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Diebold Nixdorf (NYSE:DBD)
Q1 2019 Earnings Call
April 30, 2019 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Diebold, Inc. posted first-quarter 2019 conference call. Today's conference is being. At this time, I would like to turn the conference over to Steve Virostek.

Ma'am, please go ahead.

Steve Virostek -- Investor Relations

Thank you, Katie, and welcome everyone to Diebold Nixdorf's first-quarter earnings call for 2019. Joining me today on the call are Gerrard Schmid, president and chief executive officer; and Jeff Rutherford, our chief financial officer. For your benefit, we've posted presentation slides which will accompany our prepared remarks on the Investor Relations page of dieboldnixdorf.com. Later this afternoon, an audio replay of today's webcast will also be posted to the IR website.

On Slide 2 of our presentation, 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. In supplemental schedules of our slides, we have reconciled each non-GAAP metric to its most directly comparable GAAP metric. Moving to Slide 3, we inform all participants that certain comments may today may be characterized as forward-looking statements and that there are a number of factors that could cause actual results to differ materially from these statements. You may find additional information on these risk factors in the company's SEC filings.

Also, please keep in mind that forward-looking information is current as of today and subsequent events may render this information out of date. And now, I hand the call to Gerrard.

Gerrard Schmid -- President and Chief Executive Officer

Good morning, everyone. I'm pleased to join you today for a discussion of our first-quarter results, an update to our DN now initiatives and the reiteration of our outlook for 2019. On Slide 3, we've highlighted the company's first-quarter performance. Overall, I'm pleased with the results, which our sustained execution against our priorities.

Total orders decreased 1% in constant currency during the quarter versus one year ago. We delivered strong growth in Americas banking, where our success was supported by orders for more than $70 million of Windows 10 capable machines. Key wins included a multi-year agreement with KeyBank to digitally transform more than 14,000 ATMs with dynamic -- with DNs dynamic software. A $5 million contract to provide recyclers and installation services with the top five financial institutions in Brazil.

A contract teachers credit union to upgrade their entire fleet of ATMs to Windows 10 in mid-western states. This win indicates we're seeing win tend demand from financial institutions of all sizes. And we renewed a $40 million 3-year services contract with one of the top financial institution in the United States. Eurasia banking orders declined modestly in Q1 with very different trends across the subregions.

Orders from European customers were down slightly while customer orders increased nicely in the Middle East and Africa. Orders in Asia Pacific declined meaningfully year over year, as we maintained our bidding discipline and focused on profitable opportunities. Important wins included an expanded partnership with a major financial institution in Belgium to upgrade more than 2,400 devices including a large number of cash recyclers to Windows 10, leveraging Diebold Nixdorf's all-connect services and our DN dynamic software suit. Secondly, a multi-year managed services contract renewal with a top tier bank in Western Europe.

A cash recycling win at Halkbank in Turkey and Bank Pekao in Poland, and a new contract to provide over 250 cash dispensers and DN dynamic connection points to a Taiwanese financial institution. Retail orders declined slightly in the quarter due to strong performance in the year ago period. In the quarter DN won a 5-year agreement valued at more than $60 million with one of the world's largest fuel and convenience retailers to deploy a new centralized card acceptance platform. Our contract includes software licenses, professional and maintenance services for stores located in 10 European markets.

In addition, we secured a $18 million contract with the French retailers' supermarket cooperative for 600 self-checkout systems and a 4-year services contract. We're experiencing good growth for our self-checkout solutions in several European countries. Changing over to revenue. The company increase our top line by 3% in constant currency versus 1-year ago, excluding approximately 6.5 percentage points of FX headwinds.

During Jeff's comments he'll discuss the impact of currency on our profitability in the quarter. We delivered 11% revenue growth from Americas banking and 4% growth from retail both in constant currency. In Eurasia banking revenue declined 4% in constant currency reflecting lower volume from Asia and modest growth in Europe, the Middle East and Africa. Our profitability improved into the quarter is encouraging.

As we're starting to realize benefits from our DN now initiatives. Gross margin expanded 60 basis points lead by 140 basis point expansion in services and 230 basis point improvement in products. Our software margins reflect a combination of lower volume, solution mix, higher delivery costs and accounting changes. Operating profits increased by $9 million or 54% year over year to $27 million, due to our continued focus on streamlining our expenses.

