Hello, and welcome to the Diebold Nixdorf Inc. Second Quarter 2021 Earnings Call. My name is Emma, and I'll be operating the call today. If you wish to ask a question at the end of the presentation, please press Star followed by one on your telephone keypad. If you change your mind, please press Star followed by two to cancel your request. I'll now hand over to Steve Virostek, Vice President, Investor Relations. Please go ahead, Steve.
Thank you, Emma, and welcome everyone to Diebold Nixdorf's second quarter earnings call for 2021. Joining me on today's call are Gerrard Schmid, President and Chief Executive Officer, and Jeff Rutherford, Chief Financial Officer. To accompany our prepared remarks, we have uploaded slides to the Investor Relations page of dieboldnixdorf.com. Our remarks are being recorded today and cannot be reused without the permission from the company. Later this afternoon, we will post a replay of this webcast to the IR website. On slide two, we have a reminder that today's comments will include non-GAAP financial information, which we believe is helpful in assessing the company's performance. Reconciliation schedules for each non-GAAP metric can be located in the supplemental schedules of our slides, as well as in the tables of today's earnings.
On slide three, I will remind all our participants that certain comments made today will be forward-looking, and that there are a number of risk factors which could cause actual results to differ materially from these statements. Additional information on these factors can be found in the company's SEC filings. Participants should be mindful that our forward-looking information is current as of today, and subsequent events may render this information to be out of date. Now I'll hand the call over to Gerrard.
Good morning, everyone, and thanks for joining us today for our update. The company's transformed business model continued to perform on track during the second quarter as customer demand for our solutions drove strong product order growth. We're extremely pleased with the value that our customers are seeing in our propositions across hardware, services, and software. While the demand environment is strong, we're operating in a more complex and inflationary supply environment that had a modest impact on our banking business late in the quarter. Since we expect these conditions will continue, we're adjusting our 2021 outlook for profit and cash flow. Slide three highlights how we're leveraging our competitive differentiation to gain market share and grow our business. During the quarter, we delivered 6% revenue growth, spearheaded by our retail segment that grew 38% versus the prior year period.
Product orders accelerated this quarter, increasing 40% versus the prior year and reaching a four year high. Our success was broad-based, with strong growth across all three segments, and our backlog increased by approximately 20% versus the prior year period. In our banking business, demand for our next-generation DN Series ATM was strong and accounted for over 70% of all orders. I am pleased with the broad-based customer adoption of DN Series. We expanded our global business partnership with Santander Group to deliver customer innovation and operating efficiencies with more than 3,000 new ATMs, including DN Series, and maintenance services in the U.S., Brazil, Mexico, Spain, Argentina, and Chile. Additionally, in the United States, we displaced a competitor at both a top 10 bank and a top 25 bank, with orders for nearly 700 DN Series terminals.
We also booked two sizable contracts with National Bank of Egypt and Egypt National Post, valued at nearly $27 million for DN Series, dynamic software licenses, and maintenance. In Indonesia, we won contracts to refresh more than 2,200 legacy ATMs with DN Series and our dynamic security software at a large government-owned bank. In Brazil, we displaced a competitor with an order for more than 500 cash recyclers. These examples clearly point to improving market share for Diebold Nixdorf as customers recognize the distinctive value of DN Series to their digital agendas. We also experienced an increase of ATMs connected to our AllConnect Data Engine as the number of connected machines increased more than 25% sequentially to over 90,000 during the quarter.
Using advanced cloud computing and machine learning algorithms, we are remotely identifying root causes and are being more prescriptive with our response. This is a critical enabler of reducing the number of service calls, increasing our effectiveness, and reducing costs. By 2023, we expect the operational efficiencies from widespread ACDE use will increase gross service margins to the 32%-33% range. Our retail business continued its very strong performance, led by our self-checkout products. During the quarter, we reached agreement to replace a competitor's self-checkout solutions at a multinational clothing and home products retailer based in the U.K., and we're excited by the opportunity to extend our solutions to nearly 1,000 stores. We also signed an initial award at a discount apparel and household product retailer to furnish more than 400 self-checkout devices and maintenance services across Spain and Austria.
In Sweden, we booked a contract valued at nearly $4 million, a large multinational retailer to automate checkout and reduce fraud at the self-checkout counter using artificial intelligence and image recognition. Slide four contains an overview of our growth strategy, beginning with our foundational strengths in producing market-leading, high-quality products, delivering high service levels and terminal software capabilities. Across our banking and retail segments, the core model accounts for a majority of our revenue and cash flows today. Our differentiated solutions are demonstrating our ability to gain market share in these core businesses. Strength in our core offering enables higher growth opportunities shown on the right of the slide.
