Diebold Nixdorf (DBD) Q3 2018 Results - Earnings Call Transcript

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About: Diebold Nixdorf (DBD)
by: SA Transcripts

Diebold Nixdorf, Inc. (NYSE:DBD) Q3 2018 Earnings Call October 31, 2018 8:30 AM ET

Executives

Stephen A. Virostek - Diebold Nixdorf, Inc.

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Jeffrey Rutherford - Diebold Nixdorf, Inc.

Analysts

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

Paul Coster - JPMorgan Securities LLC

Kartik Mehta - Northcoast Research Partners LLC

Paul Condra - Credit Suisse Securities (NYSE:USA) LLC

Justin Laurence Bergner - Gabelli Funds LLC

Robert Wildhack - Autonomous Research

Saliq Jamil Khan - Imperial Capital LLC

Operator

Ladies and gentlemen, good day, and welcome to the Q3 2018 Year-End Earnings Conference 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, Dave, and welcome everyone to Diebold Nixdorf's third quarter earnings call for 2018. Joining me today are Gerrard Schmid, President and Chief Executive Officer; and Jeff Rutherford, Interim Chief Financial Officer. For your benefit, we've posted slides to the Investor Relations page of dieboldnixdorf.com, which will accompany our discussion today. This webcast is being recorded and a replay will be made available for playback later today on the 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 have reconciled the GAAP metrics – excuse me, the non-GAAP metrics to the most directly comparable GAAP metric.

On slide 3, we remind everyone that certain comments may be characterized as forward-looking statements, and there are a 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 remind our listeners that this forward-looking information is current as of today and subsequent events may render this information out of date.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 to Gerrard.

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Good morning, everyone. Earlier this month, Jeff Rutherford joined the company as Interim Chief Financial Officer, following the departure of Chris Chapman. Jeff brings 20 years of executive experience at public companies, including successful stints at industrial supply and diversified manufacturing companies. I'm delighted to have him on our management team.

Today, my remarks will cover a recap of our capital raise during the third quarter, a summary of our third quarter results and business conditions, an update on our DN Now program activities and savings targets, and some preliminary comments about our perspective on 2019.

Slide 3 provide a timeline of events relating to our third quarter capital raise activities. Following our announcement of second quarter results, the company experienced a high volume of redemption requests from Diebold Nixdorf AG shareholders, who had previously elected to hold their shares during Diebold's acquisition of Wincor Nixdorf in 2016.

Under German take-over law, minority shareholders have the right to tender their shares for cash compensation. During the month of August, the company settled requests for approximately 4.6 million shares for approximately $300 million.

While the company used cash on hand and borrowings under its revolving facility, these redemptions stretched the company's overall liquidity. We engaged with lenders to successfully raise $650 million of new capital through a new term loan and we renegotiated the financial covenants for our credit agreement.

Given current debt levels, we are reaffirming our commitment to improving cash flows and using excess cash for deleveraging. Our core priority, as a team, is to improve cash flow performance through operational improvements. Another source of cash, or funds rather, will from divestitures of non-core businesses.

As you may recall, last quarter we had announced our intent to divest 5% to 10% of revenue from non-core businesses. We are working with advisors and prospective buyers and expect this activity to run through mid-2019, with the initial transactions likely to be substantially completed in the fourth quarter. We expect the early transactions will be beneficial to our debt covenants, as well as our overall liquidity position.

On slide 4, I'll recap the company's financial and operating performance. Total orders were up slightly versus one year ago. Americas Banking continues to post solid gains in year-on-year activity and growth in order activity. Key wins in the quarter included a number of Win 10 related upgrade contracts with financial institutions in North America.

We were also awarded a Windows 10 upgrade contract for more than 500 Vynamic software licenses and a new managed services agreement with regional bank on the West Coast.

In Latin America, we won a $25 million contract with a top 10 bank in Brazil to install ATMs equipped with intelligent deposit and recycling capabilities. We also are pleased to win $11 million award from a top Mexican bank to upgrade their ATMs and expand their market presence.

In addition to these orders, the company renewed a five-year maintenance service contract with a major U.S. financial institution and a three-year contract with CaixaBank in Brazil to service 25,000 ATMs.

In Eurasia Banking, orders were slightly lower year-over-year due to our conscious decision to scale back our bid activity in Asia on deals which do not meet our margin targets.

Third quarter orders in EMEA increased modestly versus one year ago. A few important wins in the quarter included an $8 million contract to upgrade ATMs at the regional bank in France, a $6 million multi-year Vynamic View software and services contract with a financial institution operating in several countries across Europe and Northern Africa, and a scope expansion contract with Westpac in Australia to deploy our Vynamic software portfolio.

Diebold Nixdorf is now the sole software provider for Westpac's fleet of 2,600 ATMs.

Retail orders increased nearly 10% year-on-year, as we closed a number of sizeable deals in Europe and showed nice growth in North America. We secured a $68 million multi-year contract to provide managed services, fee services and field maintenance on 9,000 new point-of-sale devices located in eight European countries, with a leading home-improvement retailer.