Adjusted EBITDA increased by $3 million year over year and our adjusted EBITDA margin increased 50 basis points to 6.3%. Moving onto cash flow. As most of you know our business tends to use cash during the first half of the year and generate cash last in the year. Through proactively managing our collections, payables, inventory and other cash uses the company was able to reduce cash use by more than $90 million versus the prior-year period while 56% improvement.

Moving onto Slide 4. Our recent improvements to profitability and cash flow are largely driven by momentum from our DN now initiatives that we laid out last year. This program is simplifying our operations, reducing costs and enabling a greater focus on our customers. Slide 4 is a reminder of those initiatives, the timelines and expected realization of $400 million gross saving trough the year 2021.

I'd like to expand upon a few of these initiatives, starting with our need streamlined operating model approximately 1,400 employees have departed from the company through March 31, and we have clearly defined exit dates for more than 95% of the remaining 300 employees. As a reminder, we expect this initiative will about $100 million in gross saving through 2019 and $130 million of saving by 2020. Equally as important, our new structure has clarified roles and responsibilities which is driving increased accountability across the organization. Second, we are simplifying our ATM product portfolio and manufacturing footprint.

During the quarter, we successfully relocated the production of certain ATM products to lower cost locations, and we've stood up transition teams in preparation for closing a few subscale facilities. Third, with respect to improving our net working capital, the company demonstrated good progress in the first quarter. Jeff will comment on these initiatives in a few minutes but let me say that I'm very encouraged by our ability to reduce net working capital as a percent of revenue to 19.1% in the first quarter down from 24% in the year ago period. I'll discuss our progress with service modernization and the reduction of selling, general and administrative expenses in just a moment.

And finally, with respect to our non-core assets, during the first quarter we terminated our unprofitable business in Venezuela, liquidated a cash and transit business to reach our customers in Europe, and divested our program management IT consulting business serving European financial customers. This month, we divested our Netherlands-based cash and transit business for banking customers and net proceeds were approximately $10 million. One larger divestiture is taking longer than we originally envisioned, and we continue to make progress on several others. On Slide 5, I'll spend a bit more time discussing our services modernization plan.

As discussed on prior earnings calls, our key actions include: automating incident reporting and response; standardizing our contract terms and other processes, which enable the company to realize scale benefits; and upgrading older customer hardware and software, which typically generates higher volume service pulls. On the prior earnings call, we introduced three key performance metrics to help track our progress: the first metric is a trailing 12-month service renewal rate, which remained solidly above our 95% target for the first quarter; next is the contract base of ATMs, which we maintained at approximately 630,000 versus the prior year; and most importantly, the key financial metric is our gross services margin, which increased to 140 basis points year over year in the first quarter to 24.7%, made by gains in both banking segments. At the country level, we drove notable improvements in the United States, Canada, Mexico, Germany, France, the U.K. and several other markets.

In fact, our gross service margin in the United States was just above 30% for the quarter. These results coupled with the strong service level quality for our customers had strong engagement from our Services team, it's highly encouraging. Moving to Slide 6. We described our work streams and early progress to further reduce our selling, general and administrative expenses.

Using global spend analytics, we have identified significant sources of savings from consolidating and reducing the company spend with third parties. In fact, any leaders within the company have taken ownership for this procurement initiative, and we're using a well-renowned model to track our progress at a granular level using five different degrees of implementation. Additionally, we're beginning to consolidate our real estate footprint with a particular focus on underutilized office space. During the first quarter, we announced plans to close seven European leased offices.

Our analysis indicates that we have incremental cost reduction opportunities across all our regions. In our finance organizations, we implemented initial actions to streamline certain finance functions during the first quarter. This program is expected to build more momentum in the latter part of 2019, as we make greater use of shared services and increased automation of finance and accounting. Also during the quarter, the company's information technology leaders successfully contracted to reduce our global telecommunications spend, as well as our storage costs in the United States.