In addition to market dynamics that support long-term growth in self-checkout and our continued market leadership in cash recycling, we are pursuing a large addressable market for recurring revenue, underpinned by our ability to deliver managed services and value-add software at scale. In managed services, we continue to make progress with new contract wins in the quarter. For example, we were pleased to win a five-year managed services contract with a large Italian bank valued at $24 million. In our retail business, we secured a multi-year agreement with A.S. Watson, the world's largest international health and beauty retailer, to deliver new managed mobility software and services for 10,000 inventory devices across stores in Asia and Europe. Our partnership will accelerate A.S. Watson's offline plus online retail technology deployment in support of a great shopping experience and convenient checkout process.
One of our software highlights in the quarter was a multi-year agreement with Nedbank for more than 4,000 Vynamic View software licenses in Africa. We were selected because of our multi-vendor approach, which improves ATM availability by constantly monitoring hardware and software performance through a single user interface. With respect to our new Vynamic Payments offering, we are continuing to scale our debit platform at a top 10 global bank. We are processing nearly 1 million transactions each day and are expanding its capabilities from the branch and IVR channels to include all transactions across more than 15,000 ATMs over the next few months. By the end of this year, we expect to process over 5 million transactions per day. We are encouraged by our progress and will continue to invest in our advanced capabilities in order to better position the company for growth.
I mentioned earlier, demand has been very strong. We're experiencing a more difficult supply chain environment. Slide five highlights some examples of what we and many other technology companies are seeing. The chart on the left illustrates how global maritime shipping has become less reliable due to limited container capacity. This trend, combined with challenges in dock labor and trucking capacity, are adding operational challenges for DN, but our risk mitigation actions are currently proving effective. Strong global demand for logistics is also driving higher freight costs and increasing the need for expedited freight solutions. On the right side of Slide five, we show how strong global demand for semiconductor chips is running well ahead of supply, which is extending our procurement cycles, giving inflationary pressure.
Demand for chips is being driven by strong economic activity across multiple sectors, as well as a higher demand for electronic devices to support a global hybrid work environment. Because our products are among the most sophisticated on the market and highly digital, semiconductor chips are important components in our devices. While we have detailed plans to procure the semiconductors needed to fulfill our strong demand, continued execution is key to the model. Additionally, broad-brushed economic growth is driving up the cost of key input materials such as steel, plastics, and other electronic components. Jeff will discuss the financial implications of these factors in his comments. Before I hand the call over to Jeff, it's worth repeating that we're seeing a solid demand environment for our differentiated hardware, services, and software solutions. So focus is managing global supply chain complexities to fulfill customer demand. Over to you, Jeff.
Thank you, and good morning, everyone. I will begin on slide six with a more detailed discussion of our second quarter results and key variances versus the prior year period. Where applicable, I will also make comparisons to our first quarter results for 2021. Total revenue for the second quarter of 2021 was $944 million, an increase over second quarter 2020 of 6% as reported, and 2.5% excluding a foreign currency benefit of $46 million and a $16 million impact from divested businesses. Adjusted for foreign currency and divestitures, product revenue increased 5%, service increased 2%, and software was relatively flat. During the quarter, approximately $30 million of revenue was delayed due to extended transport times. This primarily impacted our Americas Banking segment and reduced total revenue growth by approximately 300 basis points. On a sequential basis, total revenue was unchanged.
Non-GAAP gross profit for the second quarter was $262 million, or a decrease of approximately $2 million versus the prior year period on lower gross margins of 27.7%. Gross profit in the prior year included approximately $17 million benefit from non-recurring cost savings. Service margins declined 130 basis points versus the prior year period, which benefited from meaningful cost benefits of lower labor and spare parts usage during the second quarter lockdown in 2020. When compared with our expectations, second quarter service margins were in line and were slightly higher than in the first quarter of 2021. Product gross margins were down 350 basis points versus the prior year period, due primarily to $8 million of higher freight and input costs and $5 million from an unfavorable geographic mix of banking products. In addition, the aforementioned revenue delays contributed to the unfavorable mix.
Software gross margins increased by 170 basis points versus the prior year period due to better contract management and resource utilization. On a sequential basis, gross profit margins declined 130 basis points in the quarter due to the unfavorable mix and higher freight costs. Operating expense of $199 million for the quarter increased $33 million versus the prior year, $5 million sequentially. When compared with the prior year, key variances include normalization of non-recurring SG&A cost savings from the second quarter 2020 lockdown of approximately $16 million. Planned investments to support the company's growth initiatives in managed services and software of approximately $8 million, and unfavorable foreign currency headwinds net of DN Now cost reductions. When compared with our first quarter operating expense, increased slightly due to the timing of our growth investments. The net result was operating profit of $63 million, an operating margin of 6.7% in the quarter.