We also won a new $70 million full year contract with Marks & Spencer to service more than 90,000 IT access points. Additionally, we were awarded a new $9 million contract to provide EPOS terminals to a health care company in Germany.

Changing over to the topline, I am pleased to report that revenue increased 1% in constant currency during the third quarter to $1.1 billion. This is the strongest revenue growth performance since our 2016 acquisition of Wincor Nixdorf. Growth was underpinned by solid growth for our products and software.

Our non-GAAP operating profit of $56 million in the quarter reflects an improvement of recent trends as our SG&A expense benefited from lower one-time incentive compensation expense and the initial savings from our DN Now workforce alignment activities.

Slide 5 provides a summary of our DN Now value drivers, key initiatives and savings targets. Our management team sees opportunities to create value by expanding gross margins, increasing SG&A efficiency and improving net working capital.

Moving on to the specific initiatives, we crossed over to a new operating model in the quarter and I am pleased with the progress we are making to streamline management layers and reduce our personnel costs. We have notified most of the affected employees and about 85% have confirmed exit dates.

Based on decisions made thus far, we are increasing our savings target from $100 million target to $130 million with approximately $100 million to be realized in 2019.

Another key initiative is our services modernization plan. First, we'll be working directly with our customers to proactively upgrade certain hardware models and software stacks, which are updated and costly to maintain.

Second, we will continue to automate incident management and response. We'll extend the use of our web-based interface tools to our customers as a means of speeding up the process of reporting incident information.

In many cases, this tool will replace inefficient phone calls or e-mails sent to our call centers. Under better diagnostic information, we will expand our use of automated dispatch tools to boost the effectiveness and productivity of our field services technicians.

Third, we are standardizing a number of internal processes to better leverage our scale. As discussed on the prior earnings call, we have established globally consistent KPIs and standard reports across all of our service territories. We are also taking steps to better align our service pricing with resource requirements and market conditions.

In addition, we are working to standardize our service offerings and contract terms, which will facilitate a more consistent contract management. Our objectives are to enhance service levels and increase our profitability in a sustainable manner. Based on the promising results we've seen from our pilot projects, we expect to deliver approximately $70 million of savings to the year 2021.

As discussed previously, we are streamlining our ATM product portfolio and we will exit 2018 with 30% fewer models without sacrificing customer choice. These actions have been communicated to our sales force and to our customers. This effort is being well received, as demonstrated by the fact that 98% of Americas Banking orders where we've seen strength in the quarter were based on streamlined configurations.

Additionally, operationally since Q1, I've been pleased that we have realized meaningful improvements in our cycle times at all major factories, as we address supply chain delays and made other process improvements. As we reduce the complexity of our offerings and strengthen the supply chain, we expect to reduce costs by another $50 million through the year 2021.

As currently constituted, the DN Now program is designed to generate savings of approximately $250 million by 2021, with meaningful savings from the new operating model materializing in 2019.

Given the maturity and market structure of our industry, it is vital that we drive ongoing cost reductions to neutralize headwinds such as product pricing reductions in certain markets, the inflationary effects of labor and raw materials, and the possibility for lower end market demand for ATM products.

With good momentum occurring across the early DN Now actions, we are driving forward with several additional initiatives to reduce costs and improve cash flow. We have a specific focus on improving inventory management, reducing general and administrative expenses, leveraging the scale of our business through improved procurement practices and driving greater sales productivity. We expect these actions to add further benefits and will update you in Q4.

Apart from DN Now, I want to highlight the changes we are making to our Board of Directors, as we continue to align skill sets with the company's strategy, opportunities and challenges.

During the quarter, we appointed Bruce Besanko to the Board of Directors. Bruce is a retail industry veteran, who brings significant financial leadership experience to the Board. He is the second addition to our Board this year, following Ellen Costello's appointment in June.

On slide 6, I'll take you through the changes to our outlook and discuss our expectations and key business drivers for 2019 and beyond. Our third quarter revenue and profits were in line with expectations, and we are maintaining our 2018 outlook for $4.5 billion of revenue and narrowing the adjusted EBITDA range to $300 million to $315 million.

Turning our attention to 2019, we expect a continuation of recent topline trends, as growth in our Retail and Americas Banking segments is largely offset by declines in Eurasia Banking. Within the Americas, we project ongoing strength from regional and community banks, partially offset by lower activity from the national accounts, which will face difficult comps.

Longer term, we expect to stabilize revenue from the Eurasia Banking segment, which will result in slight topline growth.

Looking at our profitability, we expect meaningful savings from our DN Now initiatives to drive adjusted EBITDA higher in the future. For 2019, the company expects substantial savings from the DN Now activities to be partially offset by a more normal incentive compensation expense, continued wage and fuel inflation, and typical product price deflation.

We anticipate modest growth in adjusted EBITDA in 2019, with solid growth in 2020 and 2021, as incremental savings are realized and our mix of business is improved.

With respect to cash flow, we have increased our expected use of cash for 2018 from about $100 million to about $200 million due to unfavorable trends in net working capital from higher inventory in accounts receivable and higher cash interest costs.

