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Diebold Nixdorf (NYSE:DBD)
Q3 2019 Earnings Call
Oct 29, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the Diebold Nixdorf Hosted third-quarter 2019 earnings call. At this time, I would like to turn the conference over to Mr. Steve Virostek. Please go ahead, sir.

Steve Virostek -- Investor Relations

Thank you, Britney, and welcome everyone to Diebold Nixdorf's third quarter earnings call for 2019. Joining me today are Gerrard Schmid, president and chief executive officer; and Jeff Rutherford, our chief financial officer. During our prepared remarks, we will be referencing slides which can be accessed 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.

Slide two of our presentation today, contains a reminder that a number of our comments pertain to non-GAAP financial information, which we believe is helpful in assessing the company's performance. In the supplemental schedules slides, we have provided schedules which reconcile each non-GAAP metric to its most directly comparable GAAP metric. On slide three, we inform all participants that certain comments 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keep in mind that forward-looking information is current as of today, and subsequent events may render this information out of date.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 with that, I will hand the call back to Gerrard.

Gerrard Schmid -- President and Chief Executive Officer

Thank you, Steve. Good morning, and thanks to everyone for joining our call. When we laid out our DN Now transformation changes at the beginning of 2019, our efforts were focused primarily on sustainable improvements in cash flow and operating profits, while enabling a greater focus on our customer's end solutions. This quarter and on a year-to-date basis, I am very encouraged by the year-over-year improvements we have delivered to both gross margins and cash flow as key measures of our progress.

As you can see on Slide 3, we are driving sustainable improvements to operational efficiency, while evolving our solution set and strengthening our financial position by executing our DN Now plans. As a critical business partner to banks around the world and the largest European retailers, our connected commerce solutions enable millions of daily transactions spanning more than 100 countries. Our industry leadership and geographic breadth has many benefits, and it also exposes the company to changes in the macroeconomic landscape. For example, this year we faced numerous revenue foreign exchange headwinds as the U.S.

dollar has strengthened against other foreign currencies. On a year-to-date basis, currency fluctuations have effectively reduced the company's revenue by approximately $130 million, or just over 4% versus the prior year. We are also observing early signs of weakening customer confidence in future economic activity in some markets, most notably in Europe. That being said, we are confident in the competitiveness of our solutions, whether it be through our newly launched DN Series, our AllConnect Data Engine enabled services offering, our retail self-checkout solutions, dynamic software, or our managed services capabilities.

On slide four, I'll speak to third quarter highlights. Starting with orders, in our Retail segment we experienced solid growth for self-checkout and kiosk solutions, including a new contract for self-service kiosks integration and monitoring software at 60 Dave & Buster's restaurants. Point-of-sale orders however declined after several quarters of growth as certain European customers reacted to slowing economic activity. We also saw certain contracts extend into later quarters.

For Eurasia Banking, orders decreased in constant currency as a few deals with customers in EMEA slipped into future periods. Business conditions in the U.K. remain challenging, and we maintain our focus on profitable contracts in Asia. Americas Banking reported relatively flat orders versus the prior year as we were up against a strong prior year period comparison in Latin America.

We continue to see solid activity from regional banks in the U.S., with some easing of demand from larger banks in the U.S. as they complete their Windows 10 upgrades. During the quarter, we secured a sizable new software contract to transform the debit platform at a top 10 U.S. financial institution.

Turning to our revenue performance in the quarter, total revenue was essentially unchanged versus one year ago after accounting for approximately 300 basis points of foreign currency headwinds and a hundred basis points from our portfolio shaping actions. We believe this lens provides an important perspective on our revenue performance, and this approach will become even more meaningful as we expect to complete a few transactions over the next few months. Non-GAAP gross profit for the third quarter improved $29 million or 12% versus the prior year, primarily as a result of our DN Now initiatives, and despite $7 million of foreign currency headwinds. Our non-GAAP gross margin increased approximately 350 basis points versus the prior year to 25.5%, which represents the best performance on this key metric since our combination.

We delivered solid margin expansion across all three segments, with contributions from services and products and software. Our progress is indicative of changes we're driving in the way that we conduct business through our DN Now initiatives. Adjusted EBITDA for the third quarter increased by $5 million year over year or 5% as higher SG&A expenses offset some of the gross profit benefits. Our cash flow performance was excellent.

