Diebold Nixdorf (DBD) Q2 2018 Results - Earnings Call Transcript

Diebold Nixdorf, Inc. (NYSE:DBD) Q2 2018 Earnings Call August 1, 2018 8:30 AM ET

Executives

Stephen A. Virostek - Diebold Nixdorf, Inc.

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Christopher A. Chapman - Diebold Nixdorf, Inc.

Analysts

Matt J. Summerville - D.A. Davidson & Co.

Paul Coster - JPMorgan Securities LLC

Justin Laurence Bergner - Gabelli & Company

Robert Wildhack - Autonomous Research

Mario Joseph Gabelli - GAMCO Asset Management, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Diebold Nixdorf Q2 2018 Earnings Call. At this time, I would like to turn the conference over to Mr. Steve Virostek. Please go ahead, sir.

Stephen A. Virostek - Diebold Nixdorf, Inc.

Thank you, Carla, and welcome to Diebold Nixdorf's second quarter earnings call for 2018. Joining me today on the call are Gerrard Schmid, President and Chief Executive Officer; and Chris Chapman, Chief Financial Officer. For your benefit, we've posted slides to accompany our discussion and these slides are available on the Investor Relations page of dieboldnixdorf.com. Later today, we will post a replay of our webcast to the same IR website.

On slide 2, we have a remainder that our comments will include non-GAAP financial information which we believe are helpful in assessing the company's performance. In the supplemental schedules of our slides, we've reconciled each non-GAAP metric to its most directly comparable GAAP metric.

On slide 3, we remind everyone that certain comments may be characterized as forward-looking statements, and that there are number of factors that could cause actual results to differ materially from these statements. You may find additional information on these factors in the company's SEC filings. I'd like to also remind our listeners that forward-looking information is current as of today and subsequent events may render this information out of date.

And now, I'll hand the call over to Gerrard.

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Good morning, everyone, and thank you for joining our call. Guys, I apologize upfront for summer flu impacting my voice this morning. My remarks today encompass three main topics: firstly, feedback from our customers; second, our in line revenue performance, but higher than expected costs in the second quarter, which are impacting our 2018 outlook; and third, an overview of our action plans, several of which are already well underway, designed to improve our profitability and net leverage, while enhancing our customer relationships.

Since I joined Diebold Nixdorf in February, I've spent significant time speaking with both customers and employees, to discuss our value proposition, the ways we're conducting business, and the changes we can make to be more customer-centric and efficient. On slide 3, we summarize feedback from a number of my Banking customer visits in different parts of the world, including the United States, Mexico, Canada, the United Kingdom, France and Singapore.

While there are a few differences of opinion regarding the long-term role of the ATM channel, there is broad agreement that ATMs will continue to be an important customer touchpoint for the foreseeable future. Many customers view the ATM channel as a highly strategic asset. Others are seeking to leverage it to better understand changing customer behavior. And there is a third group who views this channel as a necessary cost of doing business.

On the Retail front, I also held detailed discussions with our European customers to hear firsthand what they value and how we can serve them better. Although, each had a slightly different strategy, virtually all of them were investing in technology solutions to support the end-to-end customer experience, which includes store branded mobile apps, websites, and physical locations. The resounding impression across all of my meetings is that Diebold Nixdorf is a valuable and relevant technology partner. However, we believe there's always room to do better.

Moving to slide 4, I'll discuss our second quarter results. Product orders in the quarter were in line with revenue. In North America, there was continuing evidence that Windows 10 upgrades are gathering momentum. We received about $80 million of orders, including a $4.5 million order from a U.S. regional bank, and received sizable RFPs for Win10 ATMs from four other U.S. regionals. In Retail, we signed a new three-year managed services contract with a major French home improvement company to digitize and standardize the customer experience across 220 stores.

Although, total revenue was down 6% year-on-year in constant currency, it is stabilizing versus recent quarters. We are encouraged by the modest growth in the Americas Banking segment. Based on our orders and revenue performance, we are narrowing our 2018 revenue outlook to about $4.5 billion. Profits in the second quarter were well below our expectations as the company generated $6 million of non-GAAP operating profit for the quarter or approximately $1.1 billion in sales. We're experiencing higher service costs in our Banking and Retail segments, and to a lesser extent, from higher shipping costs incurred as a result of delays in our ATM supply chain.

These disappointing operational matters and higher costs, some of which are temporary, while others will take longer to work through, impacted our quarterly profits and are the main reasons why we are revising our outlook for 2018. Chris will get into more details in his commentary. It has become quite clear to me that complexity is driving higher costs in the business. As I mentioned on the prior call, our cost structure is inefficient, because it continues to reflect attributes of the two legacy companies, as well as the complexity inherent in the breadth of our product lines. Over the next few minutes, I'll discuss the steps we're taking to minimize complexity in our business, improve our profitability and net leverage, while enhancing our customer relationships. We've branded this program DN Now to emphasize our intent and commitment to act decisively.

