DIEBOLD NIXDORF (DBD) Q4 2020 Earnings Call Transcript

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DIEBOLD NIXDORF (DBD)
Q4 2020 Earnings Call
Feb 10, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Diebold Nixdorf 2020 earnings call. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Steve Virostek. Thank you. Please go ahead, sir.

Steve Virostek -- Vice President, Investor Relations

Thank you, Ashley. And welcome everyone to Diebold Nixdorf's fourth quarter and year-end 2020 earnings call. Joining me on today' call are Gerrard Schmid, President and Chief Executive Officer, and Jeff Rutherford, our Chief Financial Officer.

To accompany our prepared remarks today, we have posted slides to the Investor Relations page of dieboldnixdorf.com. Our remarks are being recorded and we will post a replay of the webcast on the IR website later today.

Slide 2 of today's presentation contains a reminder that our comments will include non-GAAP financial information, which we believe is helpful in assessing the company's performance. We have posted reconciliation schedules for each non-GAAP metric. We're reconciling to the most directly comparable GAAP metric in the supplemental schedules of our slides and in the tables of today's earnings release.

On slide 3, we remind all participants that certain comments may be characterized as forward-looking statements, 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that our forward-looking information is current as of today and subsequent events may render this information to be outdated.

And now, I will hand the call to Gerrard.

Gerrard Schmid -- President and Chief Executive Officer

Thank you, Steve. And good morning, everyone. I'm pleased to join you today to discuss our investment thesis, our solid 2020 results and our outlook for value creation.

I'll begin on slide 3 with our investment thesis. Since 2018, our focus has been on transforming our business model to generate strong free cash flow. We have been streamlining and simplifying our business through our DN Now transformation initiatives. We evolved these initiatives and increased our savings target to $500 million through 2021. With two years of solid execution in the books, our path to higher profitability is well under way. As our DN Now restructuring spend tapers off in 2021, we expect this to translate into meaningful increase in free cash flow.

The second element of our investment thesis is the ability to leverage our digitally enhanced solutions to drive sustainable top line growth and a positive mix shift.

Slide 4 highlights how we're transforming our business model. In 2021, we will continue to enhance our productivity and anticipate delivering approximately $160 million of incremental savings. Key initiatives for this year include continued services modernization progress, driving a higher mix of our next generation self-checkout retail devices, and next generation DN Series ATMs, and investing in digital and cloud technologies to enhance efficiencies across IT, finance and HR enablement functions.

And with the DN Now transformation set to conclude by year-end, our restructuring payments will also come to end, with cash restructuring payments expected to be no more than $50 million this year. The net result of our efforts will drive a strong sequential step up in free cash flow, which is anticipated to be in the range of $140 million to $170 million for the year.

In addition to enhancing the free cash flow generation from our operating model, we are targeting growth in areas where we have competitive differentiation. Within banking, we are well positioned to support the accelerating digital transformation agenda of our customers across the globe as they enhance their value proposition for their end customers and seek greater operating efficiencies.

Our momentum with the DN Series ATMs and fourth generation cash recycling technology is promising. We have seen customer enthusiasm for the advanced feature set, increased connectivity through the All Connect Data Engine, greater modularity, support for advanced software capabilities and improved security features in a small footprint.

For our services business, we are leveraging the IoT and machine learning capabilities of our All Connect Data Engine to enhance availability for customers and improve our own efficiency. Early deployments with legacy ATMs suggest that ACDE can reduce call rates by approximately 20%.

In addition, we are supporting our customers' efficiency agendas through offering pre-configured managed services solutions for those customers who want the most comprehensive ATM solutions, performance levels and capabilities.

Beyond self-service channels, we're also investing in software offerings for financial institutions. I will shortly describe our cloud native Vynamic Payments offering and the market opportunity on the next slide.

Within retail, consumer journeys continue to evolve and shift toward more digital and self-service solutions. We are seeing strong momentum through our differentiated suite of self-checkout solutions and we further enhanced our position in January when we announced the DN Series EASY, which is a new family of self-checkout products designed to be more modular, more reliable and flexible because of its open architecture.

2020 was a very strong year for Diebold Nixdorf from a self-checkout shipments perspective as we delivered growth of approximately 90% in the fourth quarter and just over 2% for the full year. The high service attach rates of approximately 90% is another reason to like this business.

We also see opportunity to expand our software reach with retail customers. And we're investing in our cloud-based Vynamic Retail offerings. In December, we launched our cloud-based software offering for fuel and convenience customers.

As more technologies proliferate within our retail customer environments, they are also turning to Diebold Nixdorf to support them with our comprehensive managed services offering to generate greater operating efficiencies and more integrated store operations.

On slide 6, I'd like to highlight an exciting new software offering, which we are bringing to market, the Vynamic Payments platform. As the payment landscape rapidly evolves, banks are facing a proliferation of new payment types and rapidly growing payment volumes, and cumbersome legacy payment platforms limit their ability to offer a consistent and optimized consumer experience across multiple channels.

Our cloud native solution offers a path for banks to address these pain points. We are currently deploying our Vynamic Payments platform at our first client, a top 10 global financial institution. The solution will scale to support billions of debit transactions across multiple channels.