We expect the collective impact of first-quarter SG&A decisions to drive future annualized run rate savings of about $20 million, once they're fully reflected in our P&L. On the bottom half of this slide, we'll see a key performance metric, SG&A expense as a percent of revenue for the last five quarters and our 2021 target of 13% to 14%. During Q1, the company's SG&A, as a percent of revenue, was 17.7% or unchanged on a year-over-year basis. However, there were a few items working against this metric in the quarter and they include: normalized compensation expenses; unfavorable mark-to-market entries, resulting from legacy Wincor auctions, which links to the Diebold Nixdorf share price; and other benefits in the first quarter of 2018 which did not recur.

Collectively, these factors accounted for about $13 million or 120 basis points of headwinds versus the prior year. In summary, our first-quarter results demonstrate solid execution from the leadership team and good alignment on our priorities. With 2019, we continue to expect our DN now initiatives will generate approximately $160 million of gross savings. Since the majority of these actions are within our control, we remain confident in our clearly defined path for value creation.

As a result, we are reiterating our output for 2019 for revenue, adjusted EBITDA and free cash flow, which Jeff will detail in a few minutes. And now I'll hand the call over to Jeff.

Jeff Rutherford -- Chief Financial Officer

Thank you, Gerrard, and good morning, everyone. During my prepared remarks today, please keep in mind that my comments will focus on non-GAAP metrics unless otherwise noted. On Slide 7, our revenue table provides a year-over-year comparison for the segments and the business lines, both as reported and on a constant currency basis. The foreign currency headwind in the quarter was significant, had nearly 6.5 percentage points or about $66 million due to the strengthening of the U.S.

dollar against the euro, the Brazilian real and the British pound. For this reason, we believe the currency-adjusted growth rates provide the most meaningful comparison. Total revenue increased 3% in constant currency, led by 11% growth in Americas banking, 4% growth in retail and a 4% decline in Eurasia banking. Looking at the business lines, product revenue increased 15% in constant currency due to growth in banking and retail volumes.

Our Services revenue decline of 3% is largely attributable to our focus on more profitable contracts, particularly in Eurasia. Software revenue was down versus the prior period due to retail -- lower retail activity and the divestiture of our program management business in Europe. Our next three slides provide segment level financial information. Starting with the Eurasia banking on Slide 8, revenue could decline 4% in constant currency to $383 million during the first quarter due to four factors: number one, significantly lower product volumes in Asian countries due our -- due to our focus on profitable business; two, lower service revenue resulting from our decision not to renew low margin -- a low margin maintenance contract in India; three, the impact of the divestiture; and four, modest revenue growth from customers in the EMEA region.

Non-GAAP operating profit for the quarter increased from $20 million last year to $34 million due to higher gross margin for both product, and services coupled with lower operating expenses. All of which can be attributed to the DN now initiatives. Foreign currency was approximately $4 million headwind to operating profit in the quarter versus the prior year. On Slide 9, you can see the revenue from the Americas banking segment, increased 11% in constant currency to $363 million, led by strong product and software growth.

Our impressive product revenue growth of 52% benefited from Windows 10 upgrades, continued demand for cash recyclers and from the resolution of supply chain issues, which impacted the first quarter of 2018. Service revenue in the quarter declined modestly year on year due to -- due primarily to a lower contract base resulting from different customer dynamics, as well as lower build work. Operating profit increased from $5 million to $18 million in the quarter, primarily due to higher product gross profit, improving gross service margins and reduced operating expenses, resulting from our DN now initiatives. Slide 10 highlights for our retail head -- segment.

Revenue increased 4% in constant currency to $283 million in the first quarter as product growth in Europe and the Americas more than offset mild declines in services and software. The decline in services was primarily due to the liquidation of the cash and transit business. Operating profit decreased from $10 million to $8 million due primarily to lower software volume and an unfavorable solution mix. The foreign currency impact and the underperformance in the non-core business.

These factors more than offset DN now savings. We provide a year-over-year comparison of our profit metrics on Slide 11. Non-GAAP gross profit decreased $2 million year over year due primarily to foreign currency headwinds of approximately $15 million and $5 million of inflation. These factors more than offset the DN now savings from the new operating model, ATM portfolio simplification and our services modernization plan.

Non-GAAP gross margin increased approximately 60 basis points to 23.9%, led by gains in products and services. As mentioned during the segment comments, we are also driving operating expenses lower through our DN now initiatives. Removing the effects of foreign currency, operating expenses -- expense was favorable by approximately $1 million with cost reductions offsetting the approximate $13 million of the headwinds which Gerrard described earlier on the call. As you could see from the bottom half of this slide, our profit metrics are moving in the right direction.