First, we are well on our way towards implementing a new streamlined and customer-centric operating model. On slide 5, you'll see significant differences between the prior matrix model and our new customer-centric model. Having started this work in April, we are driving global consistency across the organization and we are aligning the workforce with market demand. We expect that total program will result in cost savings of around $100 million. Decisions made thus far are expected to generate approximately $30 million of run rate savings by the end of our first quarter of 2019, with the balance to be realized by the third quarter of 2019.

Second, to optimize our inventories and simplify our supply chain, we have taken decisive steps to streamline our ATM product portfolio. We will exit 2018 with 30% fewer models without sacrificing customer choice. These actions have already been communicated to our sales force globally. The expected benefit is reduced complexity in both, sales and supply chain, as well as shorter lead times, which will help to increase both operating profits and cash flow.

Last quarter, we told you we were scrutinizing all major business lines and geographies in order to simplify our business and focus our efforts on initiatives and plans with the highest impact. We are moving forward with plans to divest noncore businesses, which collectively account for approximately 5% to 10% of revenues. Proceeds will be used to enhance our capital structure. For competitive reasons, we'll not comment on specific plans, however, we will communicate our progress as we bring our portfolio optimization activities to a conclusion.

In addition to the actions already underway, our DN Now program includes other large scale initiatives which are moving from planning to execution. These actions will drive important benefits to the business and are expected to mature over several quarters. In our services business, we are taking steps to enhance our profit margins, while simultaneously improving customer service levels. In the quarter, we completed a robust services diagnostic, let by a global consulting firm and we're starting to implement actions designed to materially increase service margin sequentially over the next three years. The essential step we are taking is to implement a consistent set of KPIs across our global services operations. You can expect to hear more about our actions on the next earnings report.

To address our previously disclosed supply chain delays, we continue to work directly with critical suppliers by having our key personnel on site. And while we are seeing improvements to component availability, we are continuing to drive improvements in this area over the next few months, including the diversification of our supplier base. On the IT front, we are rationalizing core infrastructure and application platforms, and investing in productivity tools. This activity is expected to continue for number of quarters. As the global leader in connected commerce, we are making investments in R&D to deliver more convenient and innovative ways of transacting business for our customers. We're investing in next-generation product capabilities and cloud-based software offerings.

Additionally, we are leveraging the scale of our distribution and our open architecture to broaden our offerings to customers. As an example, we announced innovative technology and service partnerships with Mastercard and ACTV8 during the quarter to further integrate the benefits of physical and digital transactions. In the future, you can expect us to announce additional partnerships which will further differentiate our solutions and leverage our distribution.

Underpinning all of these plans is a goal to drive better operational performance, as well as higher and more consistent profits. To increase the alignments across the organization, we have heightened the breadth and frequency of our internal communications. The leadership team hosted a dozen town halls in diverse global geographic locations which were attended by more than 4,500 employees. I am pleased that our employee engagement is high as we work together to build Diebold Nixdorf.

At this point, I'll turn the call over to Chris, who will discuss our new segments, Q2 financials, and our 2018 outlook.

Christopher A. Chapman - Diebold Nixdorf, Inc.

Thanks, Gerrard, and good morning, everyone. As usual, my comments today will focus on our non-GAAP results unless otherwise noted. As we roll out the new operating model, we are changing our reportable operating segments to more customer-centric Banking and Retail. These new segments are aligned with the deeper focus on how we interact with our customers, delivering integrated solutions. We've summarized these changes on slide 8. Eurasia Banking is the largest segment, accounting for 40% of revenue in the quarter, while Americas Banking generated just over 30% and Retail was about 25%. Our secondary reporting has also changed to services and software and products.

On slide 9, you can see the total non-GAAP revenue decreased 6% on a constant currency basis as growth in Banking Americas was more than offset by declines in Eurasia Banking and Retail. Foreign currency favorably impacted revenue by around 300 basis points in the quarter reflecting the strength of the euro. Looking at the mix of revenue by business line, services and software accounted for nearly two-thirds of the total revenue in the quarter, with the balance coming from product. Services and software revenue was unchanged versus the prior year in constant currency as Banking was flat and Retail was up 3%. Product revenue in the quarter was down approximately 16% in constant currency, primarily due to lower Banking volumes and a difficult compare for Retail.

Moving to slide 10, I'll discuss the revenue and operating profit variances for Eurasia Banking. Revenue declined by 13% on a constant currency basis due to lower product volumes and corresponding installation service activities. Services and software revenue declined 6% year-on-year primarily due to a large underperforming service contract we lost in India. Product revenue was down 24% year-over-year in constant currency with this trend being more pronounced in Asia Pacific. Operating profit for this segment declined $12 million versus the prior year due to the lower product volume as well as an unfavorable software customer mix which more than offset improvements in operating expenses.