We also recently announced a win at one of the largest credit unions in the United States. Our solution leverages an API-enabled micro-services approach, which provides distinct competitive advantages for our company, including the ability to transform the banks payment operations, a flexible and future proof approach to support multiple payment types and channels, giving banks the flexibility to adapt to changing regulations, schemes, payment types and channels and the ability to quickly scale to billions of transactions. These characteristics place Diebold Nixdorf in a position to offer a distinctive solution versus less flexible and more expensive legacy platform providers.

Moving to slide 7, I will recap our financial performance in 2020 and growth outlook for 2021. We are experiencing strong demand for our differentiated and digitally enabled solutions. Despite the continued complexities of the COVID-19 pandemic, product orders increased 17% in the fourth quarter, with banking growth of 34%. In fact, order activity across the full year exceeded our performance in 2019.

We're also pleased that our customers are further validating our progress as customer satisfaction further improved as Net Promoter Scores from our banking customers increased substantially for a third consecutive year.

At the same time, we enhanced our execution of the DN Now transformation initiatives and delivered approximately $165 million against our savings targets during the year. These achievements were the main driver behind meaningful year-over-year increases to profits and profit margins even as we experienced revenue impacts from the pandemic.

With respect to free cash flow, our fourth quarter results of $186 million was the strongest we've experienced in eight quarters, fueled by solid profitability and strong collections. For the full year, the company generated $57 million in free cash flow, which exceeded our outlook by $27 million.

In addition to our strong financial performance, I am gratified by the multiple ways in which our team adapted to the dynamic and highly uncertain macroenvironment.

We are entering 2021 with a strong order book, differentiated and well positioned solutions and a detailed operating plan for bringing our DN Now transformation efforts to a successful conclusion.

While we have confidence in our outlook for 2021, we also recognize that we must continue to manage a number of pandemic-related uncertainties, including the pace of easing of lockdown restrictions, wide availability and access to vaccines, and the impact on business activity, both in customer buying patterns and in our supply chain.

Against this backdrop, our 2021 outlook is for revenue of approximately $4 billion to $4.1 billion or 3% to 5% growth, adjusted EBITDA of $480 million to $500 million which translates to 6% to 10% growth, and significant free cash flow growth to a range of $140 million to $170 million.

On slide 8, I'll provide some more details underpinning our strong 2020 financial results. Strength in product orders during the quarter drove our product backlog 23% higher versus the prior year. In our retail business, customers are investing in automation and self-service capabilities to improve the in-store experience, while lowering operating costs.

During the fourth quarter, we received initial orders from our milestone agreement with a pan-European grocer who was refreshing the second largest fleet of self-checkout devices in the world.

In Poland, we procured a $7 million contract for self-checkout products and Vynamic iScan software licenses with another large grocery store.

In our banking business, I'm pleased to report that, for the first time, DN Series ATMs contributed meaningfully to the order book. Success in the Middle East included two sizable deals. In Saudi Arabia, we booked an order with a top three bank to refresh 1,800 ATMs with DN Series. We also booked a new logo in Egypt for 500 DN Series in support of this bank's expansion initiatives. Notably, both agreements included multiyear contracts for security, monitoring and marketing software.

In the Netherlands, we secured two new contracts valued at approximately $11 million to provide DN Series ATMs and indoor Lobby cash recyclers.

In the Americas, we expanded our existing partnership with Citibank for additional DN Series ATMs, a full Vynamic software suite and maintenance services across 15 countries, which will help standardize the customer experience, while reducing complexity, cost and security risk.

We also won a new contract to install 1,000 new DN Series cash recycling modules and our IoT-enabled All Connect Data Engine with the largest private bank in Brazil.

During the first quarter of 2021, we are seeing continued success with an initial order for cash recycling DN Series units and maintenance services at a top 10 financial institution in the United States. We consider this win as a new logo because, for many years, this bank has purchased ATM solutions from others.

Turning to revenue, our trajectory steadily improved as the year played out, reflecting how both the company and our customers adapted to the challenges of the pandemic. We reported sequential growth in the third and fourth quarter of more than 10%.

Our fourth quarter revenue was about 5% better than our recent outlook. Full-year revenue of $3.9 billion declined by 11% as reported and 8% when one removes the effect of divestitures and currency fluctuations, with most of that decline attributed to COVID delays.

In the face of revenue headwinds, we continued to execute our DN Now initiatives and deliver greater profitability. Adjusted EBITDA increased 13% to $453 million for the full year. Our adjusted EBITDA margin of 11.6% increased by 250 basis points versus the prior year.

And I previously mentioned our strong fourth quarter free cash flow performance and now total $57 million for the year.

Let me hand over to Jeff Rutherford who will discuss our financial performance.

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Thank you, Gerrard. And good morning, everyone. As usual, my prepared remarks today will focus on non-GAAP metrics unless otherwise noted.

2020 was a good year for us, especially when considering the challenges of navigating a global pandemic. The team made tremendous progress with our DN Now transformation, delivering for customers, advancing our digital-enabled solutions, refinancing debt and living our values.

Before we review our operating results, I would like to discuss our non-GAAP adjustment summarized in Note 2 of our earnings release, including our transformation and restructuring activities.

During the fourth quarter, we made a concerted effort to accelerate our transformation expenses and cash payments with the explicit goal to complete all expenses and payments for the DN Now transformation before the end of 2021.