Operating profit increased 54% during the quarter to $27 million and operating margin increased 90 basis points to 2.6%. Adjusted EBITDA increased by $3 million to $65 million, while the adjusted EBITDA margin expanded by 50 basis points to 6.3%. We'd like to mention that the company made minor corrections to certain foreign subsidiary amortization expenses which were used to calculate adjusted EBITDA in 2018, this change does not impact reporting operating profit or free cash flow. You'll find revised GAAP to non-GAAP reconciliations for each quarter of 2018 on Slide 16 of this presentation.

Moving to Slide 12, we continue to aggressively manage our networking capital investment, and we reduced this metric as a percentage of trailing 12-month sales from 24% in the year ago period to 19.1% in the first quarter of 2019. Our progress is due to better collections, improved payment processes and inventory management. In fact, our first-quarter collections represent the best start to the year since the combination. Our working capital improvement was the key reason why the company was able to reduce its free cash flow use in the quarter by $91 million versus the prior-year period.

Other contributing factors were modestly higher adjusted EBITDA and lower capex, partially offset by higher net interest and restructuring payments. On the left side of Slide 13, we illustrate our liquidity position at the end of March 2019. With cash of $409 million and net debt of approximately $1.8 billion, our net debt to trailing 12-month adjusted EBITDA ratio was 5.7 times, which is more than a full turn below our bank covenant maximum. To the right side of the slide, we provide a timeline for our debt maturities.

Well, there are no meaningful maturities in 2019, our revolving credit facility and term loan A will mature in December 2020. We incorporated these debt maturities into our 3-year plans so that we maintain sufficient capital for meeting all of our operating and funding needs. On Slide 14, we maintained our outlook for 2019. We expect to generate revenue of $4.4 billion to $4.5 billion, which reflects a modest year-on-year decline due to currency headwinds, near-term divestitures, continued banking revenue weakness in Asia, as well as modest growth in Americas banking and retail.

Our outlook for adjusted EBITDA is $380 million to $420 million, which we expect will be supported by approximately $160 million of DN now savings. Our outlook also includes about $50 million of inflation and normalized compensation net of expected benefits from divestitures, but does not include approximately $20 million of benefits which occurred in 2018. Our free cash flow outlook for 2019 is breakeven and includes the following estimates: net working capital cash flow of approximately $100 million, net interest expense of approximately $190 million, restructuring payments of approximately $130 million, and approximately $80 million of capital expenditures, $60 million of cash taxes and $40 million of other cash uses. While we do not provide quarterly guidance, I would like to remind our investors that we expect typical, seasonal trends to play out over the course of 2019.

Specifically, we anticipate revenue to increase modestly on a sequential basis in the second quarter, and again in the second half of the year. Adjusted EBITDA is forecast to modestly increase on a sequential basis, however, our profitability in the second half of the year should be considerably stronger as our DN now initiatives gain traction. With respect to free cash flow, normal seasonal trends, in the case that the company will use cash for the first three quarters of 2019 and generate significant free cash flow in the fourth quarter. And now, I will hand the call back to the operator to begin our question-and-answer period. 

Questions and Answers:

Operator

Thank you.[Operator instructions] Our first question comes from Matt Summerville with D.A. Davidson.

Matt Summerville -- D.A. Davidson and Company -- Analyst

Thanks. Couple of questions. Gerrard, could you maybe give just a little bit more of a granular overview on the Americas banking business, the kind of order momentum you're seeing there, perhaps quantifying that. And then talk about the Windows 10 cycle in the context of whether you're financing to be more replacement versus upgrade heavy and perhaps toping a bit more toward small banks versus big banks.

Gerrard Schmid -- President and Chief Executive Officer

Good morning, Matt, thanks for your question. So for the Americas, we're very pleased that we're seeing solid order momentum or is in the double-digit plus range across the board, across Latin America, Mexico, United States and Canada. So it's broad brush regionally. And when we take a look at it on an institutional side basis, we're seeing it play out across both the bigger banks and the small banks at a relatively similar momentum level.