Slide 11 provides highlights of our Banking Americas segment. Revenue growth of 2% in constant currency for the second quarter is encouraging after several quarters of year-on-year declines. During the second quarter, we generated 5% growth from services and software led by North America. Product revenue was impacted by lower product volumes in Brazil, partially offset by higher volume from national accounts in North America. Operating profit for this segment declined $10 million versus the prior year, primarily due to higher service cost of sales.

While part of the decline is attributable due to some discrete costs incurred in our Brazil service operation, we've seen increased costs in our larger markets resulting from a combination of slower than anticipated realization of our efficiency plans, and higher labor and commodity costs. Also during the quarter, product cost of sales was adversely impacted by higher shipping costs from expedited freight in order to mitigate supply chain delays and meet our customer delivery schedules.

Moving to slide 12, global Retail revenue declined 4% in constant currency in the quarter as lower product volumes offset growth in services and software. Product volumes were down on a difficult compare due to large projects in Germany in the prior-year period. Partially offsetting the second quarter decline was higher product volume in France and Benelux, as well as the initial installations of food ordering kiosks at quick-serve restaurant franchises in North America.

Operating profit declined by $20 million in the quarter versus the prior year. A majority of the decline was from subscale and noncore businesses that are part of the identified assets being evaluated for divestiture. In addition, we also had an unfavorable mix of software projects combined with higher operating expenses from expansion investments in the Americas and increased R&D spend.

Turning to slide 13, gross margin in the quarter declined by 350 basis points to 20.6% reflecting the higher service cost of sales combined with the lower product volume and higher freight costs previously outlined. Our operating expense continues to improve on an absolute basis, reflecting the benefits of our ongoing cost actions and was down $14 million year-over-year, which is inclusive of a negative impact from currency of $7 million. Additionally, during the quarter, we had a $4 million mark-to-market benefit from one of our compensation programs. Operating profit of $6 million and adjusted EBITDA of $47 million for the second quarter were down versus the prior year, primarily reflecting the gross profit trends described above.

Turning to slide 14, the non-GAAP loss per share was $0.21 for the quarter and excludes restructuring expense of $0.03 and non-routine expense of $1.78. Non-routine expenses consisted of $0.39 from purchase price accounting adjustments, $0.19 relating to our integration activities, and $1.18 from a noncash goodwill impairment charge. Impairment testing was required following the previously discussed change to our reporting segments. The tax impact in restructuring and non-routine items was $0.20, and our non-GAAP effective tax rate was 46% for the quarter reflecting a year-to-date non-GAAP effective tax rate of 40%.

During the second quarter, we reported free cash use of $125 million, an improvement of $9 million from a year ago as shown on slide 15. Lower GAAP earnings, was offset by better performance on collections and reduced capital expenditures. The leadership team is focused on driving continued improvements to our working capital and we saw early signs of success with respect to our collections activity in the second quarter improving our DSO by six days versus the prior year.

Inventory remains the biggest opportunity for additional gains and working capital efficiency, and a number of initiatives are underway to yield sustainable improvements in our DIO. Looking at our liquidity and leverage information, as of the end of the quarter, we had cash on hand of $313 million and had access to approximately $380 million from our credit facility. With net debt of approximately $1.6 billion, our leverage ratio is around 4.5 times based on our trailing 12-month adjusted EBITDA.

Slide 16 bridges the material changes to our revised outlook for adjusted EBITDA and recaps our DN Now actions. On a full year basis, adjusted EBITDA is being impacted by the following items presented on an approximate basis: the $50 million impact due to an increase in our service cost of sales with approximately $10 million being one-off in nature, with the remaining amount due to slower than anticipated realization of our efficiency plans and inflationary pressures, specifically impacting our labor costs in a tight labor market; $20 million from temporarily higher costs impacting our supply chain; and the $20 million change, related to our revised volume expectations and expected mix of revenue.

As a result, adjusted EBITDA outlook for 2018 is now a range of $280 million to $320 million. While we expect to mitigate the higher freight costs and a portion of the service costs by the end of the year, it is clear that more action is needed to fundamentally change the way we operate. To this end, we are executing on a number of initiatives under the DN Now program designed to improve our profitability and net leverage, while enhancing our customer relationships. We expect to deliver in excess of $200 million of savings based on our current $4.4 billion cost base.

Included in this program is a $100 million cost improvement to be realized over the next year from our new operating model. Additionally, we expect meaningful savings from other initiatives including: simplifying our ATM product portfolio, launching a new services improvement plan, stabilizing the supply chain, strengthening our IT environment and investing in new, more cost-effective product platforms. We expect these initiatives will generate over $100 million of additional savings and we'll provide further details on future calls.