DN generated $65 million of positive free cash flow in the third quarter, which is ahead of our expectations. When compared with the prior year, our free cash flow improved by $100 million -- $190 million for the quarter due to more efficient collections, inventory management, payables, as well as higher operating profits. On a year-to-date basis, our execution in these areas drove a free cash flow improvement of $390 million over 2018. We believe this points to a sustainable change in operating behaviors from the broader team at DN.

Slide 5 is a familiar chart which summarizes our key DN Now initiative and our objective to deliver $400 million of gross savings through 2021. The transition to our new operating model is virtually complete and we have good line of sight toward approximately $100 million of gross savings for 2019 as well as cumulative savings of $130 million of savings through 2020. We've also made good progress in simplifying our ATM product portfolio and optimizing our manufacturing footprint. Our focus has shifted to realizing the benefits from a successful launch of our next-generation banking solution, the DN Series.

Our services modernization plan continues to generate positive results, which can be seen in our non-GAAP gross service margin, which expanded by 350 basis points versus the prior year period to 26.9% in the quarter. We continue to execute on our companywide initiative to reduce selling, general and administrative expenses by about $150 million through 2021. This includes a number of actions which will right-size our support structure, improve internal processes, enhance our productivity, and better leverage our global scale, and while SG&A ticked up in the quarter, we see that as an exception to a long-term trend. DN remains focused on improving our networking capital, and we are on track to meet and possibly exceed our 2019 goal of $100 million year-on-year improvement.

For the third quarter, we reduced networking capital as a percent of trailing 12 months revenue to 15.6% from 24% in the prior-year period. As we close out to 2019 and build our operating plans for 2020, we are developing additional productivity initiatives, which will be shared on future earnings calls. Slide 6 updates the progress we're making on simplifying our product portfolio. The efficiency gains from our manufacturing initiatives contributed to our non-GAAP product gross margins of 20.8% in the quarter, which increased 320 basis points versus the year-ago period.

One of our biggest drivers of competitive differentiation is the DN Series, our next-generation banking platform. While we're still in the early stages of our launch, I can tell you that the initial customer reception has been very positive, as they see clear benefits from a more modular and upgradeable design, which includes our next-generation cash recycling technology, advanced sensor technology, and connectivity to the DN AllConnect data engine, which will increase uptime and offer better customer experience, greater node capacity, and industry-leading security features in a smaller footprint, and increased options for personalization and branding. DN Series offers a compelling value proposition, driven by a vastly better customer experience. We're pleased to announce that we have initiated the DN Series certification process with more than 150 customers across 30 countries.

We're encouraged by this early progress, including interest from customers that have not historically purchased hardware from DN. On Slide 7, we've provided an update of our services modernization plan. We accelerated the replacement of older hardware and software in the quarter, have now upgraded more than 100,000 touch points. This activity delivers a performance benefit for our customers and a financial benefit to the company from reducing the volume of service calls and spare parts.

Our key performance indicators across the services business are tracking to plan. During the third quarter, we continue to maintain a services renewal rate above 95% and our contact base of ATMs are stable at approximately 621,000 units. Our key financial metric is the gross services margin, which increased 350 basis points year over year, reaching 26.9% in the third quarter. This is the fifth consecutive quarter of year-on-year service margin expansion and all three segments contributed to our success.

These results and continued engagement from our services team is very encouraging and underpins our confidence in delivering target gross margin of 28% to 29% by 2021. On Slide 8, I'll speak to our initiatives for further reducing our selling, general and administrative expenses. Within the finance organization, we continue to lay the groundwork for centralizing our accounting processes, making greater use of shared services and increasing automation. Year-to-date savings are approaching $5 million from streamlining and outsourcing certain finance functions, and we're tracking to substantially greater savings over the next few quarters.

In our sales organization, we are realigning support resources with market opportunities. And in doing so, we've been able to reduce our expenses. We also continue to bring strong discipline to the procurement activities associated with external spend. For the nine-months ended September 30, we have reduced third-party spend by approximately $19 million.

With respect to our real estate holdings, the company continues to consolidate underutilized space including half dozen offices in the Americas and we streamlined our presence in China. Year to date, we've either closed or right sized more than 30 locations and we're on track to reduce our office square footage by about 9% by yearend. In the third quarter, our progress on reducing our non-GAAP SG&A expense was masked by about $12 million of unfavorable items listed on this slide. And Jeff will provide further color during his remarks.