The same trends drove adjusted EBITDA of $86 million and adjusted EBITDA margin of 9.1% in the quarter. Starting on slide seven, I will discuss our segment highlights. Eurasia Banking product order growth increased 39% versus the prior year period as we realized market share gains from our next generation DN Series ATMs. Segment revenue of $326 million decreased 3% versus the prior year period, and 7% after adjusting for foreign currency benefit of $24 million and a $12 million impact from divestitures. We experienced lower product revenue in the Mediterranean countries, which was expected. Segment gross profit decreased to $94 million year-over-year and included foreign currency benefits of $10 million and divestiture impact of $4 million. Gross margin of 28.8% was down 150 basis points. Certain cost savings from the prior year did not recur, as previously stated, and our revenue included a higher mix of lower margin geographies.
Over on slide eight, Americas Banking product order growth was very strong and increased 44% versus the prior year, led by market share gains via DN Series. Segment revenue decreased 6% to $313 million, primarily because of lower product revenue in North America, which included the aforementioned $30 million delay. When compared with our expectations, Americas Banking is proportionally affected because of the physical distance between our customers and our primary manufacturing facilities for DN Series ATMs, which are located in Europe and Asia. Backlog in Americas Banking grew 45% year-over-year. Segment gross profit at $89 million was down $18 million due to cost savings in the prior year period, which did not recur, an unfavorable geographic mix, and higher freight and input costs, which I mentioned previously. The unfavorable mix reflects a larger revenue contribution from South America.
Moving on to slide nine, our Retail segment delivered a very strong performance. Product order growth of approximately 40% was led by our self-checkout solution. Retail revenue of $305 million increased 38% as reported, and 28% after adjusting for a $19 million foreign currency benefit and a divestiture headwind of $1 million. Sales of our point-of-sale and self-checkout products both increased significantly versus the prior year period. As our installed base increases, we are also generating growth from our services and software business. Retail gross profit increased 45% to $75 million. Due primarily to revenue growth, gross margin expanded 140 basis points, reflecting increased revenue and a more favorable mix of self-checkout solutions. On slide 10, I will summarize our free cash flow performance and update our leverage and debt maturity schedules.
Unlevered free cash flow use in the first half of $62 million increased versus the prior year period due to a decline in EBITDA, higher inventory investment needed to support strong demand and increased safety stock, partially offset by reduction in transformation and restructuring payments. The increase was slightly higher than our expectations. The company's cash balance as of June 30th reflects seasonal cash use. The company ended the quarter with $500 million of total liquidity, including $238 million of cash and short-term investments. At the end of the quarter, the company's leverage ratio was 4 x, well below our covenant maximum of 6 x. On the right side of this slide, we update our gross debt levels as of June 30th. Note we have no material debt maturities until November of 2023. Slide 11 contains our updated outlook for 2021.
Revenue of $4 billion-$4.1 billion is unchanged because of our strong order book and foreign currency benefits working to offset longer logistics schedules, which Gerrard went through earlier. We are modifying our adjusted EBITDA by approximately $25 million to a range of $455 million-$475 million to reflect inflationary pressure on materials and, in particular, higher freight costs. Our free cash flow outlook is $120 million-$140 million and includes our revised profit outlook, plus investments we are making in higher safety stock as global supply chains tighten. Our outlook continues to reflect a material improvement in the company's EBITDA to free cash flow conversion rate from 12% in 2020 to approximately 30% in 2021. For our concluding remarks, I'll hand the call back to Gerrard.
Thanks, Jeff. I'll close our call with slide 12 and two key messages. First, our growth strategy is showing strong progress, and we're experiencing solid customer demand for our digitally enabled and differentiated solutions, with product orders up 40% and backlog increasing 20%. We are realizing broad-based market share gains with our DN Series ATMs. Customer adoption of our AllConnect Data Engine is accelerating. We're winning contracts and adding to our payments capabilities. Our retail business continues to deliver strong growth from self-checkout solutions and high service attach rates. Collectively, these accomplishments give us a high level of confidence in the enduring value of our solutions and our company's transformed business model. The second key message is that Diebold Nixdorf and many other technology-based companies are confronting a more challenging supply chain environment globally.
Our procurement, manufacturing, and operations teams are doing exceptional work to mitigate longer lead times on semiconductors and other components, prolonged transportation schedules, inflationary pressures on direct materials such as steel, plastics, and other electronics. We will continue to work diligently with our suppliers to manage volatility. These conditions, plus higher freight costs, are leading the company to adjust our 2021 outlook for profit and cash flow. In closing, we are pleased with the company and the team's progress in executing our strategy of providing differentiated solutions that are yielding strong order growth as well as our ongoing efficiency gains in our business model, our improved cost discipline through our DN Now program, all of which are leading to strong free cash flow growth and return on invested capital. This concludes our prepared remarks. I'll hand the call back to the operator for our Q&A session.
Our first question today comes from Matt Summerville from D.A. Davidson. Matt, please go ahead. Your line is now open.
Thanks. Excuse me. Morning. A couple of questions. On the negative side of things, the $25 million EBITDA takedown. It sounds like you're instituting some actions to try and mitigate that. I guess I'm curious maybe what that gross number looks like if the $25 million is a net number, and what are you doing in terms of mitigation, and what can you do with price capture as well to help offset some of that?