Turning to slide 17, based on our current backlog and expected order activity in the second half of the year, we now expect 2018 revenue of around $4.5 billion, which is at the bottom end of our prior range. The impact of currency for the year is expected to be around a 2% benefit, which is down from the 3% as mentioned on the first quarter earnings call. The company expects a GAAP net loss range of approximately $325 million to $365 million, which includes the following approximate amounts: $140 million for depreciation and amortization expense, $35 million for share-based compensation, $115 million of intangible asset amortization, a $90 million goodwill impairment charge, restructuring expense of $100 million which includes the additional charges we expect from the operating model separations, and $60 million of integration expense.

As a result of the previously outlined changes in our expected cost and volume, we expect adjusted EBITDA to be in the range of $280 million to $320 million for the full year. The range of the 2018 outlook, coupled with the variability of our full year non-GAAP effective tax and interest expense, resulted in our decision to suspend our practice of providing earnings per share outlook. Free cash flow for the full year will be impacted by the revised profit outlook as well as our expectation of higher severance payments from our DN Now activities. Efforts to improve working capital and reductions to our capital expenditures are expected to provide a modest offset during the year. All in, we now expect free cash use to be around $100 million for the year.

While we are currently in compliance with our financial maintenance covenants, our revised outlook indicates that there is a potential that in future periods the company may not meet its net debt to trailing 12-month EBITDA covenant as defined by our credit facility agreement. We have engaged our principal lenders and are in constructive dialogue regarding an amendment to address this concern. We anticipate a resolution in the coming weeks and we will update you accordingly.

With that, I'll hand the call back to Gerrard for some closing comments.

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Thank you, Chris. In closing, I'd like to emphasize a few key points on slide 18. First, we are seeing indications of revenue stability, including growth in services and software, and we're particularly pleased to see the Americas Banking segment return to growth. Second, we're not satisfied with our performance and are moving with a sense of purpose and pace to address our costs and operational matters through a number of actions under our DN Now program. These actions are designed to improve our profitability and net leverage, while enhancing our customer relationships. Third, our operating expenses are moving in the right direction and we anticipate further progress on this front.

Looking to the future, we expect to sustain our differentiation in the marketplace by R&D investments and innovative partnerships. Our prospects for success are supported by our deep customer relationships and the fact that Diebold Nixdorf is viewed as a valued partner. We are a key enabler in how the customers automate and digitize their businesses. These relationships along with our industry-leading solutions and the dedication of our talented employees provide me with confidence in our future. We look forward to updating you on our progress.

At this time, I'll hand the call back to our operator to facilitate questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now take our first question from Matt Summerville from D.A. Davidson. Please go ahead.

Matt J. Summerville - D.A. Davidson & Co.

Thank you. Two questions, first, on the service organization. Where is the accountability there for the 600 basis points or so of margin compression you've seen since the merger? And I guess the fact that this business that used to be sort of Diebold's bread and butter is now riddled with inefficiency is pretty disturbing to me. Can you talk through that in terms of how quickly this can be remedied?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Yeah. Good morning, Matt, and thank you for your question. So, at the end of the day, let me frame my answer with the backdrop of the comments I made in the first quarter and second quarter. At the end of the day, the complexity of our operating model effectively had services actions distributed globally across multiple operating units, which quite frankly I think is the fundamental reason for – the reason why we are where we are today.

One of the key tenets under the revised operating model is to consolidate all of our global services personnel under a single operating structure globally where we can therefore drive consistency of common operating KPIs and performance improvements. And therefore, I now have a proverbial single throat that I can have a conversation with around our operating performance. And having completed the very robust services diagnostic globally, we have a clear path on how we can return our services organization to its former strength.

Matt J. Summerville - D.A. Davidson & Co.

And then as my follow-up question, is there any way that as you go through this, Chris, process to seek amendments or waivers on your credit agreement, could you be required by either your credit or debtholders to have to issue equity?

Christopher A. Chapman - Diebold Nixdorf, Inc.

I'm not going to comment on the specifics of the process that we're going through. Obviously, we've got a very supportive lender group and we'll work along with them to head down what I think is the simplest path of finalize on an amendment. I don't foresee that equity path as being a requirement at this stage or something that we would contemplate.

Matt J. Summerville - D.A. Davidson & Co.

Thank you. I'll get back in queue.

Operator

Our next question comes from Paul Coster from JPMorgan. Please go ahead.

Paul Coster - JPMorgan Securities LLC

Yes. Thanks for taking my question. First off, can you just describe for us the nature of the supply constraints you had on the product side? And on the service side, I'm wondering why it is that you're not in a position to raise prices since it's a labor-driven part of it anyway, the issue is higher labor costs.

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Yeah. So, let me try and take those one at a time. Yeah. The supply chain issues are really being driven by two factors. The one factor is obviously the excessive complexity on our own product portfolio, which adds some vulnerability to our supply chain. We are remediating that through the actions that I articulated on the call, where we're substantially reducing the complexity of our ATM product range which inherently will stabilize the supply chain.