Looking to the fourth quarter, we expect progress from our DN Now initiatives, as well as the easing of unfavorable items which will result in a noticeable sequential improvement in our SG&A expense. Looking at the past 12 months, non-GAAP SG&A as a percent of revenue has lowered by 20 basis points to 15.6%. And we remain confident in our ability to reproduce SG&A through percent of revenue and we are reiterating our target of 13% to 14%. In conclusion, our third-quarter results demonstrate that the company continues to drive substantial improvements to our profitability and cash flow even as revenue was relatively the same as the prior-year period. Based upon our year-to-date results, currency headwinds and our current order book, we are revising our outlook to about $4.4 billion of revenue for 2019.

We are also narrowing our outlook for adjusted EBITDA of $400 million to $410 million in light of higher compensation expenses based on our stronger than expected cash flow performance. On the strength of our working capital achievements, we are raising our free cash flow outlook from a modest positive to range of $70 million to $100 million. And now, I'll hand the call over to Jeff.

Jeff Rutherford -- Chief Financial Officer

Thank you, Gerrard, and good morning, everyone. Our third-quarter results demonstrate that Diebold Nixdorf is strengthening its financial position by improving our operating efficiencies, generating positive cash flow and reducing our debt leverage ratio. Slide 9 contains the revenue comparison for three segments and business lines, both as reported and on a constant currency basis, excluding the impact of our portfolio shaping actions, total revenue of $1.08 billion was essentially unchanged year over year after factoring in the effects of foreign currency and our portfolio shaping activities. The foreign currency headwind was approximately 300 basis points during the quarter or about $26 million versus the prior year, primarily due to the U.S.

dollar strengthening against the Euro and to a lesser extent, against the Brazilian Real and the British Pound. Our portfolio shaping actions accounted for another percentage point or about $13 million of year-on-year variance. Using the same lens for the segments, DN delivered revenue growth of approximately 6% from the Americas, while Eurasia Banking declined 2% and retail declined 6%. Looking at revenue trends within our three business lines, software and products revenue increased 3% primarily due to growth in the Americas.

The 2% decline in services revenue is largely attributable to lower installation activity in Europe and maintenance in the United States. Moving to slide 10, I'll discuss the financial highlights for all three segments. Starting with Eurasia Banking, revenue decreased 2% after adjusting for currency and our portfolio shaping actions to $400 million during the third quarter. Lower installation activity in Europe impacted services revenue, although product revenue increased primarily due to customers in EMEA.

Software revenue was relatively flat year over year. Non-GAAP operating profit decreased modestly from $44 million last year to $42 million in the third quarter as benefits of our DN Now initiatives were masked by the items Gerrard mentioned due to his comments about SG&A expense. In the Americas Banking segment, revenue increased 6% to $404 million led by product and software growth. We continue to benefit from Windows 10 refresh activity in North America and cash recycler shipments growth in Latin America.

Service revenue in the quarter declined modestly year on year due primarily to lower maintenance, revenue in the United States, partially offset by growth in Mexico and Brazil. Operating profit increased from $2 million one year ago to $29 million in the quarter due to product revenue coupled with significant expansion of our product and services gross margins by our DN Now initiatives. A retail segment experienced lower than expected product volumes, as well as lower gross margin stemming from a less favorable mix of products. And this is primarily, the primary driver of the year-on-year revenue and gross profit declines.

Additionally, operating profit at $13 million was impacted by slightly higher operating expense versus the prior. On Slide 11, we provide a year-over-year comparison of our non-GAAP profit metrics. Gross profit increased $29 million year over year primarily as a result of our DN Now productivity gains and cost reductions and included foreign currency headwinds approximately $7 million. Non-GAAP gross margin increased approximately 350 basis points to 25.5%, which is our best performance since the combination of Diebold and Nixdorf 2016 and reflects our focus on sustainable -- and sustainably improving our profitability.