During that process, new projects were identified, including in our software business, which increased our total cost and payments. These incremental projects will yield longer-term benefits, so there is no change to our cumulative DN Now savings target of $500 million through 2021. I need to note there will be no additional or incremental DN Now projects other than those identified as of today.

For the quarter, we had spent $72 million of restructuring and transformation expenditures and paid approximately $60 million in cash. Since we are nearing the end of DN Now restructuring, we have scheduled all necessary severance spend. We are targeting a maximum of $50 million for these cash payments for 2021.

Other non-routine expenses in the quarter were minor and include balance sheet and contract cleanup of legacy issues and costs associated with divesting non-core businesses.

During the fourth quarter, non-routine expenses were approximately $8 million and we expect these adjustments have largely concluded, with the exception of divestiture-related costs.

Slide 9 contains our financial highlights for the quarter and the full year. My comments will focus on the quarterly numbers.

Before getting into the specifics, I'd remind everyone that the fourth quarter of 2019 was an exceptionally strong quarter for us. Despite a tough comparison, we performed exceptionally well. Revenue, adjusted EBITDA and free cash flow exceeded our prior guidance announced in October.

Fourth quarter revenue of $1.1 billion declined 2.5% after adjusting for foreign currency and divestitures. Foreign currency was favorable by approximately $18 million and divestitures were unfavorable by $36 million. Our revenue variance was primarily due to unplanned delays of approximately $40 million, largely driven by the pandemic.

We delivered product revenue growth of 1% versus the prior quarter, showing a strong rebound from COVID-19, and we are encouraged by robust order entry growth during the second half of 2020, supporting a stronger rebound ahead.

Continued strong gross margin results in the quarter were offset by the revenue decline, resulting in a $7 million decline in gross profit versus the prior-year period. Progress on our services, modernization and software excellence initiatives drove a 50 basis point increase to total gross margin versus the prior quarter. Software margins expanded 850 basis points, services expanded 120 basis points and products declined 230 basis points due to a less favorable geographic customer mix in our banking segments.

Operating profit increased $4 million or 4% versus the prior quarter, while operating margins increased 80 basis points to 9.5% for the quarter. We continue to show progress in reducing SG&A expense during the quarter. However, R&D expense was slightly higher as we continue to invest in future solutions.

We delivered adjusted EBITDA of $128 million, which exceeded our prior outlook by $13 million. Adjusted EBITDA margin expanded 20 basis points year-over-year to 11.6%.

Fourth quarter free cash long was $186 million. The upside to free cash flow versus our model was higher profitability and significantly stronger cash collections, which dropped our days sales outstanding by 8 days sequentially. Our cash performance also included the previously referenced higher restructuring and transformation payments.

As Gerrard mentioned, we see opportunities for cloud native software growth. In the interest of greater transparency, we are disclosing capitalized software development in our free cash flow reporting. We will include capitalized software development and capital expenditures in our free cash flow definition going forward, while continuing to exclude the impact of M&A related activities and cash element of non-operating hedging derivatives.

The next three slides contains financial highlights for our three segments adjusted for currency and divestitures. My comments will focus on fourth quarter trends.

On slide 10, Eurasia Banking revenue for the quarter increased 1% to $419 million after adjusting for $36 million from divestitures, net of a $20 million benefit from foreign currency.

Total gross profit was down $4 million year-over-year, reflecting a stable margin on lower revenue. We realized gross margin improvements to services and software through our transformation initiatives, offset by lower product margins due to a less favorable mix.

Moving to slide 11, Americas Banking revenue of $375 million declined 7% versus the prior quarter, excluding a $13 million foreign currency headwind, primarily reflecting non-recurring projects in North America as well as COVID-19 related project delays.

Segment gross profit of $100 million was down $8 million year-over-year due to the revenue decline, partially offset by gross margin expansion of 90 basis points due to our DN Now transformation initiatives and a more favorable product mix.

On slide 12, retail revenue of $312 million was 1% lower year-over-year after adjusting for a $12 million foreign currency benefit. Gross profit increased to $73 million during the quarter as our mix of products was more favorable due to the rising self-checkout shipments and our DN Now initiatives positively impacting services and software margins. Retail gross margin expanded by 80 basis points during the quarter.

On slide 13, we provide information about leverage and debt maturity. At the end of 2020, the company's net leverage ratio of 4.4 times was unchanged from the end of 2019 as the increase in EBITDA and our positive free cash flow was offset by payments associated with our debt refinancing, M&A activities and an unfavorable exchange rate on foreign net debt balances.

Over the next three years, we will generate stronger free cash flow due to the elimination of restructuring payments, continued strong management of net working capital investments and incremental profitability. We expect to use free cash flow to pay down debt and we're targeting a reduction in leverage ratio to less than 3 times net debt to adjusted EBITDA by 2023.

On the right side of the slide, we provide details for our outstanding debt. You can see that the next material debt maturity date is November of 2023, which provides the company with ample time to complete our transformation, strengthen our credit profile and execute on our growth initiatives.

In response to investor questions, I will discuss our income tax structure, key considerations and cash tax payments as disclosed on slide 14. Our company's tax structure consists of two tax principals, the United States and Germany. The tax principals provide products and related support to distribution subsidiaries in approximately 60 countries.