In 2019, we expect to deliver significant improvements to free cash flow as we increase our profitability, improve our working capital performance, and reduce integration spending. Longer term, free cash flow will also benefit from lower restructuring costs.

And now, I'll hand the call to Jeff for a discussion of our third quarter financial performance.

Jeffrey Rutherford - Diebold Nixdorf, Inc.

Thank you, Gerrard, and good morning everyone. I'm pleased to be here at Diebold Nixdorf and I'm looking forward to working with the leadership team to implement the value-creating DN Now improvements, which Gerrard outlined previously.

As I discuss the financial results for the third quarter, please keep in mind the comments will focus on our non-GAAP results unless otherwise noted.

On slide 7, you can see the total revenue increased 1% on a constant currency basis during the third quarter, as growth in Banking Americas and Retail more than offset the decline in Eurasia Banking. When compared with the third quarter of 2017, foreign currency impacted revenue by approximately 200 basis points, reflecting a strong euro.

Looking at our revenue by business line, software and product revenue increased 6% and 5%, respectively, in constant currency during the third quarter due to higher volume. Services revenue declined 2% in constant currency year-on-year due to contract roll-offs in Asia Pacific and lower activity in Latin America.

Moving to slide 8, I will discuss the performance of our Eurasia Banking segment. Revenue declined by 5% on a constant currency basis, primarily due to lower product volume from customers in Asia and the role-off of a large low-margin maintenance services contract in India.

Partially offsetting these trends were growth in Windows 10 hardware upgrades in Germany and software growth in Asia. Operating profit for this segment increased $3 million versus the prior year due to lower incentive compensation expense, the initial benefits of our DN Now workforce alignment actions and increased software gross profit, offset by the aforementioned change in product and service volume.

Slide 9 contains highlights from the Americas Banking segment. Revenue growth of 4% in constant currency for the third quarter is encouraging, as the company benefited from higher product volumes in Brazil, Canada, U.S. national accounts and Mexico, and stronger software activity in Latin America. A slight decline in services revenue was primarily due to lower activity in Latin America.

Operating profit for this segment declined $11 million versus the prior year as higher cost of sales offset improvements in selling and administrative costs. Services gross margin was lower versus the year-ago period due to unfavorable mix of business in North America.

On a sequential basis, gross service margin expanded 230 basis points and we are seeking to build on this momentum due to the actions of our services modernization plan. Additionally, product gross margin was impacted by higher shipping cost to compensate for our supply chain delays in the quarter.

However, the company has largely mitigated these delays and we expect normalized freight costs in the fourth quarter. Software gross margin declined due to increased professional service activity in North America, which carries a lower margin.

Moving to slide 10, global Retail revenue increased 7% in constant currency in the quarter due to a large Kiosk rollout in North America and higher point-of-sale activity in Spain. Partially offsetting this growth was modest decline in services revenue in EMEA.

Operating profit for the quarter declined $8 million versus the prior year, primarily due to unfavorable mix of software projects, which impacted the gross margin, as well as investments supporting software R&D and expansion into North America.

Turning to slide 13, gross margin in the quarter declined 280 basis points to 21.8%, reflecting higher service delivery costs as well as unfavorable product and software mix. Operating expense was $10 million lower versus the year-ago quarter, reflecting lower incentive compensation and the initial benefits of our DN Now program, partially offset by investments in North America Retail.

More specifically, the benefit from lower incentive compensation and the mark-to-market adjustments for legacy Nixdorf compensation plan was approximately $10 million for the quarter when compared with the same period last year. Our outlook assumes these benefits do not reoccur in the future.

Operating profit of $56 million and adjusted EBITDA of $99 million for the third quarter primarily reflect the gross profit and OpEx trends described previously. You'll be able to read more about our third quarter results when we file our 10-Q next week.

Let's turn to slide 12. Non-GAAP loss per share was $0.61 for the quarter and excludes restructuring expense of $0.50 and non-routine expense of $1.99. The restructuring charges are from the workforce alignment actions needed to transition to the new operating model.

Non-routine expenses consist of non-cash goodwill impairment charge of $1.44, purchase price accounting adjustments of $0.35, integration expense of $0.14, and $0.06 from legal expenses.

The tax impact from restructuring and non-routine items was $0.31, and our non-GAAP effective tax rate was 300%, reflecting the impact of changes to the U.S. tax code, namely the impact of Global Intangible Low-taxed Income and the business interest deduction limitation, which as a result of the company's debt activities during the quarter, required a full valuation allowance of non-deductible business interest expense for the current year.

During the third quarter, we reported free cash use of $125 million, which is approximately $60 million more than a year ago as shown on slide 15. The main year-on-year changes were lower earnings, an increase in receivables due to the timing of revenue, an increase in inventory needed to support strong product installations in the fourth quarter, and higher interest expense from the new term loan. This year-over-year increase was partially offset by improvements in payables and lower capital spending.

We are reducing our 2018 outlook for CapEx from $75 million to approximately $60 million due to certain timing issues. Since Gerrard described the backdrop for our capital raise activities in the quarter, I will expand on those remarks by discussing the use of those funds.

