Matt asked us, you know then bigger numbers at the end of the year. My goal is to start to normalize that. You know will it be 15,000 units every quarter from now on? Probably not. It will probably still need some work to be done. But if we start getting into that cadence, itâs very easy to start working the backlog down and working it down predictively. So my goal is, if you listen to what we said. Right now, we have 80% of next yearâs â or we will end the year with roughly 80% of our product back you know revenue in-house. That is a very high number. Once we normalize things rather than having almost three quarters of backlog, my goal is that we have a quarter or a little â you know or over a quarter of backlog you know in our books at any given time. That would be the normalized rate. I would say that for the foreseeable future, probably we start going from having three quarters of revenue in backlog to probably having five to six months and keep working our way down as we improve velocity in our supply chain. Remember, the demand is there, what we need to accelerate is the velocity to get it into the hands of our customers. So I hope that was helpful.
Jack Boyle: Yeah. Sorry, I was muted there. And I appreciate that additional detail. Maybe you can go in a little more detail and maybe perhaps I missed it as to why it was flat. Was that you know just an issue of supply chain continuing to be an issue?
Octavio Marquez: Why was backlog flat? Again, remember backlog you know itâs â yeah. So again, it just meant that we didnât convert as much revenue as we were hoping for during the quarter, and we have more orders than what you know itâs a combination of orders coming in and revenue being converted. So the math around that, they didnât allow us to ramp down the backlog. So yeah, itâs a combination of more orders and less ability to accelerate the conversion of backlog into revenue.
Jeff Rutherford: Yeah, for every quarter in â22, order entry has exceeded revenue recognition for units. So thatâs whatâs been building the backlog. And thatâs why we have modeled in that we â and thatâs why weâre carrying 14,000 units in inventory. So what needs to happen in the fourth quarter is to convert those inventory units to revenue and have you know plus 8,000 units coming through and produced and revenue recognized. Thatâs what the model has. And that would work down a certain amount of that backlog. So thatâs why weâre projecting for the backlog to be down, but the demand remains high and has exceeded our ability to produce in revenue recognized units.
Jack Boyle: All right. Thank you, both. Appreciate.
Octavio Marquez: Sure.
Operator: Thank you. Our next question comes from Ana Goshko of Bank of America. Ana, your line is open. Please go ahead.
Ana Goshko: Hi. Thanks very much. So you know just listening to your comments. And just to set expectations correctly, I think the takeaway from that Iâm hearing is kind of the new base case for the fourth quarter and EBITDA is really the $263 million, maybe the $293 million is kind of aspirational now. Is that fair?
JeffRutherford: So the $293 million is our operating forecast. What we provided in the cleansing documents with the TSA was â it wasnât guidance. It was our operating forecast. So thatâs where weâre operating to. Weâre operating to the $293 million. What we provided today was a look at their potential risk in units conversions as the window is closed relative to where weâre shipping product. So we havenât changed our targets, but weâre saying that thereâs the potential for risk and it could be as high as 15%. And that really relates to the unit risk in ATMs is what weâre providing. Thereâs still time to achieve those targets, but the window is closing. So weâre providing the potential risk to those units in todayâs call.
Ana Goshko: Okay, thank you. And then so thereâs a lot of usage of the term supplier relationships with regard to the conversion problems or kind of headwinds youâre facing in the fourth quarter. So can you be more concrete about â is it a couple of supplier relationships? Is it a specific component? Or you know what is really the issue behind that?
Jeff Rutherford: The issue is under our old capital structure, and this is something weâve talked about for probably close to a year now is, we wanted to get to an ABL, we wanted to get to a point where we didnât have restrictive covenants that put us in a position even when we have liquidity of not being able to access liquidity. So when that happened to us, especially in the situation weâre in now. So think of the situation weâre in now is that, because of increasing inventory, right, it puts pressure on liquidity, which is why we really need to move those 14,000 units up. But increasing inventory puts â historically, would have put significant pressure on our covenant compliance in the last leverage point we have is really related to accounts payable. So what we ended up doing then is, stretching supplier payments. Historically, we pay â we would pay twice a month, mid-month, end of month and our DPOs would be in the 80s, maybe as high as 90s dependent on timing. But under the current restraints of the old credit facility, we would push those up into the 100s even higher, right, in the 120s. We put a lot of that pressure on indirect spend, but â and when weâre really pushing supplier payments, it starts hitting critical vendors. And thatâs component suppliers. So when component suppliers were getting hit, right, then they get to a point where theyâre limiting shipment or requiring payment before shipment. So we want â we need to get out of that. And thatâs what the TSA allows us to do, is to get back to a normalized payment process, where we get back to that 80 to 90 DPO and we donât have these critical supplier interruptions and component â key component interruptions that were â and itâs not just one. I mean itâs all of our electronic component suppliers. If we do that, that has caused issues within the supply chain.