As mentioned during Gerrard's comments, SG&A expense was unfavorable in the quarter, as a few items are met are masking the progress of our DN Now initiatives. On a year-over-year basis, these items include $14 million of annual incentive compensation, which includes large expense in the third quarter of 2018 due to the company's performance, under performance in 2018, and higher than expected expense in the third quarter of 2019 to do much better cash flow perform, $7 million from mark-to-market accounting on our legacy Wincor option program, which is tied to the value of the DN stock price. And approximately $4 million invested in HR tools and other items to enable our DN Now transformation. In the fourth quarter, we expect to report a strong sequential improvement in SG&A expense.

As we realize savings from our DN Now initiatives, operating profit in the quarter increased $10 million versus the prior year period to $66 million, and the operating margin expanded by 120 basis points to 6.2%. Correspondingly, adjusted EBITDA rose $5 million year over year to $98 million and adjusted EBITDA margin expanded by 80 basis points to 9.1%. Expenses in both the current and prior period include a reclassification of approximately $2 million from cost of service to selling expense. This change pertains to a handful of software employees who have been involved in pre-sales activities.

Moving to slide 12, I'm pleased to discuss our free cash flow capital accomplishments, which continue to exceed our expectations. For the third quarter, we generated $65 million free cash flow, which translates to a $190 million improvement versus the prior-year period. Unlevered free cash flow of 102 million for the quarter was 209 million better year on year. The strong gains can be attributed to clear management focus, better governance, and sustainable process enhancements for harvesting net working capital.

As a percentage of revenue, net working capital decreased from 24% to 15.6% year-over-year. I'd like to recognize the hard work and dedication of dozens of segment and finance leaders for their tremendous performance in collections, inventory management, and payables management. Our cash generation during third quarter is even more impressive when you consider that interest in debt payments increased by approximately $20 million versus the prior year. Lower integration payments in the quarter offset higher cash restructuring outflows.

I'm gratified by the company's sustained improvements to cash flow. Over the past 12 months we generate $227 million of free cash flow, which is better by approximately $390 million versus the comparable period. Over the same time period unlevered cash flow improved by approximately $480 million to approximately $413 million. Based on these results, we have clearly engineered our cultural change in the way DN employees think about and manage cash.

On Slide 13, we've provided our liquidity and leverage highlights as of the end of September. Our liquidity of $680 million includes nearly $300 million of cash plus available credit. So the company has sufficient liquidity to meet in seasonal cash flow needs, invest in R&D and fund the DN Now transformation program. At the end of the third quarter, the company's net debt was approximately $1.85 billion, and our leverage ratio was approximately 4.7 times for the trailing 12-month period.

The chart on this page illustrates our steady progress and in reducing our leverage ratio through EBITDA growth and debt reductions over the past five quarters. Subsequent to the quarter, we used approximately $19 million in net proceeds from the sale of our equity stake in Kony to reduce our secured debt. Since our last earnings call, our debt maturity schedule change is shown on the right of this slide. We successfully access the capital markets by amending and extending the vast majority of our revolving credit facility, and our Term Loan A from December 2020 to April of 2022.

This extension provides ample time to deliver a significant value creation from our DN Now transformation. We are pleased to receive strong support from our lenders and demand for the Term Loan A was oversubscribed. We priced our refinancing at low-end of the proposed range and total debt was unchanged as a result of this event. I want to extend the thank you to all of our lenders for the confidence in our company.

Additionally, during the quarter, we brought on a new treasurer Zeeshan Naqvi to lead our capital market and cash management activities. Zeeshan joined the company from Moody's global credit rating agencies and is already making a difference. During the quarter, we entered in their interest rate swaps for approximately $500 million a floating rate debt. We opportunistically reduced our interest rate risk, and we expect to save approximately $2 million per year from this act.

I'm also pleased to announce that Jim Barnett has joined Diebold Nixdorf as our Chief Accounting Officer. Jim has a robust background and global economy, and will leverage his experience to drive our own finance transformation. On Slide 14, we update our outlook for 2019 and the key drivers. We now expect to generate revenue of approximately $4.4 billion, which reflects our significant currency headwind, as well as changes in the retail environment.