Yeah. Good morning, Matt. At a high level, let's break it down into two components, direct material inflation as well as freight inflation. On the direct material side, we continue to work very aggressively with our supplier base to look for various mitigants. I'd tell you that we can mitigate meaningful amounts of inflationary pressure on direct materials. Where it's more of a challenge for us right now is on the freight side, where just given the massive demand for sea capacity in particular, we're seeing more pressure on that front. In terms of the second part of your question, we continue to look at our entire portfolio of solutions and are continuing to execute on adjusting our value to our customers to reflect a clearly increasing inflation environment.
The other thing I would add, Matt. Sorry, Matt. This is Jeff. A majority of our adjustments related to logistics. We have time, and we have the people that are working on the inputs and the other aspects of cost increases. There's nothing we can do relative to logistics. We're going to have to pay to get the product, especially to North America. We're going to have to pay the rate cost to do that.
Got it. Obviously, orders up against, I would assume, a somewhat easy comparison relative to 2020 with that 40%. Maybe I was wondering if you could put that into context, maybe what the comparison would have looked like versus the second quarter of 2019. Relative to, I guess, what kind of outgrowth do you feel you're delivering relative to underlying demand in both banking and retail to help illustrate your share gain? Thank you.
Yeah, Matt, I would say the most important comment I made in my earnings script today related to the absolute dollar value of sales activity relative to all prior periods. This was the highest level of sales activity in four years. While the comp against last year was easier, what's more important is where we're standing relative to, quite frankly, the past four years, and this is substantially higher than in any other quarter. That was broad-based across Americas Banking, Eurasia Banking, and retail. In all cases, each of those segments delivering roughly 40% growth, some higher, some a little bit lower, but in and around that range.
We can see clear evidence that on the banking side, we're winning market share because where we're seeing the growth coming from is from renewals in our installed base, but also net new customers that historically bought their ATMs elsewhere. We're seeing that broad-based across, as I mentioned earlier on, a top 10 bank in the U.S., a top 25 bank in the U.S., as well as several examples in Eurasia, Latin America, and elsewhere. On the retail side, while we are benefiting from a broad expansion for self-checkout adoption, we're also seeing market share takeaways. We mentioned earlier on a very important win for us with a large U.K.-based retailer with 1,000 stores where we displaced a competitor. I think there's meaningful evidence emerging that our products are showing very well and adding value to our customers.
Yeah. The other thing I would add to that, Matt, would be when we look at order entry for the second quarter, don't forget we had strong product revenue in the back half of 2020. We're comping against that, and we're also seeing a very strong conversion in the DN Series. The product side of the equation is strong, which increases the issues relative to supply chain and moving logistics. Also don't forget that market share gains contribute to services contract base, after the three-month lag to a service contract. Strong product unit growth results in strong services contract base.
Appreciate that. Thank you, guys.
Thank you. Our next question comes from Paul Chung from JP Morgan. Paul, please go ahead.
Hi. Thanks for taking my question. Can you talk about the DN Series win at the top 10 bank in the U.S.? What kind of drove that win? If you could expand on pricing there as well and how that impacted the win. What particular features of the DN Series is attracting customers and displacing competition? A follow-up.
Yeah. Good morning, Paul. The predominant capability that secured the win for that top 10 bank was not pricing. It was our cash recycling capability. We're on our fourth-generation technology there and feel that we are distinctively market leaders in cash recycling, given that we own our own IP in that space. That particular top 10 bank is looking to reduce their overall cash handling costs, and cash recycling gives them an important enabler to do that. What we signaled in this quarter was an order that was several hundred machines in scale. We expect that to expand quite substantially with that top 10 bank. I think we are very well-positioned. That particular institution was not a historical customer of Diebold Nixdorf. As I said, pricing was not a meaningful factor in the equation.
Got you. Just on gross margins, how should we think about the second half of the year, the push out of $30 million in revenues? Does that provide you some scale benefits in the second half, and any comments on seasonality of gross margin would be helpful. I assume freight costs still weigh in the second half and maybe start to normalize maybe in 2022. Is that the right way to think about it?
Yeah. I would say, let's take the freight cost first. We expect it to continue through the balance of 2021. Especially after we need to get through the holidays, right? That's what's clogging, especially from Asia. We think it's going to last sometime through the Chinese New Year. Then we'll get some relief, and hopefully it'll normalize. We expect it to continue through the balance of 2021. From a margin perspective, we do anticipate, and based upon the strong order entry we're receiving, that we're going to see strength in product revenues in the back half of the year. Even comparing to the strong back half in product revenue we had last year. It's twofold. It's banking, and it's also the strong product growth in retail.