So that really is pointing to a broad brush growth of what we've seen in prior periods. Now we expect that to continue as we look at our order activity for the next couple of quarters and obviously, things will likely flatten out given the exceptionally strong result that we posted in Q4 of last year. In terms of your second question as to the mix between replacement versus upgrades, I think that this is a topic where we're seeing a relatively even balance between those two, with some institutions favoring a software upgrade others favoring a full on machine replacement. So it's a relatively even mix.

Today we're going to take a look at our order activity.

Matt Summerville -- D.A. Davidson and Company -- Analyst

Then maybe, can you spend a minute perhaps talking a bit about the new product pipeline you have, more specifically in the ATM business, as we think about the balance of 2019. And then Jeff, can you comment based on where currency rates are today, how much top and bottom line headwind do you expect related to FX? Thank you.

Gerrard Schmid -- President and Chief Executive Officer

Yeah, Matt, so I think I've already provided the comments vis-a-vis the Americas, in terms of new order activity. We are continuing to see very strong pipeline and sales momentum in the Americas and expect that to continue on a go-forward basis. You know, Europe, what we're starting to see, and we mentioned this in -- a couple of quarters ago that we're starting to see Europe show some early signals of momentum, in particular, in Western Europe. Middle East is showing very strong momentum for us right now.

And as we've pointed out for the past several quarters, we've maintained a very, very disciplined focus on Asia and as a result, we're willing to concede market shares in favorable profitable business. So we're seeing our order activity moderate in that market.

Jeff Rutherford -- Chief Financial Officer

And then Matt, as far as currency, obviously the euro is the most impactful currency for us. We expect based on where the euro is trading today that there'll be an impact in the second quarter. We are actually modeling it somewhere between 3% and 4% impact on the top line, and then it'll level out as we go into the third and fourth quarter as the levels will be less, it'll be less than 1% in the third and fourth quarter, based on the current euro-level trade.

Matt Summerville -- D.A. Davidson and Company -- Analyst

Thank you, guys.

Operator

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

Justin Bergner -- G. Research -- Analyst

Oh, hi. Good morning, Gerrard. Good morning, Jeff.

Gerrard Schmid -- President and Chief Executive Officer

Good morning.

Jeff Rutherford -- Chief Financial Officer

Good morning, Justin.

Justin Bergner -- G. Research -- Analyst

My first question just related to non-core asset sales. I think you gave a brief synopsis. Could you just remind us what was completed in the first quarter? I heard the mention of the $10 million sale this month and progress toward remaining asset sales. And where do you ultimately intend to end up versus your initial goals on asset sales.

Gerrard Schmid -- President and Chief Executive Officer

Yes. So Justin, let me start with the latter part and then back into the actions in the quarter. We're still tracking toward divesting around 5% of our revenues. There's obviously a number of assets in that mix.

And as I said in my prepared remarks, the broad range of those are tracking in line with our expectations. There's one slightly larger one that's took a little bit longer than we'd expected. In the specific quarter for Q1, we exited Venezuela. We also divested our banking cash and transit business in Europe, as well as a retail cash and transit business in Europe.

And furthermore, in April, we consider the divestiture of our IT consulting business geared toward European financial institutions.

Justin Bergner -- G. Research -- Analyst

OK. That's helpful. And then were the first-quarter proceeds pretty minimal or could you quantify what the proceeds were in the first quarter?

Gerrard Schmid -- President and Chief Executive Officer

So there were $10 million.

Justin Bergner -- G. Research -- Analyst

I'm sorry, they were $10 million?

Gerrard Schmid -- President and Chief Executive Officer

Yeah. So don't forget, Justin, as I've said, yeah, they were $10 million. And as I believe I've said in the past as well, if you will think about the sequences divestiture that we are executing against, not only are we targeting proceeds but also divesting businesses that have a drag on earnings. So a number of those that we exited in the quarter were a drag on earnings.

So we'll increase our EBITDA on a go-forward basis, given that we exited those.

Justin Bergner -- G. Research -- Analyst

OK. great. And did I hear correctly in the opening comments that the April divestiture was another $10 million?

Gerrard Schmid -- President and Chief Executive Officer

No. It's $10 million accumulatively across that as [Inaudible] mentioned.