Our outlet for adjusted EBITDA is now $400 million to $410 million and includes an additional $10 million of incentive compensation, which is triggered by our better than expected cash flow. For the year, we continue to expect DN Now savings of $175 million, partially offset by about $65 million of inflation and normalized compensation, net of expected benefits from these divestitures, as well as approximately $25 million of benefit of non-recurring benefits, which occurred in 2018. Our free cash flow outlook for 2019 has improved from a modest positive to a range of $70 million to $100 million. We're expecting the key components of free cash flow to include at least $100 million of cash generated from net working capital, approximately $185 million payment of interest expense, approximately $115 million for DN Now restructuring payments and transformation expenses, and approximately $50 million of capital expenditures, $50 million of cash taxes, and $20 million of other cash uses.

Based on our strong year-to-date performance on net working capital and the lower levels of receivables and inventory and the performance of accounts payable our opportunities to generate cash flow in the fourth quarter of 2019 has been reduced versus prior years. Our cash flow outlook and the aforementioned balance sheet actions should enable us to end 2019 with a leverage ratio in the mid fours. It also should be noted that approximately 50% of our 2019 free cash flow will be used to pay down secured debt. As our practice to provide formal guidance for the next year when we report fourth quarter results in February, however I'd like to provide a few comments about what to expect in 2020.

First, with the completion of certain portfolio shaping actions DN's annual revenue is likely to be reduced by approximately $100 million. Next, our current backlog coupled with moderating customer confidence in certain markets, described by Gerrard, points to modestly lower revenue year-on-year. Our DN Now issues are expected to deliver gross savings of at least $100 million, however we also expect some offsets such a lower revenue volume, wage and fuel inflation, certification costs for our DN Series, and certain other investments needed to support our transformation. With respect to free cash flow, we expect a positive year-on-year contribution from adjusted EBITDA growth and modestly lower restructuring expenses.

And now I'll hand the call back to the operator to begin the Q&A period.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question comes from Ishfaque Faruk with Sidoti & Company.

Ishfaque Faruk -- Sidoti and Company, LLC -- Analyst

Hi, good morning, Jeff and Gerrard. My first question is could you give us a sense for how the pilots for the DN Series ATMs has been so far, and it looks like it's going pretty well, you guys are undergoing certification in 150 banks?

Gerrard Schmid -- President and Chief Executive Officer

Good morning, Ishfaque. Yes, we've been, as I said in my remarks, we've been very, very pleased with customer receptivity to our DN Series. We have them installed in production in a number of banks. And in the 150 banks that we made reference to in our prepared remarks, they're going through the normal certification process that's required before one can actually move them into production.

So I'd say at this stage we've been extremely pleased with the demand for these machines. I will obviously remind everyone that the certification process for reach given bank can take a period of nine to 12 months, so there's still a period ahead of us before you'll start to see large numbers in production, but the early indicators are extremely positive.

Ishfaque Faruk -- Sidoti and Company, LLC -- Analyst

OK, and may be one more for Jeff. Jeff, you said that you expect slightly lower modest decline in revenue next year. Is that something to do with the length of the certification process or like some of the FX headwinds you guys mentioned earlier?

Jeff Rutherford -- Chief Financial Officer

It's not due to certification. It's more to the expected FX headwinds, and the activities in the markets that Gerrard spoke to earlier on the call.

Ishfaque Faruk -- Sidoti and Company, LLC -- Analyst

All right, that's it for me.

Jeff Rutherford -- Chief Financial Officer

And so, specifically it's both FX as well as some softening of demand in retail that we're seeing in Europe given some economic contraction in that market.

Ishfaque Faruk -- Sidoti and Company, LLC -- Analyst

Thank you.

Operator

Our next question comes from Kartik Mehta with Northcoast Research.

Kartik Mehta -- Northcoast Research -- Analyst

Jeff and Gerrard -- Gerrard, you talked a little bit and so did you, Jeff, about some weakening in Europe. And I'm wondering is that already having an impact on your orders on the ATM side or is it still strictly retail related? And are you just anticipating that to continue now into 2020 if it hasn't impacted ATM demand yet?

Gerrard Schmid -- President and Chief Executive Officer

Kartik, to date it's been primarily on the retail front, and we -- depending on what happens economic you would probably expect that to continue through 2020. On the banking side, the only thing we noticed was a handful of deals extend from this quarter into future quarters. It's not yet clear that those are necessarily tied to changes in economic conditions, but we obviously are mindful that that may unfold. But to date we haven't seen any impact there.

Kartik Mehta -- Northcoast Research -- Analyst

And then I think in the slide presentation you talked about Latin America slowing a little bit. And I'm wondering is that -- any specific countries, is that Brazil since that's the largest market for you or other countries in Latin America that are maybe being impacted?