Due to high restructuring, transformation and interest payments, the combined tax principals reported a pre-tax loss, but paid approximately $7 million of income taxes due primarily to tax loss pertaining to the US foreign source income alignment, or in tax jargon, if you prefer that, the Global Intangible Low Tax Income, GILTI provisions and Subpart F provisions of the US tax code. And also, due to US limitations on the deductibility of interest payments.

The distribution subsidiaries pay the principals for products and related services. And as appropriate, these entities generate taxable income. On a collected basis, distribution subsidiaries paid approximately $30 million in cash income taxes during 2020, bringing total company cash income taxes to approximately $37 million.

Looking to 2021, we expect to report pre-tax income on a consolidated basis due to continued operating profit growth and the significant reduction of transformation and restructuring expenses. Taking into account all the factors listed on this slide, we expect cash tax payments in 2021 will be approximately $35 million, while targeting an effective tax rate of 25% to 30%.

We have implemented tax planning initiatives designed to benefit our tax efficiency going forward. For the two principals, we seek to better align foreign sources of taxable income, with appropriate market consideration, while improving the deductibility of interest payments with principal taxable income. For our distribution subsidiaries, the main opportunity is to rebalance the distribution of income based on true transaction economics.

On slide 15, I will discuss our 2021 outlook. We are expecting revenue in the range of $4 billion to $4.1 billion, which translates to a 3% to 5% growth. Based on our order book as well as the challenges of 2020, we are expecting product revenue growth to lead the way and for banking growth to modestly exceed retail growth.

Divestitures, which have already been completed, are expected to result in a headwind of approximately $50 million to services revenue, with the majority impacting our first half results.

Our adjusted EBITDA range is $480 million to $500 million or 6% to 10% growth. Key contributions are expected from top line growth and $160 million of DN Now savings, primarily from higher mix of DN Series, software excellence and greater efficiencies from our service organization and All Connect Data Engine. Offsetting these benefits are approximately $40 million of incremental growth investments in growth areas, which Gerrard discussed today, a $40 million reversal of one-time savings and services gross margin benefits, which occurred in 2020, and investments we are making in people, which primarily relate to the timing and magnitude of merit increases, and also inflation.

The net effect of revenue growth, DN Now savings and offsetting expenses generates the EBITDA growth previously referenced. For operating expenses, the net effect will be approximately $20 million of higher expenses in 2021 versus 2020.

In terms of seasonality, we expect our first half will account for approximately 45% of annual revenue and approximately 40% of annual adjusted EBITDA.

Moving on to our free cash flow outlook. We expect to generate $140 million to $170 million in 2021, representing an EBITDA to free cash flow conversion rate of approximately 30%, up from 12% in 2020.

We expect net working capital to be a $50 million source of funds in 2021 as accounts receivable DSOs and inventory investments normalize from COVID-19 impact.

Uses of cash include the following approximate amounts. $170 million in interest payments; $50 million of restructuring payments; $85 million of capex and software development payments; and 75 million from cash taxes, pension and other items.

The sequential increase in our capital expenditures is driven primarily by payments associated with accelerating our digital capability and moving workstreams to the Oracle Cloud for IT, HR, finance, and sales support.

Modernizing our enablement functions and tools will facilitate future efficiency gains that provide better analytics, enabling the company to leverage growth and run a more efficient and agile business. Additionally, our investments in capitalized software are supporting development of our cloud native software offerings, Vynamic Payments and next generation Vynamic Retail.

We believe our 2021 outlook reflects the proper balance of top line and profitability growth, higher free cash flow conversion and investments for the future as we continue to generate long-term value for our stakeholders.

And now, I will hand the call back to Gerrard for comments on our 2023 financial targets and our ESG initiatives.

Gerrard Schmid -- President and Chief Executive Officer

Thank you, Jeff. Before we conclude our prepared remarks, I'd like to comment briefly on our longer-term outlook and financial targets on slide 16.

Starting with revenue, we are targeting annual organic revenue growth of 2% to 4% through 2023, supported by the areas which I discussed earlier. We are focused on high quality revenue growth, which will be accretive to the company.

We also expect to deliver ongoing operational efficiencies and gross margin expansion in our services business through widespread deployment of our All Collect Data Engine, which underpins our gross service margin target range of 32% to 33%. In addition, we will be driving continuous improvements through the use of digital tools and standard processes.

Collectively, these factors contribute to an adjusted EBITDA target for 2023 in excess of 13%. Stronger profitability, substantially lower restructuring costs and more efficient net working capital management are key levers toward our goal of improving the conversion of adjusted EBITDA to levered free cash flow.

Our plans call for increasing this ratio from 12% in 2020 to approximately 30% in 2021 and approximately 50% in 2023. We expect cumulative three-year levered free cash flow to exceed $600 million. Furthermore, we believe the company can generate a return on invested capital of greater than 20%.

As we increase our profitability and use excess cash to pay down debt, we expect to reduce our leverage ratio to less than 3 times net debt to trailing 12 months adjusted EBITDA.

As part of our commitment to sustainable growth, we are also affirming our commitments to be a leader in our sector in environmental, social and governance, or ESG, matters. Our key initiatives are summarized on slide 17.