Justin Bergner -- G. Research -- Analyst

OK. Great. Shifting gears, I just want to dig a little bit deeper into the service performance. How should we think about the trajectory going forward for service gross margins? And I know you mentioned the 30%-plus gross margin, a figure in the Americas.

I'm not sure sort of what to reference that to, and is -- that's indication that the service gross margin improvement is more pronounced in the Americas or sort of there's more to be gained in the Americas and the rest of the world.

Gerrard Schmid -- President and Chief Executive Officer

So if you look at Diebold before the Wincor acquisition, Justin, we were doing 30% service margins in North America. So no, we raised this to simply make reference to the fact that we really have made up a bunch of lost ground in prior quarters while still delivering very strong service levels for our customers. If I step that up to a more global level. Last quarter, we provided a 3-year outlook on where we saw our services margins heading to north of 27%, and we're still on the view that that's the right way to think about this business on a global basis.

Now obviously, we're seeing some very good momentum and we're pleased with the fact that for three conservative quarters we've started to see some real progress coming out of that services business that we're still holding firm that -- on a consolidated basis globally we're targeting north of 27%.

Jeff Rutherford -- Chief Financial Officer

And that is for year 2021. So we'll make steady progress during 2019.

Justin Bergner -- G. Research -- Analyst

Thank you for taking my questions.

Operator

[Operator instructions] Our next question comes from Kartik Mehta with Northcoast Research.

Kartik Mehta -- Northcoast Research -- Analyst

Hey, good morning, Gerrard and Jeff. Gerrard, I wanted to get your perspective on Asia --

Gerrard Schmid -- President and Chief Executive Officer

Good morning.

Kartik Mehta -- Northcoast Research -- Analyst

Well, thank you, and what do you think the long-term perspective -- what the long-term business model could be there for you? Is it a market that you see yourself kind of just continuing to divest? Or are there opportunities to have a bigger impact in those markets?

Gerrard Schmid -- President and Chief Executive Officer

Hey, Kartik, so I think at the end of the day, you know, we need to split Asia in to a more nuance view then simply one macro market. I'd tell you that from our advantage point markets like China and India are incredibly challenging, generate a reasonable return and therefore, it's not clear to us that over the medium term that those markets improved substantially. Yes, when we look at other markets in Asia, think of markets in the Southeast Asia region plus further south there are certainly market where margins remain very robust, where banks are buying not only on price but also buying on services, machine quality and the depth of the software portfolio. So those are markets that we see as remaining attractive.

So I think -- what I broadly think, Kartik, is we're going to pick and choose where we choose to compete in Asia. And as I've commented on the past, we have a number of competitors out there with just a very, very different perspective on pricing, and we're just not willing to participate in deals of that nature. So we're being selective on where we choose to participate. And those markets that are attractive for us, we think are likely to remain attractive over the medium term.

Kartik Mehta -- Northcoast Research -- Analyst

And then, Gerrard, as you look into the U.S., as far as the retail business is concerned. I know one of the goals was to try to expand the retail business in the U.S. Where do you stand as far as getting more traction in the U.S.? Are you targeting maybe different retailers anywhere previously?

Gerrard Schmid -- President and Chief Executive Officer

Yeah. So Kartik, I think in prior management teams there was a view that we could pursue the U.S. in broad brush terms across the full range of our retail portfolio. I'd say that we're taking a much more targeted approach, focusing on those products where we believe we have a strong competitive advantage and that would be most notably in our self-checkout area, where we're seeing very, very strong growth in Europe.

And on a future function basis we believe we actually stand tall. So I think we're being much more selective on our opportunities. By that very nature, it'll take more time for us to show that momentum. If I take a step back though, I definitely am not of the view that our retail growth is purely predicated on accessing the U.S.

market. There's no doubt that there remains interesting opportunities for us in our existing core markets of Europe, as well as in Asia. And -- now that's why I think it's worth calling out that we look at the competitive dynamics between banking and retail very differently in Asia Pacific market. And we think that Asia remains an attractive area for us to grow into.

Kartik Mehta -- Northcoast Research -- Analyst

And then just one last question for you, Jeff. You know, as you -- I know that the mix of maturities for you, really the big maturity there 2020 and the term loan A and the credit facility. And I'm wondering, how do you -- the opportunity to maybe reduce interest expense with those debt maturities coming up?