One of the things to remember in the back half of the year, we do have a headwind in logistics, but we have a tailwind in conversion to DN Series from legacy ATMs. Our expectation is that we will see a lift in back-half margins off of prior year margins because of that mix into self-checkout from POS and from legacy ATMs into DN Series ATMs.
Okay, great. Then last question. On the retail side, very nice self-checkout contribution. How do we think about the seasonality for this business as well? Do you still have expectations for seasonal strength in 4Q? Your order growth was quite strong. What's the timing of that recognition for that business as well? Thank you.
Yeah, I would say it's the same as what we just talked. We continue to see strong demand in self-checkout. I think we can say that it's a little above our expectations for both POS and self-checkout. We anticipate that the self-checkout demand will continue for some time. That's not only new self-checkout, we are also seeing market share gains in self-checkout. self-checkout has the same unit economic model that ATM has. As we install self-checkouts, there's an extremely high conversion to services contract basis. We continue to see, as we roll out self-checkout, we're seeing high 90% attachment to service contracts.
Okay, great. Thank you.
Thank you, Paul. Our next question today comes from Justin Bergner from Gabelli Funds. Justin, please go ahead.
Good morning, Gerrard. Good morning, Jeff.
Morning.
Morning, Justin.
A couple questions. The reduction in the EBITDA guide due to supply chain pressures, is that essentially all within the Americas Banking segment, or is there a modest piece of it that's relevant to Eurasia Banking and retail?
Yeah. Let's break it down into a few different pieces, Justin. You heard us say earlier on that we're seeing inflationary pressure both in direct materials as well as logistics. Direct materials is pretty evenly spread across all three segments. However, it is a smaller part of the inflationary pressure given that we have procurement levers to offset some of that. Now, in terms of logistics costs, we do move goods around the world. In that particular case, Americas Banking, it's more disproportionately hit than the other two segments because of the sea container capacity constraints between Europe and U.S. ports.
Okay. Understood. With respect to the shipments, you talked about having to, some cases, pay for expedited freight. Can you delay some of these shipments with customers in order to avoid having to pay for expedited freight? Is that a feasible option or not so much?
Justin, as Jeff said earlier, based on everything we're hearing from the market, we anticipate the logistics constraints globally to be there likely through the Chinese New Year. We clearly continue to work with customers to make sure we meet their needs, which is ultimately the most important part here. In some cases, we will use expedited shipping for spare parts and other activities. Clearly, we are minimizing expedited shipping for wholesale ATMs given the weight of ATMs. We have some flexibility to move things around, but I wouldn't say we're aiming to push things out to Chinese New Year.
Okay. With respect to the guide on the revenue side, what can happen at this point to sort of allow you to hit the high end of the guide? Is it effectively the case that the volume of shipments is a little bit lower because there's an inflationary price offset aiding your revenue? Just help me understand sort of the contours of the maintained revenue guide, if you can.
The revenue guide, we are seeing a little bit of a tailwind from FX, and that's built into the model. To achieve the revenue guide, and this is why we are very highly confident we can do this, it's all based on demand and the ability to deliver that product to the customer base. Our segments do a great job of managing that process. Once we manufacture a product and it will be the plant, it belongs to the segments, and the segments do a wonderful job, and they're incented to do this, you have to think through that, to get those products, whether it's retail or banking, to the customer for revenue recognition. We feel strongly. The only thing that we are really dealing with here is what we've already talked about, is the lead time and logistics, especially to the U.S.
Yeah. Broad-based supply chain volatility is really the only inhibitor to hitting our revenue guidance because the demand is there to support it.
Okay. Just one last one. Any sort of update on sort of your debt financing priorities given the favorable interest rate environment? I know you've talked about it on a couple of past calls.
Yeah. Reminder, in our secured notes, there is a no-call provision making it expensive to do anything before July of 2022. Now, that's based off of remaining interest to July 2022. Every day, that number declines. We monitor the markets. There are some things we've talked about. We will be having discussions with lenders and potential investors over the next 12 months. Timing, we're not ready to announce anything relevant to timing. We certainly are interested in the market. We will be rebalancing, obviously, for interest purposes. You've heard me talk about that ad nauseam in prior periods. This will be both with U.S. banks and investors and European banks and investors. We'll be doing the groundwork over the next 12 months, and when it's time to pull the trigger, we'll pull the trigger.
Great. Thank you.
Sure.
Thank you. Our next question comes from Kartik Mehta from Northcoast Research. Please go ahead.
Thank you. Hey, good morning, Gerrard and Jeff.
Kartik.
Oh, morning. Any concerns at all that these delays could cause a loss in orders? It doesn't sound like the delays are that much, but as we move out through the year and as we get into the fourth quarter, any concern that the orders could be delayed into 2022, or you could lose them?
No, Kartik, we don't see any risk at this stage of losing orders. Yeah, we work very closely with our customers. Our customers are acutely aware of these logistics constraints. We're not in this on our own. It's impacting every other company. Look at the front page of the business section of The Wall Street Journal today, talking about that as well. No, I don't see that as being a likely outcome unless there's a material change in circumstances.