First, sustainable supply chain and operations is vital to our customers and suppliers. Our focus is on reducing our carbon footprint, promoting recycling and using environmentally sustainable materials, and we are applying all these principles in the design and production of our new product lines, such as DN Series ATMs, DN Series EASY and BEETLE point-of-sale.

Since 2015, we have systematically reduced our carbon emissions by 16,500 metric tons, and we report our results in the Carbon Disclosure Project.

And as we have discussed on prior calls, we continue to prioritize the health and safety of our employees through the pandemic through educational, personal protection equipment and specific initiatives supporting employees in the hardest-hit countries.

As a global company, operating with customers in over 100 countries and employees in more than 60 countries, we also take our role as a global citizen seriously. With respect to diversity and inclusion, we have formed a CARE Council to promote inclusive values where we're considerate, aware, responsible and empathetic toward one another. And we are holding one another accountable to create a great working environment for our diverse and global workforce.

Our impact on local communities is also important to us. As part of our global citizenship actions, the Diebold Nixdorf Foundation has committed to $0.5 million to expand financial literacy in underserved populations through an organization called Operation HOPE.

We invite you to learn more about our overall efforts by reviewing our recently released corporate sustainability report, a link of which is available through our slide deck or on our website.

This now concludes our prepared remarks. I'll hand the call back to our operator, Ashley, to begin our question-and-answer session.

Questions and Answers:

Operator

[Operator Instructions]. And your first question comes from Paul Chung with J.P. Morgan.

Paul Chung -- J.P. Morgan -- Analyst

Hi. Thanks for taking my questions. So, just on your guidance for 2021 and specifically on the DN Series, how good is your visibility for the year? And what can kind of drive some additional upside in the second half. And then, does your guidance kind of assume the pandemic continues for most of the year or are you baking in possible acceleration in the second half? And then, I have a follow-up.

Gerrard Schmid -- President and Chief Executive Officer

Yeah. Good morning, Paul. So, let me answer that second question first. We are not baking in any material acceleration of economic improvements through the back half of the year. Equally, we're not baking in any major deceleration if things happen to get worse. So, we're effectively assuming a steady-as-she-goes scenario. It's quite similar to what we saw through the fourth quarter.

As it relates to DN Series, as we mentioned in our prepared remarks, we had very solid order activity through the third and fourth quarters, and are entering 2021 with a very strong backlog, specifically related to DN Series. So, our visibility to revenue through the first half of the year are very, very strong. And obviously, given the sales cycles around ATMs, somewhat less visibility as you look to the back half of the year. So, clearly, the back half of the year will be more influenced by sales momentum through the next quarter or so. But at this stage, based on everything we're seeing in the first several weeks of 2021, we're feeling confident about the revenue guidance range that we have around products in particular.

Paul Chung -- J.P. Morgan -- Analyst

Okay, great. Thanks for that. And then, on your free cash flow, nice guide for '21, a bit more than we expected. It's like largely driven by your EBITDA conversion. How do we think about the working cap benefit of $50 million, the kind of puts and takes there. Assume you'll be investing a bit in inventory for the DN Series. What can flex that up and down as you move throughout the year? And any other metrics that you want to call out that are big kind of swing factors if the economy improves in the second half? Thank you.

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Yeah. Paul, thanks. This is Jeff. And relative to working capital, I will say that, if you look at our working capital performance in 2020, it was impacted by COVID-19 and in particular in cash collections and customer behaviors. And we saw a significant release of that pent-up payments in the fourth quarter. And that's why we beat our model in the fourth quarter, is that we had very, very good cash collections. We are seeing that continue, but our DSOs are still higher than they were at the end of '19 by approximately 5 days. So, we expect through the year that that will continue to come down and we're targeting that 5 day reduction.

We're also carrying a higher inventory level than we normally would. In particular, we didn't have a big push for revenue at the end of the quarter. In fact, we were carrying specific inventory investments for certain customers, higher than we normally would carry. We don't expect that to repeat at the end of 2021. And we also know that we have ample opportunity relative to accounts payable and turns.

So, in all the three major areas of working capital, we see opportunity to harvest cash in 2021. But you're right, that $50 million is key to our free cash flow conversion in 2021. And also, I'll say it again, both Gerrard said it and I said it in our prepared remarks, that $50 million of restructuring payments in 2021 is a hard number. It's all scheduled out. It's dependent upon certain issues relative to Works Council negotiations and so forth. But we feel very, very confident that we will not exceed that $50 million restructuring payment number for 2021.

Paul Chung -- J.P. Morgan -- Analyst

Okay, great. Thank you.

Operator

Your next question comes from Kartik Mehta with Northcoast Research.

Kartik Mehta -- Northcoast Research -- Analyst

Hey, good morning, Gerrard and Jeff. Gerrard, can you maybe give a little bit more detail on the revenue growth targets you've established through 2023. Maybe just the mix of how you get to that 2% to 4%?

Steve Virostek -- Vice President, Investor Relations

Yeah. Good morning, Kartik. And happy to. Let me start with 2021 and use that to bridge to the outer years. As Jeff said, as we look at 2021, we think that product activity, both in retail and in banking, will fuel most of the top line growth, fueled by strong backlog and sales momentum that we're seeing in the first half of this year.

As we start to transition into '22 and '23, the mix starts to shift more in favor of software and services related growth, areas like managed services and Vynamic Payments that I made reference to. So, that's the combination of what feels the 2% to 4% organic growth rate that we're anticipating.