Gerrard Schmid -- President and Chief Executive Officer

Yes, Kartik, I don't believe we actually said that Latin America was slowing, where there had been some tough comps in certain countries, but we continue to see very active activity across Latin America.

Kartik Mehta -- Northcoast Research -- Analyst

And then just finally, Jeff, you gave some indications on 2020. Obviously you're anticipating a revenue decline year over year. Maybe what percentage of the decline do you think if FX related and maybe what is -- what you're anticipating from business conditions? And then, I think Jeff you said of the DN Now savings a portion of it would be offset because of higher SG&A costs than others, so just a little bit more color on those two would be great. Thank you.

Jeff Rutherford -- Chief Financial Officer

Yes, I think we've covered down on, and just, Kartik, just to be clear, your question is about 2020, right. So we're not giving guidance yet on 2020, but what we're talking about is we expect FX headwinds in 2020, and we expect that retail will be weakening in Europe in 2020. As far as the DN Now initiative, we said we expect them to be $100 million, but we're going to still experience some level of inflation when we get to 2020 that'll offset that. And we're also looking at what investments we're going to need to make that may have P&L effect but have long-term growth, and we're not ready at this point in time to release that.

Kartik Mehta -- Northcoast Research -- Analyst

Thank you, Jeff, I appreciate it.

Jeff Rutherford -- Chief Financial Officer

But certainly our expectation is that from expansion in gross margin and reduction in expenses. And we're at the forefront of some major changes in SG&A expenses that are coming through. We expect EBITDA to be up year over year, but we haven't given guidance on it yet.

Kartik Mehta -- Northcoast Research -- Analyst

OK, thanks, Jeff. I just -- you had given some commentary so I was just trying to understand it a little better.

Jeff Rutherford -- Chief Financial Officer

Yes.

Operator

Our next question comes from Matt Summerville with D.A. Davidson.

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

-- and want to be clear on the anticipated debt paydown. So, at the midpoint of your free cash range, $85 million, you're saying half of that will be used to reduce debt in addition to what sounded like $19 million in net proceeds from Kony that also went to reducing debt. Are my numbers correct there, please?

Jeff Rutherford -- Chief Financial Officer

Yes, that's correct.

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

OK. And then maybe Gerrard, could you please compare and contrast kind of the readiness of U.S. FIs this cycle as it pertains to kind of the Windows 10 side of things versus maybe the prior cycle. Just trying to get a feel for sort of how much is left in the tank.

And then I also have a follow-up related to the DN Series. Are you seeing customers delay purchases of current generation terminals in favor of opting for the next gen DN Series?

Gerrard Schmid -- President and Chief Executive Officer

Good morning, Matt. So as related to the U.S. market, I think I'll break it into two different tranches. We continue to see very good order activity from the regional banks, and we continue to anticipate that that will extend well through 2020.

When I take a look at the large U.S. banks, a number of those are starting to taper off their Win 10 upgrade cycles through the backend of 2019, so don't necessarily anticipate that much buying activity from them as we look into 2020, beyond their normal refresh activity. So I'd break it into the tale of two different stories. As relates to the DN Series, no we haven't seen any evidence of any material nature of banks delaying current buying patterns.

Now and again there's one-offs here and there, but when you look at the overall portfolio we still have a good mix of banks buying our existing fleet of machines plus those starting to run certification processes with the DN Series.

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

And then maybe just as a follow-up, Jeff, with respect to kind of the going forward flow-through as it relates to the $400 million in gross savings, is there a number you would maybe triangulate us on as we think about that for 2020 and 2021, kind of the go-forward flow through in that regard?

Jeff Rutherford -- Chief Financial Officer

Yes, so again, we're not providing guidance for 2020 and '21, but it's going to be similar to what we saw in '19. We're going to have $100 million in -- we already said $100 million expected in 2020, but it's going to be offset by inflation and other investments. So the net dollars will probably be less than '19, but it'll be the same type of ratio.

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

And then, Jeff, you're also basically saying we should see further improvement in free cash in 2020. Would you care to maybe speculate kind of where you would target your net leverage ratio coming out of next year? Are we comfortable saying it should be sub four times, maybe approaching three-and-a-half?