Jeff Rutherford -- Chief Financial Officer

Yeah, you know, when we look at our maturity stacks, we have a short-term opportunity and a long-term opportunity. The short-term opportunity is to address the revolver and term A stack and move it out toward the term A-1. It's not feasible to move those stacks beyond the term A-1. So that's the first step.

The second opportunity then will be once that is accomplished and addressed. And as we move through this model, and you know we've given long-term goals. We've given 3-year goals and you can think about what the potential is for refinancing. And I'll qualify by saying this all depends on the capital market still.

But there are going to be opportunities that are not available to us today as we progress through the maturity of the model and realize higher levels of EBITDA and free cash flow. So we actually look at it as two tranches. A short-term tranche and the opportunities to address the revolver in term A in the short term and then the long term. So the answer to your question, the ability to reduce our weighted average cost of capital is really going to come in the long term addressing of our capital structure, not necessarily in the short term.

Kartik Mehta -- Northcoast Research -- Analyst

Thank you very much. I appreciate it.

Operator

Thank you. Our next question comes from Rob Jost with Invesco.

Rob Jost -- Invesco Ltd. -- Analyst

Hi, thanks. Coming back to the retail segment, I guess a couple of things. When you point out that profit being down for a number of reasons. If we were to strip out some of these onetime things, is there a way to see what that would've looked like on a year-over-year basis, would have it been up?

Gerrard Schmid -- President and Chief Executive Officer

Good morning, Rob. So as we said in our prepared remarks, retail was down due to slightly higher software delivery expenses in the quarter plus some headwinds due to a non-core business that are underperforming in that area. So when we look at our outlook for retail profitability for the balance of the year, we remain very encouraged that our retail profitability will show meaningful momentum year over year. So I think there's a bunch of one-off items in the quarter that are not symptomatic of a trend in our retail business.

Rob Jost -- Invesco Ltd. -- Analyst

OK. And in the past you've talked about investing in that business, I think the -- was on a sales capacity. And I wonder if there is probably more of a North America than a European thing. I guess, first of all, can you clarify what I'm remembering is correct.

And secondly, are you still investing there or have you reached the level that you're comfortable with?

Gerrard Schmid -- President and Chief Executive Officer

So I'll go back to the comments I made to the prior question. The heavier investment in sales was certainly something that was done, quite frankly, before I joined the organization. As I said in my prior comments, we're taking a more targeted view toward our retail focus in the Americas. And by definition, we don't see ourselves facing higher investment expenses in that market.

Rob Jost -- Invesco Ltd. -- Analyst

OK. Great. And then my last question is on the Eurasia banking. Talking to different people who are familiar with the ATM markets, we've been lead to believe that the ATM refreshing in Europe will be slight away behind the U.S.

I'm just curious, is that what you're seeing? Would you expect the European markets or are you seeing European markets going at a slower pace? And perhaps, they'll serve as a bit of a tailwind after the U.S. market close off?

Gerrard Schmid -- President and Chief Executive Officer

Yeah. Robert, if you take a look at our comments through most of last year and even this year as well. There was no doubt that North America and the broader Americas lead the refresh cycle. And we weren't seeing the same growth momentum in Europe as we were seeing in the Americas last year.

During the back end of last year and now as we start to move into Q1, we're starting to see European activity pickup. So we do see it lagging the Americans. And as I've commented in the past, our sense is that lag will tailwind to our European activity as we look out over the next several quarters.

Rob Jost -- Invesco Ltd. -- Analyst

OK. Thanks.

Operator

Thank you. Our next question comes from Ishfaue Faruk with Sidoti & Company.

Ishfaue Faruk -- Sidoti and Company -- Analyst

Hi, good morning. Just piggybacking on the -- on a prior question that was asked. In terms of the digital transformation work that you've -- that you did for -- that you're going to do for KeyBank. Do you have like similar pile lines of work outside of the Americas?

Gerrard Schmid -- President and Chief Executive Officer

We absolutely do. So when we take a look at our software pipeline and some of the comments that we made in our prepared remarks, they're over in software wins in most of our markets. In my prepared remarks, I've talked about a large Western European financial institution that included hardware sales, service sales, as well as a very large software deployment, as well as other markets in EMEA. So it's pretty consistent across the board in terms of our pipeline of opportunities.