The other key driver is that there are certain electronic components where we are seeing global demand across multiple segments, not just the ATM segment, which is putting pressure on the accessibility of certain components. We are managing that by having a number of our supply chain specialists on-premise with our key suppliers to ensure that we can access as much of those products as possible. On the services front around why don't we simply improve pricing, we continue to have a very robust pricing strategy on that front and continue to look at every opportunity to leverage pricing to offset labor pressure. That's a standard course of our actions already.

Paul Coster - JPMorgan Securities LLC

Got it. And then, the prior CEO really was talking about service-led hardware and software company, and here we are with the service business which was the crown jewel really in terms of profitability and sales leads, clearly an issue. How would you describe the company as the elevated picture (00:29:08), and what this company is all about now? Is it still a service-led sale? Is it still a service-led company?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Yeah. Sure. Let me make a few comments there. I'll just remind everyone that our services installed base is very, very stable. And therefore, I continue to have a lot of confidence in our ability to grow both our services business margins as well as our software business. So, I think the inherent attributes of what has made Diebold Nixdorf strong in the past remain true where we will continue to leverage our core capabilities in both services and software, while seeking to be as efficient as we possibly can on the hardware front.

Paul Coster - JPMorgan Securities LLC

Okay, got it. Sorry, one last question, if I may. When is the first debt repayment scheduled?

Christopher A. Chapman - Diebold Nixdorf, Inc.

We have crossed our line. We've got various amortization payments that come due on a quarterly or semi-annual basis. Based on all of that those are just nominal amounts that we have and our full debt lines don't mature until 2020. As I said, we're looking to seek an amendment and we'll work our way through those processes and update everyone accordingly as we finalize that process with our lenders.

Paul Coster - JPMorgan Securities LLC

Great. Thank you very much.

Operator

We will now take our next question from Justin Bergner from Gabelli & Company. Please go ahead.

Justin Laurence Bergner - Gabelli & Company

Good morning.

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Good morning, Justin.

Justin Laurence Bergner - Gabelli & Company

On the service side, could you clarify if the service issues are global in nature or really North America-centric? And then, could you provide a little bit more detail if possible on that sort of negative $50 million delta as it relates to service costs in the EBITDA bridge beyond the $10 million of one-time costs?

Christopher A. Chapman - Diebold Nixdorf, Inc.

Yeah. On the services cost, let me – I'll break it into just a couple of clear buckets here. First, from a market standpoint, a lot of the inflationary and cost pressures are getting more in the larger markets, in North America being one of them and some of the Western European markets as well, where we've seen more of those inflationary and cost pressures that we've had to deal with. That's one.

Number two, we didn't describe, but we do have some level of discrete or more one-off costs as we addressed a few issues in Brazil. And also, we highlighted in our Retail business, a lot of the issues that impacted our Retail performance and some of these noncore subscale businesses roll up through the services, line services and/or software line. And so, you're seeing some of that pressure there.

And so, if I break it into those large pockets, the one-time across those latter two items that I described is really in that $10 million range and a lot of what we're seeing on the additional labor. If you think about it in fairly simple numbers or service operations roughly at $455 million cost base, we're seeing around 200 basis point, 215 basis point (00:32:11) sequential increase off of our Q1 level and that's giving some of the cost pressure that we've outlined, and that's what we've changed on our overall outlook. It's that sequential change in the overall run rate of the service cost of sales for Q2 all the way through the remainder of the year.

Justin Laurence Bergner - Gabelli & Company

Got it. Maybe just a follow-up there, I mean, the way you presented makes it seem like the service issues are more inflation-driven than execution-driven. Are there also execution issues that are part of that negative $50 million or is it mainly cost inflation hitting the service business?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

It's absolutely a balance. I mean, the biggest part of our costs sitting in service is on the people cost, and then you have the secondary fees which is in your parts and just your overall delivery part of the organization that you've got to deal with there, where you've got your trucks, everything else you're dealing with. And so, on the labor side, obviously the efficiency gains there, you're looking to be able to deploy less people and be more thoughtful in terms of how you optimize the overall service network. And so, trying to get that full balance right while you're trying to improve SLAs, and then you're dealing with these inflationary pressures. So, it's a bit of a balance there, Justin.

Justin Laurence Bergner - Gabelli & Company

Okay, great. That's helpful. And then, one other question just on the revenue bridge, to get from the prior midpoint of $4.6 billion to $4.5 billion, it seems like $50 million of that is currency. What's the other $50 million and how is sort of mix impacting sort of the EBITDA bridge? A little more clarity there would be helpful.

Christopher A. Chapman - Diebold Nixdorf, Inc.