Approximately $140 million was placed in escrow for future acquisitions of the remaining Diebold Nixdorf AG shares and this is shown as restricted cash on the balance sheet. In the future, we expect to begin the formal process to merge our German subsidiary, Diebold Nixdorf AG, with a wholly-owned subsidiary of Diebold Nixdorf Inc. in order to further simplify and streamline our corporate structure.

Approximately $250 million was used to permanently pay down debt, including approximately $20 million for the credit facility, approximately $130 million for the Term Loan A, and approximately $100 million for the Term Loan B. The remaining $260 million was used to reduce borrowings on the revolving credit facility, increase liquidity and pay related expenses and fees.

With respect to our liquidity position, we had $449 million of cash and access to approximately $240 million from our credit facility at the end of the quarter. Net debt increased as a result of our capital raise from approximately $1.6 billion at the end of the second quarter to approximately $1.9 billion at the end of the third quarter.

Our leverage ratio is approximately 6.1 times based on the trailing 12-month adjusted EBITDA, although this ratio is about 10% lower after making the adjustments which are defined in our credit facility.

As Gerrard mentioned, we are reaffirming our commitment to use excess cash from operations and net proceeds from potential divestitures for deleveraging. While Gerrard covered our outlook for 2018, I'll make a few additional comments used in the content on slide 14. We are maintaining our revenue outlook of around $4.5 billion inclusive of our currency benefit of about 2%.

Based on Q3 performance, we are also narrowing our adjusted EBITDA estimate to a range of $300 million to $315 million. The company expects a GAAP net loss range of approximately $520 million to $470 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, and $200 million for goodwill impairment charge, restructuring of $90 million, which includes the additional charges we expect from the operating model workforce alignment actions, and $50 million of integration expense.

Looking to 2019, we expect to issue formal guidance when we report our results in early February. However, I would like to reiterate the main drivers. Flat revenue as growth in Retail in Americas is offset by declines in Eurasia Banking, a benefit of more than $100 million from our DN Now cost-reduction actions, headwinds including typical price reductions on product sales, the effects of wage and fuel inflation, and a return to a more normalized incentive compensation expense, continued investments in R&D, our services modernization plans, and the expansion of our retail business in the Americas.

In closing, I'd like to answer a question which many people have asked me. Why did I choose to join DN at this time? My answer is pretty straightforward. The company has all the traits necessary to transition to a sustainable value creation model. These traits include a strong leadership team under Gerrard, the complete support of the Board of Directors, and probably most importantly clearly defined and executable value creation plans.

As I learn more about the business during the past few weeks, my conviction about our ability to create value has increased due to the company's strong market presence and DN Now action plans. I believe we have a tremendous opportunity to create significant value for all of our stakeholders.

With that, I'll hand the call back to the operator, so that we can open up the line for questions.

Question-and-Answer Session

Operator

Thank you, sir. Our first question comes from Matt Summerville with D.A. Davidson.

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

Thanks. Good morning. Couple of questions. First, in the services side of the business, I think gross margins overall were 23.4% in Q3, which is up pretty nicely from what was a bit of a tough second quarter.

And I'm wondering if you were to strip out the reversals you had in incentive comp accruals, did you actually see sequential margin improvement in services? And if so, is that sort of progression sustainable and what's driving that?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Hey, Matt. This is Gerrard. Let me lead off with that. So we do strip out that incentive compensation adjustment. We would have seen the increases in the services margins and the primary driver has been some of the early momentum we are starting to see from our services improvement plan. And as we continue to ramp that, we do anticipate continuing to see those margins expand going forward.

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

With respect to – well, I guess sticking with services, are you seeing any uplift as some of your contracts come up for renewal from a pricing standpoint? And if not, I guess when does that come into play?

And then what would your cash restructuring costs look like for 2018 and 2019, understanding 2019 might be preliminary with an end goal of what I'm trying to get at is, will you be cash flow neutral or negative next year?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

So let me take the contract pricing question and Jeff will take the cash question, Matt. So as I signaled on a prior call, we have started to see some positive momentum as we've looked at pricing activities in services contract renewals.

As you can probably appreciate that a large number of our contracts are up for renewal in August and then later again in the latter part of this year. We are seeing a very high attach rate in terms of our ability to secure those pricing improvements.

From a P&L perspective, I'd say that you won't get to see it unfold materially in 2018, but that starts to become more meaningful in 2019. And most of those pricing changes that we are seeing are unfolding in the Americas in particular.

Jeffrey Rutherford - Diebold Nixdorf, Inc.

And then Matt, this is Jeff Rutherford. The question on restructuring for the year 2018, we are modeling at just under $70 million in restructuring payments. And then when we look at the 2019 model, it's a comparable number. But it's probably worthwhile right now to talk about 2019 from a perception -- cash perception on a higher level.

What we anticipate and don't let it be lost that Gerrard talked about the next phase of DN Now and the focus on working capital, because that's important. Because one of the things we really need to do, as we go through this restructuring, is to fund it. And what the funding means is going to be for us to harvest excess cash that is sitting in working capital.