Okay. Any thoughts about potentially moving some manufacturing to the U.S., or do you think this is temporary and really no reason to kind of change where you're manufacturing or how you're manufacturing?
Yeah, Kartik, we are actually well underway in terms of increasing our operational capacity in the U.S. to create some additional flexibility on our end to offset some of this pressure. We expect those operational gains to start to support us as we move through the second half of the year. That certainly will ease things a little bit.
That should help in 2022 as well, right, Gerrard?
That's right. In 2022, we also expect the logistics scenario to be easing as well. Absolutely.
Okay. Just one last question. On one of the slides, you talked about the AllConnect and the success you're having there. I'm wondering if you could talk about maybe the financial success that could have, if it's already happening or right now you're still in investment mode for that and it will take next year or the year after to really start seeing the benefits.
Yeah. Kartik, we are already starting to see some of the benefits of it. As I said in my prepared remarks, we saw a 25% growth sequentially in the Connections engine, so we now have over 90,000 devices connected. Recall, though, that we have an installed contract base that's north of 500,000 machines, so we're still relatively early in that journey. That being said, for every device, we immediately start to see the benefits. What you're starting to see is the improvements happen somewhat slowly, just given that it's machine by machine, but they absolutely are starting to happen as well. We're seeing a reduction in calls for each device connected. That's what gives us the confidence behind our earlier comments around longer-term expansion of our services margins, because we're seeing that evolve already.
Thank you very much. Appreciate it.
Thank you. Our next question comes from Ana Goshko from Bank of America. Please go ahead. Your line's open.
Hi. Good morning. Thanks very much. I have a few questions on items impacting cash flow or free cash flow. The free cash flow guide was revised down in tandem with the EBITDA, but there is reference to working capital use for inventory purchase as a result of the longer lead times. Is that expected to resolve in the second half? Because I would think that that would potentially continue to be a drag on free cash flow in the second half of the year. Also just an update on what you're expecting for the total restructuring, and other kind of DN Now or kind of transformation costs for the year.
Hi, Ana. From a transformation restructuring payments, it's still $50 million that we anticipate spending in 2021. We're going to be up in inventory. We anticipate that mainly because in certain areas we have lifted our restrictions on safety stock. We will have that inventory and we more than likely, because of high demand, have more in-transit inventory at year-end than we would normally have. In all, what we are modeling today is to be up somewhat in inventory. There are other triggers we will pull to offset that to get to where we have guided relative to cash flow. We haven't gone through all the detail, but the bigger portions of it are that we're anticipating lower EBITDA as for our guidance and increase in inventory working capital.
By the way, that inventory working capital obviously is short-term and will reverse in the model in 2022, so it'll increase 2022. Where we're at right now is that there will be slight deterioration in EBITDA and inventory. We stuck with the $50 million of restructuring payments, and all other contributors will have somewhat a net positive impact to get us to the guidance we've provided today.
Okay. Thank you for that.
Sure.
Thank you. Our next question comes from Marla Backer from Sidoti & Co. Please go ahead. Your line is open.
Thank you. You talked earlier about one of the characteristics you see on the banking side in terms of driving some market share gains that you're experiencing being the cash recycling capability. Can you talk a little bit about what you're seeing in terms of projected consumer customer uptake on the video-enabled capability of the ATMs?
Good morning, Marla. Video capability is certainly an attractive feature, but it seems to be predominantly focused on the U.S. end consumer, and more notably among some of the mid-sized U.S. banks. We don't see broader adoption, quite frankly, due to different consumer preferences in Europe and other parts of the market. Certainly a less material contributor than for sure recycling will be for our business.
Okay.
We are seeing, however, good demand within the U.S. market for that product.
Mm-hmm. Okay. In terms of Over this call, and I think on the last call, you've talked about seeing service contracts growing in terms of the % of new product revenue. Can you give us a sense directionally of what you're seeing in terms of that conversion? What percent of contracts for products being written today also include the service component versus, let's say over the past two years?
Yeah. Let me start the answer, and I'm sure Jeff may add to it as well. Marla, within our banking business, in any market where we have our own direct services organization, the attach rate for services when we deploy hardware is exceptionally high. Typically north of 90% with a very even higher recurring renewal rate for our services contract. Yeah, as Jeff was saying earlier on, part of why we're so encouraged by our very high product order growth is that ultimately it fuels higher services revenues. We're seeing the model be pretty consistent, and it's been pretty consistent for the past several quarters, which is what's giving us confidence as we look into future quarters that our services revenue will flow once these machines are deployed.
It's even higher in self-checkout. I mean, self-checkout is extremely high. We just reviewed that, in fact, this week. Point-of-sale is lower. It's a less complicated device, and our attachment rate for services in point-of-sale is somewhere around 30%.