Yeah. Part of what we've updated for it's literally just on the sequencing and it's also taking a very pragmatic view to some of these supply chain disruptions that we've had to make sure that we're not overcommitting on the full year revenue versus where we were at previously. So, while we're seeing quite solid backlog, we've got a lot of things right now in flight where we're finalizing certifications that are coming to our backlog in Q3. We've moved towards the bottom end of the range just expecting that it's going to take us a couple of quarters to address these. And the reality is some of these projects that we're finalizing certifications on every month they push, that's a month closer to sitting in the first half of 2019 than it is in the fourth quarter and what was already a fairly back end loaded year.

So, we've just reset the full year based on those expectations. But I would say from an overall order activity, from the regional perspective, looking at the various new segments we've seen across the Americas specifically, very healthy activity and things picking up across the other areas, with Asia probably being the area that we continue to see the most weakness, slower decision making, and biggest price areas there where you have to be very thoughtful of taking deals that are going to be quite negative for a period of time. So, we're trying to take a very thoughtful approach as that market continues to head in only one direction from a pricing standpoint.

Justin Laurence Bergner - Gabelli & Company

Okay. Thank you.

Operator

We will now take our next question from Rob Wildhack from Autonomous Research. Please go ahead.

Robert Wildhack - Autonomous Research

Hey, guys. Can you give some more detail on the goodwill impairment in the quarter? What was the driver here? And just remind us when your annual tests are for impairment, I'm just trying to get a sense if there is possibly another shoe to drop here.

Christopher A. Chapman - Diebold Nixdorf, Inc.

Well, whenever you change the segments, the SEC requires you to go through goodwill impairment, and this is an impairment done in the legacy segments, not the new segments. And so, as we did that, we finalized that work and we had in two legacy segments, one being the AP Service and then the other being EMEA Software, we've been having an impairment, and that was the $90 million that was done on that.

Understanding that there was not a significant amount of goodwill allocated prior to the combination, and this is just how the math works in terms of where it was spread across those overall operating segments previously. In the fourth quarter or entering the fourth quarter, we'll do the – our annual impairment testing on the new segments and we'll update accordingly at that time.

Robert Wildhack - Autonomous Research

Thanks. And then, Americas Banking had some growth in services and software, and North America looks like did it okay. What were the drivers there and is that sustainable or is that more one-time benefits? Thanks.

Christopher A. Chapman - Diebold Nixdorf, Inc.

Yeah. On the North America side, it has – as we've been talking about, we've been seeing very nice order activity. And so, we've seen some of the order activity picking up. We talk specifically about the revenue on the national side, but what I can say is we've built a very nice backlog and it continues to build on the regional order side. And so, with that activity starting to ramp up, I feel very good about the sustainability and the comps that we're going to be talking about for the next couple of quarters specific to the Americas, because of the activity that we have there.

And secondly, as Gerrard said earlier, we've actually had a very solid and slightly expanding overall service contract base. And so, as we see the increase in the hardware activity, we're going to see additional installation revenue pull through. So, I feel very good about the activities, specifically in the Americas, as we head into the next several quarters.

Robert Wildhack - Autonomous Research

Got it. Thank you.

Operator

Our next question comes from Mario Gabelli from GAMCO Investors. Please go ahead.

Mario Joseph Gabelli - GAMCO Asset Management, Inc.

Thank you. I'm out of the office, so I don't have access to the slides. I understand the debt covenants. Can you review and give us a quick 101, Wincor sales in the German market about €57. How much of the debt is related to your ownership of that two-thirds economic interest in Wincor, if any, any other covenants tied to that?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

No. The covenants are not tied to that, Mario. If you talk about the full obligation tied to that, you got 6.8 million shares outstanding at €55, €56 obligations, so to around €440 million (00:38:30), but that is not tied to the current covenants. Obviously, if that full amount were put, it could have pressure on those situations and we would have to look at our overall structure to address that.

Mario Joseph Gabelli - GAMCO Asset Management, Inc.

Right. But that's only the minority interest that you treat as equivalent of our preferred that you talk about on the put, correct?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

That's correct.

Mario Joseph Gabelli - GAMCO Asset Management, Inc.

Okay. So, then the second question is we paid XYZ dollars to that company. If you look at it today, one of the earlier questions dealt with impairment charges, not that I care about because they're non-cash and they're just cosmetic, but were any of those associated with the investment in Wincor?

Christopher A. Chapman - Diebold Nixdorf, Inc.

Yeah. A majority of that goodwill that would have been spread would have been tied to that, the goodwill tied to that, correct. So, it would have been (00:39:21).

Mario Joseph Gabelli - GAMCO Asset Management, Inc.