Kartik Mehta -- Northcoast Research -- Analyst

And then, maybe, Jeff, if you could talk about the leverage you're getting this year from revenue to adjusted EBITDA. Would you expect the same type of leverage as we move forward? Or do you think that leverage increases after 2021?

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

We certainly believe that it will increase. We have given that longer-term guidance for EBITDA percentage. So, what the key for us is, and way we built the model, right, is to leverage the enablement functions. What we don't want to get into is, as we grow the business, that we grow enablement functions. So, the key to what we've done with finance and IT and HR is make those functions leverageable, to absorb growth without increasing costs. In fact, I'll even go as far to say, is with the systems, the digital systems implementations that we're going through now, our expectation would be that we would see a decline in the percentage of enablement costs to revenue as we move forward through 2023. That would be our goal.

Kartik Mehta -- Northcoast Research -- Analyst

And then, just one last question, Gerrard. There seems to be a pretty good demand for self-checkout. And I'm wondering what you're witnessing -- what kind of growth you had in 2020 on that and what you are witnessing and what you you'd anticipate in 2021 and if that solution is able to be brought over to the US?

Gerrard Schmid -- President and Chief Executive Officer

Kartik, so in my prepared remarks, I mentioned that, from a shipment perspective, 2020 was a very, very good year. We grew self-checkout shipments by 200% year-on-year. As we take a look at 2021, we are expecting very solid, very strong growth in the first half of the year, with perhaps a little bit of a moderation in the back half of the year, but still very strong growth. So, net-net, we think we're in an interesting period of self-checkout expansion across multiple customer bases. As you're well aware, our customer base more heavily skews toward Europe and Asia at the moment. But we are optimistic that, with the launch of our new EASY range of DN Series self-checkout that that will position us well in other markets, including North America.

Paul Chung -- J.P. Morgan -- Analyst

Thank you very much. Appreciate it.

Operator

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

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

Thanks. Good morning. Couple of questions. First, maybe Gerrard, can you address how you guys are framing up the TAM for Vynamic Payments? And you mentioned a couple of customer wins, top 10 bank globally, I think a credit union here in the US. Can you talk about what the go-forward funnel in that product line looks like for you guys?

Gerrard Schmid -- President and Chief Executive Officer

Yeah, sure. So, let me answer it a few different ways, Matt. Payments, as I'm sure you're well aware, sits at the heart of any large financial institution's operations, and therefore, technology investment in those areas tend to have a relatively long sales cycle to it. So, these are big bets by financial institutions, not rapid sales cycle events. So, I'm starting with that comment just to manage everyone's expectations around the pace of customer wins.

Now, the second thing I'd say is, when we think about the spend by bank for these opportunities, they run in the tens of millions of dollars from a software perspective. So, this is not inconsequential software. This is very, very robust sophisticated technologies.

So, when we think about the TAM, we think about it in three broad groupings -- our initial core target market would be the largest banks in the planet with very, very sophisticated needs to meet the needs of multiple payment types, whether it's credit, debit, Alipay, Venmo, Zelle, across multiple channels. And then, in due course, we expect to be able to offer similar offer to the large processors that serve the needs of smaller banks and in due course to smaller institutions. So, I think that's how we anticipate the TAM evolving. And as we get into the year, we will gladly share more details as we experience growth in that area.

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

And then, as a follow-up, Gerrard, in the past, you've commented kind of where you're at with the DN Series certifications on the ATM side of the business. Maybe can you give an update there and when you expect actual out-the-door volumes to really reach a critical mass for you guys?

Gerrard Schmid -- President and Chief Executive Officer

Sure, Matt. So, we exited 2020 with north of 150 banks having completed certifications. As I mentioned in our prepared remarks, from an order perspective, DN Series are now a very material part of our order activity. And as we move through 2021, we would expect DN Series to be the majority of shipment debt levels from an ATM perspective. So, 2021 is the tipping point for us as it relates to DN Series volumes.

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

[Speech Overlap] projects as well. So, previously, we had communicated 550 projects. We're well north of 600 projects right now. So, I think that speaks to the attractiveness of the offering.

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

Perfect. And then, if I can just sneak one in real quick for Jeff. You talked about kind of the first half-second half revenue and EBITDA cadence for Diebold in '21. Can you also talk about how we should be thinking about free cash flow linearity, given the timing of cash severance payments, working capital that you're looking to harvest, can you kind of flush all that out?

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Yeah. And that's an area of continued focus for us. We will have, as you know, in the first quarter, with incentive comp payments and so forth, that will be our -- expected to be our lowest free cash flow, which would be a slight spend, right, in the first quarter. We want to even out then.

The other thing to take into consideration when I say that, Matt, is that our interest payment cadence has changed. It used to be that we paid the bond interest in second quarter and fourth quarter. Now, we're paying it in the first and third quarter. So, that's going to have an effect on us. So, the first quarter is going to be a use of cash. We're working hard to get the second and third quarters to at least flat, we'll be positive on operating side and being able to leverage the cash payments -- interest payments we have in the second and third. And then, the fourth quarter, it all releases, especially now that we don't have a big bond payment in fourth quarter. It will be a similar cadence. We are trying to level that out. It really swings on working capital. So, we have a focus on working capital, but it will be a use in the first half and then generation of cash in the second half.