So when I look at 2019 and forward, when we look at 2019 and forward from a modeling perspective, our expectation would be that working capital would pay for the restructuring. So that leaves EBITDA to pay for interests and tax payments, right? So that's what we're looking at. We're not giving guidance today on cash flow for 2019. But conceptually, what we're looking at is improvement mainly by harvesting cash out of working cap.

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

Thanks, guys.

Operator

Thank you. Our next question comes from Paul Coster with JPMorgan.

Paul Coster - JPMorgan Securities LLC

Yes. Thanks for taking my question. Let me just build on that last point, which is the working capital is generally close to then the fourth quarter of the year and certainly not favorable in the first half of the year. So can you just elaborate a little bit on that point of working capital funding these improvements?

And then the related question I've got is, if you look at the last couple of years, the fourth quarter, about half of the working capital improvement relates to what seems to be year-ahead contracts, which is offset by deferred revenue increase.

I'm just wondering, are you able to still secure those year-ahead service contracts, or are your customers starting to reduce the term of the contracts and pay on a more quarterly basis, for instance?

Jeffrey Rutherford - Diebold Nixdorf, Inc.

Yes. It's a good question. I should have touched on that earlier is that, and the fourth quarter is the harvesting of cash because of the high installation base on product, which is why inventory builds going into the fourth quarter and then we're going to see a big ramp down in inventory as those installations go up in the fourth quarter. So our expectation, our model, is for cash to be generated obviously in the fourth quarter.

And then, when – you were asking specifically about deferred revenue. We don't talk specific to customers, but we are seeing basically the same level of activity there. There are some that at least one that has rolled off of a contract so that's not available; it is one. But everything else is comparable with prior periods.

Paul Coster - JPMorgan Securities LLC

Okay.

Gerrard B. Schmid - Diebold Nixdorf, Inc.

What I'd also build on to Jeff's comments on the inventory side is that obviously while we do see a burn down of inventory in Q4 as a result of higher installation activity, notwithstanding that as we take a look at the level of inventory activities specifically in finished goods and in raw materials, we do think there's quite a meaningful opportunity for us to further improve our starting point as we enter into 2019.

Paul Coster - JPMorgan Securities LLC

Got it. And my other question is on the head count reductions. Can you just talk to us about whether it's surgical or whether it's across the board? And I guess we're generally speaking kind of feel better if there were discrete functions being cut out or discrete products. But I think you get what I'm aiming at here, perhaps you can elaborate?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Yes, sure. So let me just start at a high level. A lot of the focus of that effort has been to impact non-customer-facing roles. So we have not impacted our frontline services technicians nor our frontline sales force. We've really been looking at middle management roles in particular.

There are 1,600 people roughly that are impacted by this effort. And as I said, 85% have exit dates. The work has been both surgical and across the board. This wasn't a blunt instrument approach that we adopted. It was a very, very analytical thoughtful look at spans of control, levels of management across the board.

So we've seen reductions in a number of our SG&A functions, some modest reductions in R&D, but it has been more modest, as well as middle management layers and some of the other functions. So it has been both surgical and across the board.

Paul Coster - JPMorgan Securities LLC

Okay. Thank you.

Operator

Thank you. Our next question comes from Kartik Mehta with Northcoast Research.

Kartik Mehta - Northcoast Research Partners LLC

Good morning. Just for Jeff, maybe going back to what you had talked about from a cash interest, could you just give an idea of what the cash interest expense is right now for the company? And just a better idea about the cash taxes, because I think that's been difficult to figure out because your tax rate has been all over the place.

Jeffrey Rutherford - Diebold Nixdorf, Inc.

Yes. Okay. I get both of those, right? Interest is going to be approximately cash. Interest will be approximately $50 million a quarter under the current capital structure. That's the easy one.

The tax is a little more difficult to explain. Let me give it to you the way I understand from a higher level, and we can get into whatever level of detail you want. But basically, here's where we are from a tax structure prospective.

And now I can go back and talk about what multi-nationals have historically done that are based in the U.S. We all spent time trying to move income out of the U.S. to foreign jurisdictions.

And then the Tax Act came and everybody's role that was doing that was turned upside down. And so, our position is a little more difficult because of interest and the limitation on the deductibility of interest. So here's where we get to.

When you look at us from a global perspective and tax perspective, we all have tax laws in the U.S., and we have taxable income in our foreign jurisdictions. We are going to pay taxes in those foreign jurisdictions and it's going to be based on current modeling approximately $80 million. And then we don't have a place to get a credit for that in the U.S.

So we can get a credit in the future. We can get deductions in the future from our net loss and our interest expense in the U.S. But right now, there's no way for us to benefit that. So we need to look at tax from a strategic perspective and see what we can do. And also ultimately, when the time comes, it's going to be a debt capital issue too as to where our interest should be. But those are -- that's an issue down the road. And in the interim, we'll be paying approximately $80 million of cash tax.

Kartik Mehta - Northcoast Research Partners LLC

That's helpful. Gerrard, in the slide, you laid out kind of multiyear outlook for 2019 from a revenue standpoint. You talked about growth in retail in Americas Banking and then a decline in Eurasia Banking.