Would you say that those metrics are higher today than they were, let's say, two, three years ago because the service component is just becoming a more important part of the overall business?
Yeah, Marla, we've put a lot of focus on making sure that services is one of our differentiated propositions. As I said earlier, our attach rate in banking has generally always been in the 90s. We've seen that largely be stable, sometimes a little bit higher. As Jeff said, on the retail front, we've seen a very strong uptick in attach rate on self-checkout. It's a more complicated device. Hold steady around 30%. I wouldn't say broadly there's been a material change in the attach rate over the years. It differs by product, but the trend has been pretty consistent.
Mm-hmm. Okay. Thank you.
Thank you. Our next question comes from Matt Bryson from Wedbush Securities. Matt, please go ahead. Your line is now open.
Good morning, thanks for taking my questions. I've got two. The backlog growth number of 20% and the order growth rate of 40%, those are both really impressive metrics. Obviously other than retail, it's not flowing through into current revenues. When you're looking for 3%-5% growth for the year, if it's not in 2021, I guess typically I would think about that at some point. Certainly, your product revenue is growing at something like that rate once you start to convert those orders into revenue. I guess, is that the right way to think about things? What's the timing on that, assuming you see that conversion?
Yeah. Let me lead off first with a couple of higher-level comments. As Matt Summerville pointed out, that 40% was against a lighter 2020 comp. What's more important for us is the absolute level of orders, that they were strong. We fully expect to show very strong product revenue this year as we fulfill these orders, and you'll see those flow in Q3 and Q4. Obviously, I can tell you, as Jeff said earlier on, we have a very high degree of confidence in our revenue guide for this year, provided we can fulfill on the orders as we work through logistics and supply chain complexities.
Yeah, I agree. As I said earlier, don't forget, especially fourth quarter last year, we've had strong product. Because of the lead times and the relationship to your question relative to order entry and delivery, we track that by customer, by product. We have high visibility in all those orders as to when they're going to be delivered. We get to a certain point, and the segments will remind us that basically, we've got all the orders we're going to have for the year. When we look at our order entry, we can directly relate that to revenue recognition. We track that. We track it monthly. They track it daily. There's a high level of confidence, to Gerrard's point. That's why we can call out $30 million for the second quarter because we had that revenue recognition in the second quarter.
When it didn't happen, it adjusted out of our forecast. We track that conversion of order to revenue recognition very closely as we track the conversion of installed ATMs and self-checkout in the contract base. The base of this model is very unit economics oriented.
Thanks. For a different question, Jeff, I think you mentioned on the call that as you shift over to DN Series, you see some benefit on the product gross margin side, logistics and component costs notwithstanding. I guess my question there is, I think you mentioned on the call, 70% of orders are for the DN Series products. Can you give us some color on what the percentage is in terms of shipments and when timing-wise we might expect shipment percentages to reflect that 70% order percentage? Lastly, just in terms of the magnitude of benefit or how we should be modeling the benefit, any color at all in terms of how that flows into the gross margin line when you're getting closer to fully transition to the DN Series parts?
We're in the middle of a very high turnover from legacy ATMs to DN Series. The reason being, as Gerrard discussed earlier, it's better equipment, right? It's a better ATM. It's more efficient. It's very self-diagnostic, all the reasons. It's connected to our AllConnect Data Engine . It's very efficient, and it's more efficient to manufacture. That's what we'll say. We have competitive issues here, and we're not going to give all of our information, but let's just say that it's a better ATM that is more economical to manufacture.
Yeah. I would say, just to give a little bit more color on that, Jeff mentioned that the conversion is in flight. As you start to look through H2, you'll start to see that unfold in our product gross margins. As DN Series becomes a bigger and bigger percent of what we're shipping. That certainly forms part of our view around our confidence around EBITDA range and our gross profit range as well.
Matt, we've made the statement that DN Series is going to be in excess of 50% of shipments this year. You can imagine with the 20% of the order book in the first half, that is going to flow through product revenue and product gross margin in the second half. Then have an incremental benefit as it reaches a higher level in 2022.
Thanks for the color.
Sure.
Thank you. Our next question comes from Rob Jost from Invesco. Please go ahead, Rob. Your line is now open.
Hi. Thanks. I wanted to follow up on that last question. Have you quantified the margin uplift of the DN versus the legacy ATM?
For competitive reasons, we have not done so, Rob.
Okay.
Obviously, for internal modeling purposes, we have all that information. It's just not something we want to discuss. We don't want to discuss the unit cost of our ATMs.
Sure. Understood. Okay. Wanted to make sure I didn't miss it. When you talked about self-checkout, the comment on the side was that this was driving higher software and services. In the follow-up, it sounded like services was fairly constant. I guess I just wanted to see if I could dig in a little bit here and understand. With the self-checkout, is there something unique about what you're selling now that is driving, I guess, higher software? It sounds like service levels are very constant.