Yeah. What I'm obviously getting at the next question is that it has an economic value of Wincor. You weren't the only bidder for that. And there's – you can almost sell that portion and have no debt. So, the question is at the corporate level and work on fixing up the U.S. and – but let's go back to one question. Strategically how closely integrated on a global basis has Wincor become in the operation? I gather from previous comments by previous management, it's got pretty far along, but just your sense after you've been there for – so, take us through that?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Yeah. Mario, thank you for that question. So, at the end of the day, operationally we are on a journey to integrate, but I would say we're well on that journey. So, from a manufacturing perspective, there is absolutely one single manufacturing environment that we operate, services are tightly linked. So, I think your broader question is really along the lines of what other strategic actions, if any, should we be taking to further accelerate the deleveraging of that company.

At the moment, we are extremely focused on executing on our DN Now program. We're feeling good about the $200 million of cost take-out that we articulated to improve our capital structure and improve our profitability. We're encouraged by the top line momentum that we're seeing in major markets, like North America. But clearly, we'll always consider options that drive higher value. And if we ever were to consider a credible alternative, the board will in the first instance give it very thoughtful consideration.

Mario Joseph Gabelli - GAMCO Asset Management, Inc.

Well, I thank you and I'll have to catch up another time, because I'm pulled over on a highway. Take care. Thank you.

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Thank you.

Christopher A. Chapman - Diebold Nixdorf, Inc.

Thanks, Mario.

Operator

We will now take a follow-up question from Matt Summerville from D.A. Davidson. Please go ahead.

Matt J. Summerville - D.A. Davidson & Co.

Hey, Gerrard. I guess I want to follow up on my service question before. Are you telling us that you're confident in the leadership in that organization? My understanding, I mean to use your analogy, didn't – or don't you already have one throat to choke there? And this whole idea of running service out of Germany, does that still make strategic sense to you?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

So, let me try and unpack your question, perhaps. As I said earlier on, the historical operating model didn't give me one throat to choke. While there was a notional head of services, they were deeply matrixed with multiple leaders in multiple geographies and we had a particularly strong country-led model. So, effectively decision making was broadly distributed. Under the new operating model, we have centralized that under a single team structure with a single leadership structure. So, I do believe we'll be able to make a difference there.

Your next question is does it make sense to run that business out of Germany. We have a global business, right? Let's not forget that we operate with services employees in 60-plus countries, and I will tell you that my leadership team is global today. We interface very, very closely. And I think it's not a question of whether it should be run out of Germany or the United States. I think the question is do we have the right leadership to drive this business forward. And I'm feeling pretty good about our services capability at this point in time. But clearly, we need to be able to demonstrate that with margin expansion going forward.

Matt J. Summerville - D.A. Davidson & Co.

As you think about the organizational structure of the company, again strategically, Gerrard, do you think now would be a time that it makes sense for a company like Diebold to bring in a very proficient Chief Operating Officer? Is that something you feel this organization needs to get from point A being now to point B with the $200 million-ish of cost savings you're talking about?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Yeah. So, I think your broader question is do we have the right management bench strength to execute effectively and we have a number of activities underway to onboard additional personnel to help us execute. So, as an example, I talked about our IT situation in the past. We're in the final stages of recruiting a new CIO. There are other key leaders who're in the final stages of recruiting. So, I don't think it's particularly helpful to get into a specific comment around specific roles at this point in time, but I understand your broader question around how do we strengthen execution capabilities in the organization, and leave that one with me.

Matt J. Summerville - D.A. Davidson & Co.

Got it. And maybe just one follow-up. Can you just maybe bigger picture talk about – and maybe this is you, Chris, just how you see the global ATM environment playing out over the next 12 to 18 months? What Windows 10 can bring in some of the more developed countries? What your view is on Brazil? Does Asia continue to get worse before it gets better? And just I'd really like to also dig in on what you're seeing demand-wise within EMEA as well?

Christopher A. Chapman - Diebold Nixdorf, Inc.

Yeah. I mean it's – I hinted at it a little bit earlier. If I went across and I'll just do a counterclockwise starting with the Americas, if we see the activity in North America, clearly you see an uptick in activity, and there's also been fairly strong activity across Latin America, including Brazil, where there's been some very large public tenders there where we're in the process of finalizing certification and getting POs in and that's going to be driving some very nice demand for several quarters to come. So, on that side, we continue to see fairly robust activity. Some of it is just natural refresh, and that's the piece I think you have to take a step back and say, there's still a 3 million installed base, 3 million-plus installed base out there. At any given point in time, you're going through various refresh cycles, Win10 just being one of them, and then you have the age of the fleets.

And so, you continue to see activity where you're going through a refresh. You've got technology upgrades, both from the security standpoint, the Windows 10 related, and other factors around that of moving up the chain in terms of mobile enablement and the POS automation enablement, where a lot of banks typically do that in the last refresh cycle. So, Americas' activity strong and I see that demand continuing to pick up over the next several quarters. If I go to Asia Pacific, Asia Pacific is still the toughest market. We've talked exhaustively in the past about China and the changes there. And so, our ability to participate fully in that market has really changed. And you're seeing very, very difficult price situations there as a lot of competitors, I would say, have taken an irrational approach to how they're handling the hardware in that market. And so, that's going to be continued pressure there.