Is the decline the result of just you walking away from business because of the profitability, or is the decline the result of some fundamental changes you're seeing in those markets and that's why you projected that?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Kartik, let me break the answer into two questions. First of all, Eurasia is obviously a very, very broad region. Within Europe in particular, we're seeing no change whatsoever to our competitive posture. We remain highly competitive. Our market share is exactly where we would anticipate it to be and the buying patterns appear pretty stable.

The real issue, as we discussed in prior quarters and continue to experience, has been in Asia Pacific where in a number of markets, most notably China, Southeast Asia and India, you're starting to see a number of deals where quite frankly we just don't believe it's appropriate for us to be competing.

The margins are negative in many, many cases, and we also see a number of customers trying to extend out service warranties to multiple years.

So it's a multiyear loss-making proposition to be in that business in certain countries. We don't see that expanding broadly into multiple markets, but we definitely are seeing that in several Southeast Asian markets, and we're just electing to do not participate in that game.

Kartik Mehta - Northcoast Research Partners LLC

So maybe Gerrard, if I looked at what you said, is it fair to say that the declines in Eurasia Banking are probably low single digits and then that will be made up with low single-digit growth in the Americas?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Yes, as I said in my comments, we definitely anticipate robust activity in the Americas. And that largely offset – this gets offset by some of the declines we see in Eurasia.

Kartik Mehta - Northcoast Research Partners LLC

And then just one last question, Gerrard. If you look at order activity and you look at order activity for ATMs, excluding kind of what's happening in Asia, it sounds like Asia is more a result of you just not wanting to have unprofitable business. So you kind of exclude that.

What's happening to orders, or what happened to orders in the third quarter if you just – you took Asia out and you looked at Europe and North America?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Yes. So Europe was modestly ahead over prior quarters from an order activity. I would probably describe the overall environment in Europe as relatively muted, fairly balanced. So not seeing tremendous weakness nor seeing tremendous strength, but fairly balanced.

However, in the Americas, and when I say Americas, I include Latin America and North America, we're seeing very strong activity across the board. And it's coming from big banks, regional banks, community banks, and we anticipate that strength sustaining itself going forward.

Kartik Mehta - Northcoast Research Partners LLC

Thank you very much. Appreciate it.

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Welcome.

Operator

Thank you. Our next questioner is Paul Condra from Credit Suisse.

Paul Condra - Credit Suisse Securities (USA) LLC

Hey guys. Thanks for taking the question. I guess -- could you elaborate on that last point, I mean just in terms of the strengthening order demand? It would sound like it's across both large and small banks.

And how much would you kind of attribute that to Windows 10 refresh cycle? Whatever else it is that it just kind of feels like it's a bit more positive than what we were talking about over the past years.

So I am just wondering what the change is? Anything about banks being in a better position to make these purchases, or being more aggressive in their expansion plans? Maybe if you could just discuss that a bit.

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Sure Paul. If you go back to what we were discussing on our Q1 call, we started to say that we were starting to see the green shoots of growth starting to emerge in the Americas, and I think we have just see that momentum continue to build. And we described the drivers as being somewhat different by markets.

So if we look at markets like Mexico, as an example, there is a big push by a large number of the big banks where we have significant market share to refresh their entire environments as a large percent of the Mexican population moves from being unbanked to banked, and order activity and ATM transaction increases (43:23) dramatically.

If you look at North America, it's much more of a Win 10 refresh drive that's fueling that activity. And in the Latin American region, that's more of a general refresh of their overall hardware, given that some of those environments have been sitting on relatively old aging machines. So I think those are three different factors based on the different market conditions we're seeing.

Paul Condra - Credit Suisse Securities (USA) LLC

Yes. And then I think your competitor mentioned a little bit more of a favorable competitive dynamic. And I was just curious, given everything that's been happening over the last couple of months, how you're feeling about the stability of your contracts with your client base and how the competitive environment has changed?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Yes. Obviously, I'll point you back to our performance in the quarter where we saw 5% topline growth in our hardware and equal strength in our software business. So I think I would suggest we are more than holding our own competitively.

I'd also reflect and comment back, if you take a look at the amount of order activity that we are seeing in the Americas and Europe, which is where profit pools are the greatest, I think we are more than holding our own. So we don't see any meaningful change in our market share position in markets where it really matters.

Paul Condra - Credit Suisse Securities (USA) LLC

Great. Thanks. If I can just squeeze in one last one, what are you seeing in terms of tendering the DN AG shares recently? And just given the cash flow use next year, how do you feel about your current capital position, and whether you might need to raise more capital?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

So the tendering activity has tapered off quite substantially over the past several weeks. I would probably describe it more of a trickle than anything else. And as Jeff alluded to in his comments, we'll be initiating squeeze out proceedings in the very near term, given that we have restricted cash on the balance sheet specifically for that purpose.

In terms of our overall capital structure, I'll go back to my earlier comments. Clearly, our focus as a management team and our number one focus is to drive a substantial improvement in our free cash flow position as an organization primarily to move towards addressing our capital structure. At this stage, I don't anticipate, and Jeff can comment on it too, I don't anticipate any need for additional capital next year.