Rob, you broke up there a little bit, so I'll take a crack at answering it. If we didn't answer it, just come back at it. Historically, if you go back a couple of years, self-checkout was a much smaller part of our retail portfolio, and we've seen exceptionally strong tailwinds on that front. Also historically, services attach rates and point-of-sale were low in the 30% range. Self-checkout is a substantially more complex device, which is what's driving a much higher service attach rate in our favor, attach rate that's typically north of 95%. Every incremental self-checkout machine we sell increasingly drives up our recurring services revenue. We fully expect to see ongoing strong growth in our self-checkout services revenue line. Software also gets dragged along.
As our customers look to deploy both point-of-sale and self-checkout technologies, they rely on us for software to power those devices. Again, this is a model where strong activity on the hardware front pulls through activity on services and software.
Okay. No, that helped answer that question. Okay. My last question was just around some of the pressures you're facing, both on the logistics as well as just the cost of materials. I heard you say that you expect this to last or persist through the new year, Chinese New Year, I think is around where you think it might mitigate a little bit. Which way are things trending at this point? Are they still going up? Are you in a stable environment? I'm just trying to get a feel for how to think about the next quarter.
Let me break it into two different pieces. On the freight side, the inflationary pressures are high. We're modeling a modest uptick above what we're seeing Q2 through the balance of the year on freight costs, which are already quite high. Are anticipating for them to abate, hopefully around the Chinese New Year. That's one factor. The other factor, which I commented on in my prepared remarks is semiconductor demand is exceptionally high right now. I anticipate that that may tighten further through the year rather than abate. That one may tighten somewhat further into 2022. It's a much smaller inflationary pressure on us. That's one of an availability pressure for us than an inflationary pressure for us.
While a lot of this call has focused on the logistics side, I would just broadly say the overall supply chain environment is definitively more complex than we've seen it in years.
Okay. Thank you.
Thank you. Our final question today comes from Barry Haimes from Sage Asset Management. Please go ahead, Barry, your line's now open.
Great. Thanks for taking my questions. First one, it's not clear to me on these additional freight and other costs as to whether and how aggressively you're trying to raise price or put in surcharges to offset. Could you comment on that? To the extent you are trying to do that, is there a point in time where you think it'll catch up on a dollars basis on price cost? That's the first question.
Yeah, Barry. Obviously, for competitive reasons, I'm going to be a little bit circumspect on that particular question, but I can tell you that across the board, across hardware, services, and software, we have implemented various measures to offset a bunch of this pressure that we're seeing. The flow-through effect of those measures starts to be felt more notably in 2022. Just timing of orders, when they were priced, when things were being built, and when revenue is being recognized. I'd say more broadly, we're bearing some of the inflationary brunt the second half of the year. We're continuing to take incremental cost measures to offset that. On the pricing front, that tends to flow through into the following year.
Got it. Second question is, just getting to some of the free cash flow pieces for next year. Without forecasting earnings and getting into any kind of an earnings forecast, but just in terms of other changes. The $50 million on the restructuring costs, as I recall, doesn't repeat next year. That would be a $50 million benefit. The $25 million reduction we've seen in EBITDA, given that you think things might normalize earlier in the year, again, everything else equal, would that come back next year? Are there any other free cash flow pieces that we should be thinking about?
That's a good question. We are not only assuming that in 2022, at some point in time, that availability of cargo capacity will improve, but that the cost will adjust also. Based on that, yes, it would come back. Right? From a cash flow forecast perspective, we talked about we'll be a little heavy in inventory than we originally modeled. That should come back. Right? With what Gerrard said relative to DN Series final assembly capabilities closer in the U.S., that would help relieve some of the pressure on inventory. We would assume that EBITDA would benefit, that we would see a reduction in the long position we're taking in certain inventory categories. We will get that back. You're right, the restructuring goes to zero.
Ultimately, and this is the question I received earlier, is we would anticipate if the debt markets hold, that we'd be able to do something to reduce our interest payments going forward sometime in 2022. That's yet to be determined, and is dependent upon market conditions and availability within the markets.
Got it. That's very helpful. Appreciate it. Last, sort of two questions. One is, you've alluded a couple times to the extra inventory this year that you had to put on. Could you quantify what that number is? Lastly, if not for the supply chain issues, based on the strong order book, would your sales guide have actually gone up instead of staying flat on the reforecast? Or is a lot of the order strength more for delivery in 2022, and it's really more of a 2022 impact? Thanks very much.
Yeah. The amount of inventory, and I can give it to you as that second quarter was in the $20 million range. Right? $20 million-$25 million of higher inventory. We would anticipate that level may continue through the end of the year. The other question is a very interesting question. I'm not going to answer it the way you asked. Here's the way I'm going to answer it. If we didn't have any supply chain issues, we would anticipate having a very good 2020. Above our own expectations.
Got it. Fair enough. Thanks very much. Appreciate all the insights.
Okay.
Thank you.
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