Jeff Rutherford -- Chief Financial Officer

No, we're not going to give guidance on that today. What I would say is though on cash flow, you have to remember, for '20 is -- and I already said that we're expecting an increase in EBITDA. We're not going to have the same level of opportunity in working capital that we had this year. And you're going to see a little bit of that affect in the fourth quarter.

We've done such a good job of harvesting working capital starting in the fourth quarter of last year that it's going to become a very difficult comparable for us starting already in the fourth quarter. In fact, fourth quarter of '19 will be hit the hardest because we had such as good collection period last year. And now it's spread over time, our processes are continuing, it's just not a one-time event. And that goes to what I said earlier about congratulating all of the company.

This is a company after relative cash flow. But so we are not expecting as high a harvest of working capital. We're still going to have some restructuring payments. We're moving in to the heavy portion of the finance transformation, so I'm not going to get into too much depth on that because it does affect people, but it's going to be -- we're going to spend some money in the fourth quarter and the first two quarters of next year.

So, we have an expectation for free cash flow, but we're not going to provide guidance today.

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

Got it. Thank you, guys.

Operator

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

Justin Bergner -- G. Research LLC -- Analyst

Good morning, Gerrard. Good morning, Jeff.

Jeff Rutherford -- Chief Financial Officer

Morning, Justin.

Justin Bergner -- G. Research LLC -- Analyst

A couple of questions here, on the reduced revenue guide for 2019, how much of that $100 million relates to FX and portfolio shaping actions versus core markets. And then looking into 2020, I just wanted to confirm that the portfolio shaping actions are an incremental $100 million headwind versus whatever you're experiencing in 2019?

Jeff Rutherford -- Chief Financial Officer

Yes. And portfolio shaping, it's approximately just a little under $30 million affect on revenue, and it's going to be the same number for FX, so approximately $60 million of the effect will be for the fourth quarter.

Justin Bergner -- G. Research LLC -- Analyst

OK, great. And that 2020, it's a further $100 million year-on-year reduction in revenue from portfolio shaping actions versus this year?

Jeff Rutherford -- Chief Financial Officer

Yes. Yes, so it'll be spread throughout the year, but $100 million reduction off of where we're going to end '19.

Justin Bergner -- G. Research LLC -- Analyst

OK, that's helpful. Secondly, moving to free cash flow, there was a benefit on cash taxes and other in your guide that I guess was $10 million and $20 million respectively. Are those one-time benefits? Are those benefits going to persist as we look into 2020, because I know you've sort of commented in the past about some sort of lingering free cash flow headwinds from taxes and other?

Jeff Rutherford -- Chief Financial Officer

Yes, yes, and Gerrard is smiling at me because he knows that I'd love to have questions about taxes, right? I can go on forever and bore you guys to death, but here's the deal, there are some one-time deals in '19. We had a refund, and we've had some payments on some other prior periods, but it's going to net out that we're going to be last, we're going to be $10 million favorable than what we thought coming into 2019. Going forward, we're -- the way we're structured is, and this is going to be more than you want to know, we're structured as we're manufacturing in Germany and the United States, they are also our tax principles. They are selling all the products to the distribution subsidiaries, and our problem from a structure perspective is that all of our capital costs are in the principles and we're making too much money into distribution subsidiaries.

So, we have to balance that out. When we balance that out, right, our cash taxes will go down. So, we are still anticipating a favorable movement in cash taxes as we move into 2020.

Justin Bergner -- G. Research LLC -- Analyst

OK, I'll follow-up more on these issues offline, because this seems little complicated, but lastly, sort of big picture, if you might be able to comment a little bit more on sort of the week European service revenue performance or your ratio of service revenue performance in the quarter, I mean, it was weaker installation against better product revenue, and I guess on the Eurasia side, any benefit from sort of Win-10 tailwinds sort of coming overseas, as you look into 2020?

Gerrard Schmid -- President and Chief Executive Officer

Yes, Justin, in the quarter in Eurasia, we saw lower total implementation services activity, which is usually project-based activity wrapped around various service activities. We just lost a bit in the quarter. I wouldn't read too much into that. In terms of Win-10, I know that in prior quarters, we had started to comment on some early signs of we might have been seeing in some markets, that appears to be somewhat more muted this quarter, and our suspicion is that in light of the evolving economic outlook for Europe that we may see that spread out rather than have the same sustained momentum we saw come out Americas.