Jeffrey Rutherford - Diebold Nixdorf, Inc.

Based on our models, we have sufficient capital for 2019, absolutely.

Paul Condra - Credit Suisse Securities (USA) LLC

Great. Thanks much.

Operator

Thank you. Our next question comes from Justin Bergner with Gabelli & Company.

Justin Laurence Bergner - Gabelli Funds LLC

Good morning, Gerrard, and welcome aboard, Jeff.

Jeffrey Rutherford - Diebold Nixdorf, Inc.

Thank you, Justin.

Justin Laurence Bergner - Gabelli Funds LLC

I want to go back to the service business. Could you maybe just remind us what the tailwind -- I'm not sure I caught the exact tailwind from incentive -- lower incentive compensation in the third quarter, and if will be any of that in the fourth quarter. And maybe would you be willing to sort of quantify how much that helped the service gross margin in the third quarter?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Yes. Hey there, Justin, it's Gerrard. I'll take the first question. So, our services margins increased 230 basis points sequentially from Q2. Across the board, we saw lower incentive comp in Q3 to the tune of $10 million, so that impacted multiple lines business, not just the services piece. So if we were to strip out that incentive comp line item, we would still have seen margin expansion in our services business.

I think the more important point that's underpinning what's going on in services is the work we're doing around our services modernization plan, which will deliver $70 million of improved margin over the next several quarters.

Justin Laurence Bergner - Gabelli Funds LLC

Okay, great. And just building on that point, I mean given that it's so early in the service modernization plan, were there specific things that took effect in the third quarter that led to that sequential improvement even when you back out the incentive comp?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Well, don't forget, we have two different drivers unfolding within our cost structure. You're starting to see our DN Now operating model changes take hold. And as I've said in my earlier comments from one of the other callers, this was a surgical and broad approach that impacted levels of management across multiple functions, services being one of those two.

So one of the things you are starting to see in services is some of the benefits of that early action there, less so the services improvement plan which is still developing.

Justin Laurence Bergner - Gabelli Funds LLC

Okay great. And then just lastly on the service business. Should we think about the pricing adjustments as sort of needed to catch up for sort of not having priced inline with higher costs? Or should we think about the pricing adjustments as actually driving EBITDA growth looking into 2019?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Yes, I think there's probably a little bit of both, Justin. At the end of the day, it's been my view that we have an opportunity to be more disciplined in our pricing activities to make sure that we're pricing for the value that we're delivering to customers and pricing for activities that might be different for newer machines versus older machines.

So I think I'll broadly simply say I think there's room for us to continue to use pricing as a lever going forward. In terms of whether it simply offsets increased costs, I think you'll start to see some modest uptick that will positively contribute to EBITDA. It won't all go towards offsetting costs.

Justin Laurence Bergner - Gabelli Funds LLC

Okay, great. And then just lastly on the hardware business or I guess sort of your regional segmentation, rather. Given that you're walking away from some unprofitable business in the Asia region, should we see sort of the flat revenue in 2019 versus 2018 as being mix positive?

Obviously revenue was down in the third quarter in Eurasia, but operating profit was up, which was different than the rest of the segments. So how should we look about mix in 2019 versus 2018?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

I think on balance, Justin, it should be mix positive, with more of our activities coming from the Americas, which obviously have a greater pull-through. And we also continue to anticipate strong growth from our regional banks where we are very, very well positioned. So I think on balance, our mix will skew towards the positive.

Justin Laurence Bergner - Gabelli Funds LLC

Okay. And then will the Asia decline also sort of be mix positive as well from that perspective?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Yes, broadly it should be, that's right.

Justin Laurence Bergner - Gabelli Funds LLC

Okay. thanks for taking all my questions.

Gerrard B. Schmid - Diebold Nixdorf, Inc.

You are welcome.

Operator

Thank you. Our next question comes from Rob Wildhack with Autonomous Research.

Robert Wildhack - Autonomous Research

Good morning guys. I wanted to get some more detailed thoughts on cash flow over the longer term. Can you expand on what you consider to be significant cash flow, and if your thoughts have changed or evolved around the overall cash generation profile of the business?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Well, it's easy for me to say because all my thoughts are right now, right, so they haven't changed. So all I can do is talk about future, right. So look, it's going to be a combination of parts when we're talking about cash flow, and just make it simple.

There is – based on the DN Now and the activities that we have and the activities to come, we are going to have continued growth in EBITDA, which is where all of our value and all of our cash are being generated.

Our expectation is that, over the next year, 18 months, we are going to be getting to a point where our working capital is where it should be with -- for a company of our size. It's heavily weighted in inventory right now.

We need to get to own inventory of a lower day sales kind of aspect where basically payables is paying for inventory, and then our working capital basically is going to become accounts receivable, offset by deferred revenue.

So then it gets to – our another cash flow outbound is restructuring. We are going to get through restructuring, right?

It's going to be heavy for the next 12 to 18 months. And we're going to come out the other end and we're not going to have restructuring payments, which leaves our capital structure and interest.