And then, I would split Europe maybe into three buckets. Western Europe, you're seeing various refresh and activity, I would call it, somewhat neutral right now. We haven't seen it pick up at the same level we're seeing in the Americas. Middle East and Africa, by and large, we've seen some pretty good activity there and we've been pretty happy with our distribution channels there and the activity we're getting. And then lastly, on the Eastern European side, that's probably been a little bit softer from what we've seen from the overall activity and there's various reasons around that from political and economic that are driving that. But that's my quick around the globe view of how I would look at things.

Gerrard, maybe a couple comments you want to add?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Yeah. Matt, let me just build on that to add little bit more color. As I mentioned in my prepared remarks, I've spent a lot of time in this past quarter with major customers around the world in APAC, in EMEA and the Americas, really try to understand from them the strategic relevancy of the ATM channel and how does that then drive their capital expenditures relative to their other priorities. And I came away encouraged on two dimensions. First of all, very encouraged by the health of our customer relationships, but also encouraged that all of them, regardless of their specific point of view on ATMs, see that's a channel that will remain relevant for the foreseeable future.

Against that backdrop, there is also number of major customers that see it as a strategic asset where they will continue to invest quite aggressively in the channel. There's another cluster of customers that will continue to invest in the channel, albeit, somewhat cautiously as they watch evolving customer behaviors. And then, there's third set of customers that continue to see it as a relevant channel, but a necessary cost of doing business, but all of them seeing it being relevant for the foreseeable future. So, that gives us, I think an interesting backdrop as we think about the next several quarters going forward.

Matt J. Summerville - D.A. Davidson & Co.

Thanks, guys.

Operator

We will now take our final question from Paul Coster from JPMorgan. Please go ahead.

Paul Coster - JPMorgan Securities LLC

Yeah. Thanks for taking my follow-up. So, I've got two actually. The first one is really, clearly, we're in an inflationary environment. Sounds like you're taking some action to assert pricing power where you have it, but it's obviously constrained somewhat. Is that a function of the competitive environment? If it is, can you just sort of depict it for us somewhat?

And then my other question is, the hardware business, so it seems like you're rationalizing the SKUs, which is good. Will you also be further rationalizing the manufacturing side? Can you give us some sense of where the manufacturing will be done? And to what extent you're considering outsourcing it to make it a variable expense in any case? Thank you.

Christopher A. Chapman - Diebold Nixdorf, Inc.

Yeah. Thanks, Paul. On the pricing side as Gerrard hit earlier, we have to take a very thoughtful view around that. I think the first and the most important component of that as you go into those conversations, you got to make sure that the performance levels are where they need to be, and this is where in the past we've talked about improving the overall organization, investing into it and improving on the overall SLAs and performance. And in that side, we've seen good momentum and continue to feel good about where our performance levels are at and marking that up.

Then number two, market by market you got to be very thoughtful and look at your competitive landscape as you go in on the service side. But I would say very clearly, this is where we're taking a very hard look at the overall pricing with all of our renewals, our midyear and our forward-looking, across the various markets to make sure we take the appropriate actions to help offset and mitigate some of these pressures that we're seeing as we go forward, in addition to the efficiency plans that we have.

Gerrard will handle your second question around the overall global manufacturing footprint.

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Right. So, as you rightly pointed out, our first focus is being to simplify the product range by exiting 2018 with 30% fewer product models, and I think it's important today that that rationalization does not impact the customer choice. So, we've done a lot of detailed analyses on that front. From a manufacturer perspective, clearly, our major manufacturing today is spread across the Americas, Germany and China. We have continued to evolve our manufacturing footprint. Last year, we've shut a number of factories and we continued to rationalize down our footprint.

Moving to your broader question around would we or should we consider more aggressive outsourcing. I think it's always important to remember that the company is effectively in the final-stage assembly business rather than manufacturing. A lot of our manufacturing is already outsourced, where we maintain control of the final assembly to ensure that we have the appropriate quality products to ship to our customers. But it's an ongoing and evolving journey for us. We will always continue to look for the most efficient ways to launch our products. What you do see us doing is load balancing across different markets and across different manufacturing plants, take advantage of different labor rates, and we will continue down that path accordingly.

Paul Coster - JPMorgan Securities LLC

Thank you.

Operator

Ladies and gentlemen...

Stephen A. Virostek - Diebold Nixdorf, Inc.

Okay. I'd like to thank everyone for joining us for today's second quarter earnings call. If you have follow-up questions, please reach me via my e-mail address which is on the press release and on the website. Thank you very much.

Operator

Ladies and gentlemen, this now concludes today's conference call. Thank you all for your participation today. You may now disconnect.