So, I'd say we continue to have a watching view on that topic.

Justin Bergner -- G. Research LLC -- Analyst

Great, thanks for taking my questions.

Gerrard Schmid -- President and Chief Executive Officer

Welcome.

Operator

[Operator instructions] Our next question comes from Rob Jost with Invesco.

Rob Jost -- Invesco Ltd. -- Analyst

Hi, thanks, I just have a couple. I wanted to go back to the services, and on slide, I want to take Slide 7, your renewal rates take a step down in the third quarter, and this is on a trailing 12-month basis. So, talk please about what's happening with that 200 basis points reduction there, because that looks like there's sort of contract loss or project-based, any commentary would be helpful?

Gerrard Schmid -- President and Chief Executive Officer

Yes, that really ties Rob to a modest reduction in units in the Americas specifically related to one contract. Once again these are very, very high renewal rates, and we're not seeing any structural change in our ability to retain our business, but in the quarter, there was one Americas contract that accounted for most of that reduction.

Rob Jost -- Invesco Ltd. -- Analyst

Thanks. OK, and then in SG&A, I know you called out a few kind of unusual one-time type expenses, I'm just wondering about the glide path here, you're targeting kind of 13.5% in 2021, are you thinking about it as a kind of 100 basis points reduction going into 2020, and then another 100 basis points into 2021, or -- I'm just trying to figure out the glide path here.

Gerrard Schmid -- President and Chief Executive Officer

It's not going to be linear, right, because it's going to be the some stepped movements and some of the things we're doing and...

Rob Jost -- Invesco Ltd. -- Analyst

OK.

Gerrard Schmid -- President and Chief Executive Officer

What we're looking at is, you know, understanding what I said before about, I'll give you some insight on some of the things we're looking at. When you look at the business, we are -- with Germany and U.S. being principles, you have a full level service requirements there, and when you get to distribution subsidiaries, it can be SG&A, and particularly G&A can be handled more on a regional basis, and those are the types of things we're looking at. That will not be linear.

It's going to be stepped. So, we will provide some additional insight into that when we provide guidance, but we are committed to the $100 million of targeted reductions, but some of that's going to be cost of goods sold also in 2020.

Rob Jost -- Invesco Ltd. -- Analyst

OK, thanks.

Operator

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

Justin Bergner -- G. Research LLC -- Analyst

Oh, thanks for taking my follow-ups. In light of the Kony sale, which I guess I wasn't aware that assets are on your books, are there other similar stockholdings or assets in your portfolio that can be monetized of sort of that equity-holding nature?

Gerrard Schmid -- President and Chief Executive Officer

Justin, it's very few assets similar to our equity investment in Kony. There are other actions under way related to certain historical joint ventures, where we would be looking to move from a majority position to a much lower position, which certainly will have some positive benefits, but straight up equity transactions similar to Kony, those are relatively limited for us. With that being said, as you would have heard from Jeff, when he talked about the impact of $100 million of revenue declines in 2022 due to divestitures obviously, when you do the math, you know, that would suggest that we have a number that we expect to close in the not-too-distant future, and obviously once we do, we will provide an update on those.

Justin Bergner -- G. Research LLC -- Analyst

OK, great. Were there any meaningful proceeds from asset sales or portfolio shaping in the current quarter, are you speaking more about perspective, additional disposals or exits that would relate to that kind of revenue?

Gerrard Schmid -- President and Chief Executive Officer

Yes, other than Kony, we haven't had anything material in the last 90 days.

Justin Bergner -- G. Research LLC -- Analyst

OK, thank you.

Steve Virostek -- Investor Relations

Great, well, I want to thank everyone for joining our call today, and I appreciate your time, and if you have follow-up questions, please give us a call here at investor relations. Have a great day.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Steve Virostek -- Investor Relations

Gerrard Schmid -- President and Chief Executive Officer

Jeff Rutherford -- Chief Financial Officer

Ishfaque Faruk -- Sidoti and Company, LLC -- Analyst

Kartik Mehta -- Northcoast Research -- Analyst

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

Justin Bergner -- G. Research LLC -- Analyst

Rob Jost -- Invesco Ltd. -- Analyst

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