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

Got it. Thank you, guys.

Operator

Your next question comes from Jeff Harlib with Barclays.

Jeff Harlib -- Barclays Capital -- Analyst

Hi, good morning. Just with the significant growth in product orders in 4Q and DN Series, can you just maybe talk about some of the dynamics there in terms of -- do you see this as the DN Series sort of an acceleration of the refresh that will level out over time? Is it sort of catch-up from weakness during the early parts of COVID?

And then, on self-checkout, are you seeing significant growth you're seeing? Is it more market growth or is the company gaining share?

Gerrard Schmid -- President and Chief Executive Officer

Good morning, Jeff. It's Gerrard. So, let me talk about the DN Series ATMs first. I think we're seeing a few phenomena. So, in multiple markets that would generally be characterized as developing markets, markets in the Middle East, etc., we're seeing market expansion by those financial institutions as they look to drive up financial inclusion. So, we're seeing an expansion of the number of ATMs per institution in those markets.

Second of all, I think we are seeing some catch-up from the weakness of Q2 of 2020 as we're starting to see spend accelerate from several institutions.

And thirdly, from a cash recycling perspective, we're seeing much more heightened interest from banks in Americas, in particular, for our fourth generation cash recycling technology. And I commented earlier on some of the new logo wins that we secured on that end.

And as it relates to self-checkout, I know both ourselves and others have talked about the strength of the self-checkout market. So, there is no doubt that we're benefiting from strong market expansion for that collective opportunity set as consumers look for more self-serve options.

In addition, we are seeing some competitive takeaways in our favor and we've commented on those in the past.

Jeff Harlib -- Barclays Capital -- Analyst

Okay, great. And Jeff, just in terms of the balance sheet, you've talked about wanting to simplify your capital structure over time. You have a good amount of time for the term loans at pretty attractive rates. But then you have high coupon callable bonds in '22. Are you looking at doing -- as you look at things now, are you looking at wholesale refinancing some time in '22 or could you look at parts of the structure before that?

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

We always monitor the market, right. But based on where the model is, we're looking more toward '22. And we'll have the B, will become current at the end of '22, mature in '23. So, that would be a catalyst for us looking at the markets very intently in '22. But that doesn't rule out that we'll continue to monitor the marketplace. As we all know, it's much stronger now than any of us anticipated.

When we did the refinancing, obviously, we were right on the issues relative to the pandemic and the election disruptions. And while we missed it, it was on just the amount of capital that would be available in the marketplace and the markets functioned as well as they did.

So, we did that specifically. We did the refinancing in 2020 specifically to give us the time to mature the model, to show growth in the model, to get some movement out of the rating agencies to make refinancing more attractive. So, certainly, that should happen by the end of '21 and early '22, but we'll monitor it all the way through. And the catalysts, as I said before, is the Term Bs, which are very attractive from a rate perspective, going current in the back half of '22 and then maturing in '23.

Jeff Harlib -- Barclays Capital -- Analyst

Got it. Thanks very much.

Operator

Your next question comes from Justin Bergner with G.research.

Justin Bergner -- G.research -- Analyst

Good morning.

Gerrard Schmid -- President and Chief Executive Officer

Good morning, Justin.

Justin Bergner -- G.research -- Analyst

Thanks, Gerrard. And thanks, Jeff. I guess, first off, I just wanted to delve into when you spoke to at the tail end of your prepared remarks, Gerrard. You mentioned, I think, a top 10 US financial institution had been ordering from a competitor for the last couple of years. Is that win selling DN Series equipment or other equipment [Technical Issues] other equipment in your portfolio?

Gerrard Schmid -- President and Chief Executive Officer

Justin, it was DN Series cash recycling.

Justin Bergner -- G.research -- Analyst

Okay. Got it. So, it's not sort of -- at this point, a replacement of the existing ATMs. It's sort of a product offering.

Gerrard Schmid -- President and Chief Executive Officer

Well, as I've mentioned in the past, Justin, cash recycling has certainly been growing in popularity across the world. And when we take a look at our mix between cash dispensing and cash recycling machines, we're seeing a greater and greater shift toward cash recycling. And as we also commented in the past, the US has lagged the rest of the world around the adoption of cash recycling and we were quite encouraged by this most recent move by a top 10 US bank as they're signaling a strong appetite to consider cash recycling.

Justin Bergner -- G.research -- Analyst

Got it. Shifting gears, in regards to the tax discussion, that was very helpful. The 25% to 30% estimated effective tax rate and $35 million in cash tax payments against higher income seemed quite manageable. Are those numbers representative of normal conditions under your current capital structure going forward? And are there changes when you are able to change your balance sheet that will lower those numbers further?

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Yeah, I would say, Justin, that those are normal rates based on our statutory rates of the jurisdictions we're in. Here's what I'd say on taxes. And I'm going to be a bit -- it's a bit of a sensitive topic, right, when you're talking about 62 plus jurisdictions around the world and as they fight for the income of the organization and for the ability to tax and collect tax payments. And you probably picked up from my prepared remarks the imbalance between our distribution subsidiaries and our principals, right? And that's why we reference market dynamics of the transactions. It makes little sense that the principals would be in a consolidated loss position, mainly due to the capital structure of the company, while the distribution subsidiaries make money and pay taxes. So, we need to work on that balance between distribution subsidiaries and principals. And then, you're right, we need to align our deductible interest payments with the principal profitability, the adjusted principal profitability.