Ana Goshko: Okay, got it. So itâs less of a sort of industry supply chain issue and really touch more related to the relationships that you have with your suppliers that youâre trying to improve with â
Octavio Marquez: Well, so Ana, let me put it at as you know, let me expand on â yeah, Ana, let me expand on what Jeff said. So throughout the year, weâve battled different challenges. So if we go back to the beginning of the year, we were you know weâre still constrained on availability of core components you know just the same as everybody else in the world. As the year has progressed, weâve improved that availability of components. However, you know as we work with our suppliers, we need to normalize payment terms. We need to normalize those relationships so that is a steady flow of product of raw material in a predictable way. And in order to achieve that, we have to have two conditions. One, that the availability of materials is there, which it is now there. And the other condition is that, we have a steady cadence with them around shipments, payments, shipments, payments. Those are the things that weâre trying to normalize and thatâs why itâs so important for us to conclude all our refinancing efforts, because as we conclude that, that allows us to normalize those relationships. So the first part of the equation, which is overall availability in the market is starting to solve itself. Now we need to solve our internal you know unique situation of normalizing those relationships with suppliers. And again, you know we have multiple suppliers, some of them as theyâve seen our disclosures â are now in a steady state. Others, weâre still working with them to get them to a steady thing.
Ana Goshko: Okay, great. And then just finally, so I know that unlevered free cash flow came in below what the target was for the third quarter. You still have the same target for the full year. Are any of these issues that weâre deciding especially with the payables and the supplier relationships. Is that going to put additional pressure on your ability to meet the full year unlevered free cash flow target?
Jeff Rutherford: That whatâs built into the unlevered free cash flow target is normalizing those payable positions through the liquidity provided by the transactions of the TSA. So our goal is by year end being back to normalized supplier positions relative to payment, and that will put us in the best possible position moving into â23 to achieve those goals relative to unit conversions.
Ana Goshko: Okay, great. Well thank you very much.
Octavio Marquez: Sure, Ana.
Operator: Thank you. And our final question of today comes from Peter Sakon from CreditSights.
Peter Sakon: Hi, good morning. I just wanted to follow-up on the order activity in the most recent, I guess, the first and second quarter, you gave product order entry numbers. Could you share that with us for the third quarter this year and comparable to last year?
Jeff Rutherford: For the third quarter, youâre asking for order entry for the third quarter? Iâm just trying to understand the question. Because I donât think weâve provided order entry. We provided the backlog information. So theoretically, they can back-end order entry.
Peter Sakon: Got it. So I guess in the first and second quarter, I have letâs call it $56 million in the second quarter. And fourth, I guess it was down 6% in the second quarter. So with the revenue decline â
Jeff Rutherford: Yeah, I would say â
Peter Sakon: is a revenue entry.
JeffRutherford: So no, we did not provide order entry in this third quarter filing. So it â as I said, we provided the backlog information that effectively provides the order entry information. Well letâs take this offline and Christine can walk you through that.
Peter Sakon: Fair enough. And the EV charging, I didnât see any update. Is that no longer a focus for the company?
JeffRutherford: So Peter, EV charging continues one of those areas where we are focused on leveraging you know our service footprint. We will end the year with the 30,000 units that we set up to have under contract. I think that weâre on track on that. Weâre â you know my goal is EV charging same as other industries where you require high availability and strict service levels for our distributed technology footprint remain areas where we want to continue leveraging our services footprint. So I just donât want to continue making everything about charging. Thatâs clearly a very attractive opportunity as that market continues to evolve. But we want to make sure that weâre thinking about what we do is you know based on how do we leverage our service footprint better across different industries. If you go to our shareholder letter on Page 5, we did mention some of the wins that we had in EV. So weâre preparing you know services in six Eastern European countries now with alpitronic. We are working on a service contract with a Pan-European petrol station. And we remain on track to meet the 30,000 chargers under contract by end of 2022. So that business is going as we had forecasted. We clearly still have a lot of work to do in that market, and itâs an industry thatâs shaping it to â so I would really you know we want to be a part of this EV charging companies start developing their service model for the future. We want to be a part of how they define the service model so that we can actually be a more strategic partner to them. But yeah, you can see that in our shareholder letter in Page 5. And if you want more details, you know Christine can gladly walk you through more details on what weâre doing there. But keep in mind that, you know our service business is a very unique asset that we have. Itâs a $2.1 billion business. 70% of the revenues are recurring, and we want to leverage that infrastructure in other areas besides just banking and retail or with other technologies besides ATMs and self-checkout. So weâre looking for those options. EV charging is one, but weâre also looking at other alternatives in the market. So you know Christine, can walk you through some of those ideas if youâre interested in.
Peter Sakon: And my last question, if I may. What other conditions do you need to meet to close the transaction? And do you have a target date for closing the new financing? Thanks.
JeffRutherford: Yeah. From the financing perspective, I would draw your attention to the 8-K filings and it provides there. We need to be careful what we say relative to the TSA based upon the SEC regulations. So what we would do there is just point you to the 8-K.
Octavio Marquez: But as we said in our remarks you know â
Jeff Rutherford: By the end of December.
Octavio Marquez: By the end of December.
Jeff Rutherford: By the end of â
Jeff Rutherford: And youâll see that in the document.
Operator: Thank you. At this time, we currently have no further questions. So Iâll turn the call back over to Octavio Marquez, CEO of Diebold Nixdorf to begin.
Octavio Marquez: Thank you, operator. And thanks to everyone who listened and participated in todayâs call. We look forward to seeing you at our upcoming investor conference and during our next earnings call. Matt, thank you again.
Operator: Ladies and gentlemen, this concludes todayâs call. You may now disconnect your lines.