As I said earlier, it's $50 million a quarter and that will be addressed at some point, and then tax payments. Right now we're in an upside down tax structure where we are paying foreign taxes.

We need to address that from a strategic perspective and also from a capital structure perspective. But those are the drivers of our cash flow and we've touched on all metrics as we are going to this.

So if you take that into consideration, you can see at a point in time where the model -- as the model converge from where we are at to a value-creating model that there will be positive free cash flow.

Robert Wildhack - Autonomous Research

Okay thanks, very helpful.

Operator

Thank you. Our last question today comes from Saliq Khan with Imperial Capital. Mr. Khan, your line is open. You may have muted yourself, you need to unmute to ask a question.

Saliq Jamil Khan - Imperial Capital LLC

Great. Thank you for that. Hi, good morning guys. Just a couple of questions from my end, the first one being is, which changes are you seeing currently within the end customer or the industry that you are targeting? What are they going through that is creating a headwind for you in the medium or longer-term?

And I recognize that the financial industry, the ATM industry is going through a lot of changes over the years as a result of bank price (53:55) transformation. So if you can kind of highlight that and how that influences your thinking.

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Yes, Saliq, I do definitely say that there is nothing that we would have seen this quarter that would have changed that much longer term outlook. Ultimately, you almost need to look at that question on a regional by regional basis.

So in developing markets, and I use Mexico as an example, we're seeing a substantial growth in ATM transaction activity, as more and more of the population move towards a banked customer base.

By contrast, you've got markets like the Nordic countries that are much more cash light and the need for ATMs is more de minimis. And then you've got the rest of the world including North America somewhere between those two endpoints. So when you look at in aggregate over the next several years, over the longer term, we clearly anticipate a modest degradation of long-term demand, but not an elimination or a rapid fall off. And we just don't anticipate that happening anytime in the next several years at all.

Saliq Jamil Khan - Imperial Capital LLC

Got it. And then can you also speak to the divestitures of the noncore assets or the geography of the growth rates? And kind of speak to about how divestiture could potentially impact your relationship with your current customers?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Yes, so the first thing I'd say is these are noncore divestitures, and part of our consideration of what defines noncore are divestitures that don't meaningfully impact our main core customers. So these are small assets.

They tend to be focused in Europe and a couple of other areas. Quite frankly, our main customers that matter really will have nothing to be concerned about. It's really not relevant to their businesses.

Saliq Jamil Khan - Imperial Capital LLC

Got it. And all of the (55:56) questions that I've been fielding for over the last several years has been about the future of ATMs in the banking industry as a whole. So as you're going through the realignment of the overall business, I'm not seeing the bank branch transformation that we have spoken about maybe five years ago.

So what is the future of the ATM industry where you guys believe you can meaningfully take the lead, either on the services side, software side? How does that influence your overall thinking?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Yes, so I'll simply build on the comments I made earlier on. We continue to strongly believe that there's a long tail to cash. And given that there's a long tail to cash that continues to drive needs for ATMs for many years into the future.

On top of that, when we speak to our major customers in large markets around the world, many of them will continue to advocate and have strategies where they will be increasing the number of physical touchpoints that they'll have with consumers. And many of them see the ATM as the most natural device to increase those touchpoints.

So from my perspective, I don't see ATMs on a go-forward basis as purely being cash dispensing, but having far richer functionality to allow banks to maintain that physical touchpoint with consumers. So that's a broad perspective that I think we have a meaningful role to play in the banking industry for several years still to come.

Saliq Jamil Khan - Imperial Capital LLC

Sure thing. I'll try to squeeze in one last question on my end, which is probably over the last two to three years, we are seeing a convergence of a number of industries that has been impacting financial services.

So most recently, we saw the acquisition JetPay that NCR had made. As those convergences are happening and you're realigning the business, how should I be thinking about the next-generation of products or solutions that you guys are thinking about to be able to retain and go out there and grab more market share?

Gerrard B. Schmid - Diebold Nixdorf, Inc.

Sure. So, at the end of the day, I think there are broad buckets that your question falls into. We continue to believe that, given that we have such a large number of touchpoints with consumers, it's natural for us to evolve our software portfolio both in retail and banking into customer engagement and loyalty applications that continue to strengthen our relevancy to customers. I think that's broadly how I would describe where we will play.

Clearly, we are aware of our competitor's acquisition of JetPay and the intersection between that and the retail point of sale. I think that payments more broadly continues to be an area that's interesting and rapidly evolving within banking, but that's a longer-term call for us given that our focus as a management team is going to be on operating improvements and on cash flow enhancement to this business.

Saliq Jamil Khan - Imperial Capital LLC

Great. Thank you, Gerrard.

Operator

At this time, I'd like to pass it back to our speakers for closing comments.

Stephen A. Virostek - Diebold Nixdorf, Inc.

Good. I'd like to thank everyone for joining the call today. With follow-up questions, please send me an e-mail or call our Investor Relations line. Thank you very much.

Operator

Ladies and gentlemen, that concludes this morning's presentation. You may now disconnect. Thank you.