So, we need to align our capital structure between the two principals, US and Germany. And now, it's heavily centered in the US, which drive the US and the lawsuits. The combination of foreign source income and a loss generated by interest payments is the definition, right, that the tax code is looking for for charging an excise tax relative to profit sharing [Phonetic].

So, that's what we're working on, rebalancing the income levels between distribution subs and the principals. That will help on the tax side, on the payment side, but we're sticking with that provision side of 25% to 30%. We think that's a reasonable number.

Justin Bergner -- G.research -- Analyst

Okay, thank you. That's very helpful. I appreciate the questions.

Operator

Your next question comes from Ana Goshko with Bank of America.

Ana Goshko -- Bank of America -- Analyst

Hi, thanks very much. It was great to see the guidance, in particular the free cash flow confidence both for '21 and into '23. So, I have two questions. So, one, just to put a finer point on the discussion on the debt pieces, the company does have an 8.5% bond that becomes callable next month, which I believe could be refinanced at a much lower rate. So, is that's something you are considering refinancing? Or based on your comments, is that something that you would prefer just to kind of call out and pay down with free cash flows? So, that was the first question.

And then secondly, with the strong free cash flow outlook, to what extent does that open you to think about things like tuck-in acquisitions that might supplement the growth areas, which I think you've been constrained from in the recent past because of the free cash flow performance?

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Yeah, those are great questions. Obviously, we have been monitoring the unsecured market, right, and looking at what the potential opportunities will be and fitting that into our priorities right now. And as I said earlier, we don't have anything that we absolutely need to do until probably the back half of 2002, but we'll continue to monitor opportunities between now and then. And the unsecured market is something that we have discussed.

And I think maybe even your bank gave us some calls about that and have advised us on that. So, it's something on the table that we'll continue to look at and determine what's in the best interest. We have -- we do have a high interest in -- our [Indecipherable]. Let's admit that. You know our capital structure. It's on the high end of the range. Fortunately, we had the return on invested capital that's greater than that. So, we are creating value. But we are always going to be looking at opportunities to lower our weighted average cost capital. So, we are monitoring that situation. And we don't want to lock ourselves into something today because we can. There could be much better nine months from now. So, that's what we're looking at.

And then, as far as investments, that's not built into that free cash flow forecast that we provided, but certainly, relative to value creation, it's not off the table. But we're not announcing anything today. And like capital structure, our strategy group is very good and they are continually monitoring what's available for us that could help us in our strategy relative to value creation.

Ana Goshko -- Bank of America -- Analyst

Okay, great. Thank you very much.

Operator

Your last question comes from Marla Backer with Sidoti.

Marla Backer -- Sidoti & Company -- Analyst

Thank you. Switching topics here, can you talk a little bit about your product backlog? You certainly have net growth there at the end of 2020. Can you remind us what the average time [Technical Issues] and revenue.

Gerrard Schmid -- President and Chief Executive Officer

Marla, good day. It's Gerrard Schmid. I didn't quite hear. You might have broken up a little bit. Would you mind repeating that?

Marla Backer -- Sidoti & Company -- Analyst

Sure. I said, could you please remind us what the average decline is for converting backlog, product backlog to shipments and revenue?

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Yeah. I can take that, Marla. Thanks for your question. So, typically, we look at a product backlog as that would generate revenue in the next 12 to 18 months' time period.

Marla Backer -- Sidoti & Company -- Analyst

So, given the strong growth of the backlog, I'm wondering in terms of the conversion in your guidance, your revenue guidance seems -- there seems to be a disconnect there between the backlog growth and the revenue guidance, and I'm wondering if you could help me understand that better.

Gerrard Schmid -- President and Chief Executive Officer

Yeah. Marla, as I said in my prepared remarks, we have very good visibility for the first half of the year. And some of that revenue in the first half will be as a result of the backlog converting. Others will be related to selling activity. And quite frankly, we think it's very, very prudent for us to be somewhat conservative as we think about the back half of the year. We're anticipating that we continue to manage through this pandemic. But we also want to leave ourselves a little bit of room if there is any surprises on that. And so, I think we're being a little bit circumspect with regards to our outlook through H2 until we see and get more visibility around how lockdowns unfold and how accessibility to a broad vaccine plays itself out because we have to keep reminding ourselves that this pandemic continues to be a very, very complex situation that can change outcomes fairly quickly.

Marla Backer -- Sidoti & Company -- Analyst

Okay, thanks so much.

Steve Virostek -- Vice President, Investor Relations

So, I'd just like to thank everybody for your participation on today's earnings call. And of course, if you have follow-up questions, please give us a shout over at Investor Relations. Everybody, have a great day.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Steve Virostek -- Vice President, Investor Relations

Gerrard Schmid -- President and Chief Executive Officer

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Paul Chung -- J.P. Morgan -- Analyst

Kartik Mehta -- Northcoast Research -- Analyst

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

Jeff Harlib -- Barclays Capital -- Analyst

Justin Bergner -- G.research -- Analyst

Ana Goshko -- Bank of America -- Analyst

Marla Backer -- Sidoti & Company -- Analyst

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