Ishfaue Faruk -- Sidoti and Company -- Analyst

Got it. Got it. OK. Another one for me.

In terms of -- in your -- the DN now modernization plan. You highlight -- earn like a 230 basis point of jump in your services gross margin. Could you give a little more color on how you're going to get there?

Gerrard Schmid -- President and Chief Executive Officer

Well, so we realized a 230 basis points improvement in the quarter over last quarter. And if you go back and look at our prior release as we have targeted a over 27% services gross margins. We're seeing now three consecutive quarters of momentum flowing from our services modernization program. And the key drivers on how we do that are simplifying our contract base, introducing more automation in our full dispatch capabilities, as well as automating other aspects of our services business.

So there's a broad, there are 11 different initiatives underpinning our services modernization program, all really focused on driving out the precision with which we deliver services to our customers. And we started this work in Q2 of 2018 and are seeing very solid progress toward our multi-year goal of 27% margins in 2021.

Ishfaue Faruk -- Sidoti and Company -- Analyst

All right. Thank you for taking my questions.

Operator

Thank you. Our next question comes from Ash Thomas with Saybrook Capital.

Ash Thomas -- Saybrook Capital -- Analyst

Question. This is just a question on the balance sheet. It looks like there's a $172 million thereabout of lease liability which appeared this quarter. Would you be able to talk about what that's in relation to?

Jeff Rutherford -- Chief Financial Officer

So that's -- that is the adoption of the new GAAP requirement to capitalized leases effectively. And that's -- so that -- we're basically taking all of our leases which are generally our fleet for services and then any leases associated with offices and buildings. And the U.S. GAAP now requires you to basically capitalize that and put it one the balance sheet.

So there's an offsetting asset and liability that's closed up our balance sheet. You'll see it in the Q, which should be filed today or early tomorrow. And it has no real effect on our operations or any other metrics that we talked about today.

Ash Thomas -- Saybrook Capital -- Analyst

OK. Great. Thank you.

Operator

Thank you. Our last question will be from Justin Bergner with G. Research.

Justin Bergner -- G. Research -- Analyst

Thank you for the follow up. I just wanted to ask if the order activity in the first quarter meet your expectations or feel slightly short of our expectations. And it seems like you're reaffirming your revenue guidance despite somewhat stronger currency headwinds. So is there something that's a tailwind that's a positive offset to that.

Gerrard Schmid -- President and Chief Executive Officer

Yeah, Justin. So obviously, order moves around a little bit quarter over quarter. So we try not to pay attention to any one quarter, we look at it over a trending basis. And we are encouraged by the momentum we're seeing in our order activity.

As I said, if you take a look at our operating performance in the Americas and match to what we're seeing in our pipeline, that's really fueling the growth in our order book, coupled by ongoing strength in our retail business with Eurasia being more of a mixed view. So I would say, it's probably in line with our expectations. And as we look forward to Q2, we're very encouraged with the order activity to match against what we hope to achieve for our plan.

Justin Bergner -- G. Research -- Analyst

Great. That's good to hear. And then secondly, the SG&A initiatives that were listed on Slide 6, seems like some good initiatives there. Is any of that incremental to the DN now program as it was updated last quarter? Or is that just more spelling out some of the individual initiatives? These will be the reduction initiatives --

Gerrard Schmid -- President and Chief Executive Officer

It's selling out the additional initiatives. So we -- Yeah, it's a subset of the $40 million that we talked about, Justin. I'm just adding more color so that you can get a sense of how it went.

Justin Bergner -- G. Research -- Analyst

All right. Thank you.

Gerrard Schmid -- President and Chief Executive Officer

Welcome. Sure.

Operator

[Operator signoff]

Duration: 49 minutes

Call Participants:

Steve Virostek -- Investor Relations

Gerrard Schmid -- President and Chief Executive Officer

Jeff Rutherford -- Chief Financial Officer

Matt Summerville -- D.A. Davidson and Company -- Analyst

Justin Bergner -- G. Research -- Analyst

Kartik Mehta -- Northcoast Research -- Analyst

Rob Jost -- Invesco Ltd. -- Analyst

Ishfaue Faruk -- Sidoti and Company -- Analyst

Ash Thomas -- Saybrook Capital -- Analyst

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