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Diebold Nixdorf Inc (NYSE:DBD)
Q2 2021 Earnings Call
Jul 29, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Diebold Nixdorf, Inc. Second Quarter 2021 Earnings Call. My name is Emma, and I will be operating the call today [Operator Instructions]

I'll now hand over to Steve Virostek, Vice President, Investor Relations. Please go ahead, Steve.

Steve Virostek -- Vice President, Investor Relations

Thank you, Emma, and welcome everyone to Diebold Nixdorf Second Quarter Earnings Call for 2021. Joining me on today's call are Gerrard Schmid, President and Chief Executive Officer; and Jeff Rutherford, Chief Financial Officer. To accompany our prepared remarks, we have uploaded slides to the Investor Relations page of dieboldnixdorf.com. Our remarks are being recorded today and should not be reused without the permission from the company. Later this afternoon, we will post a replay of this webcast to the IR website.

On Slide 2, we have a reminder that today's comments will include non-GAAP financial information, which we believe is helpful in assessing the company's performance. Reconciliation schedules for each non-GAAP metric can be located in the supplemental schedules of our slides, as well as in the tables of today's earning. On Slide 3, I will remind all our participants that certain comments made today will be forward-looking and there are a number of risk factors, which could cause actual results to materially from these statements. Additional information on these factors can be found in the company's SEC fillings. Participants should be mindful that our forward-looking information is fine as of today and subsequent events may render this information to be out of date.

And, now, I'll hand the call over to Gerrard.

Gerrard Schmid -- President and Chief Executive Officer

Good morning, everyone, and thanks for joining us today for updates. The company's transformed business model continued to perform on track during the second quarter as customer demand for our solutions drove strong product order growth. We're extremely pleased with the value that our customers are seeing in our propositions across hardware, services and software. While the demand environment is strong, we're operating in a more complex and inflationary support environment that had a modest impact on our banking business mix in the quarter. Since we expect these conditions will continue, we're adjusting our 2021 outlook, profit and cash flow.

Slide 3 highlights how we are leveraging our competitive differentiation to gain market share and grow our business. During the quarter, we delivered 6% revenue growth, spearheaded by our retail segment that grew 38% versus the prior-year period. Product orders accelerated this quarter, increasing 40% versus the prior year and reaching a four-year high. Our success was broad base. The strong growth across all three segments. And our backlog increased by approximately 20% versus the prior-year period.

In our banking business, demand for our next generation DN Series ATMs was strong and accounted for over 70% of all orders. I am pleased with the broad-based customer adoption of DN Series. We expanded our global business partnership with Santander Group to deliver our customer innovation and operating efficiencies with more than 3,000 new ATMs including DN Series and maintenance services in the U.S., Brazil, Mexico, Spain, Argentina, and Chile. Additionally, in the United States, we displaced a competitor at both the top 10 banks and a top 25 banks, with orders for nearly 700 DN Series terminals. We also booked two sizable contracts with National Bank of Egypt and Egypt National Post, valued at nearly $27 million for DN Series, Vynamic software licenses and maintenance.

In Indonesia, we won contracts to refresh more than 2,200 legacy ATMs of DN Series and our Vynamic security software at a large government-owned bank. In Brazil, we displaced a competitor with an order for more than 500 cash recyclers. These examples clearly points to improving market share for Diebold Nixdorf as customers recognize the distinctive value of DN Series through the digital agendas. We also experienced ATMs connected to our AllConnect Data Engine, as the number of connected machines increased more than 25% sequentially to over 90,000 during the quarter. Using advanced cloud computing and machine learning algorithms, we are a mostly identifying root causes and are being more perspective with our spots. This is a critical enabler of reducing the number of service calls, increasing our effectiveness, and reducing costs. By 2023, we expect the operational efficiencies from widespread use we're increased gross service margins to the 32% to 33% range.

Our Retail business continued its very strong performance, led by our self-checkout products. During the quarter, we reached agreements to replace a competitor's self-checkout solutions and a multinational clothing and home products retailer based in the U.K. They were excited by the opportunity to extend our solutions to nearly 1,000 stores. We also signed an initial award at a discount apparel and household product retailer to furnish more than 400 self-checkout devices and maintenance services across Spain and Austria. And in Sweden, we booked the contracts valued at nearly $4 million, the large multinational retailers to automates checkout and reduce fraud at the self-checkout counter using artificial intelligence and image recognition.

Slide 4, contains an overview of our growth strategy. Beginning with our foundational strengths and producing market-leading high-quality products, delivering high service levels and terminal software capabilities. Across our Banking and Retail segments, the core model accounts for a majority of our revenue and cash flows today. Our differentiated solutions are demonstrating our ability to gain market share in small businesses. Strength in our core offering enables higher growth opportunities shown on the right of the slide. In addition to market dynamics that support long-term growth and self-checkout and our continued market leadership in cash recycling, we are pursuing a large addressable market for recurring revenue, underpinned by our ability to deliver managed services and value-add software at scale.

In managed services, we continue to make progress with new contract wins in the quarter. For example, we were pleased to win a five-year managed services contract with a large Italian bank valued at $24 million. In our retail business, we secured a multi-year agreement with A.S. Watson, the world's largest international health and beauty retailer, to deliver new managed mobility software and services 10,000 inventory devices stores in Asia and Europe. Our partnership will accelerate A.S. Watson's offline plus online retail technology to deployments in support of a great shopping experience and convenient to checkout process. One of our software highlights in the quarter was a multi-year agreement with Nedbank for more than 4,000 Vynamic view software licenses. We were selected because of our multi-vendor approach, which improves retail availability by constantly monitoring hardware and software performance through a single-user interface.

With respect to our Vynamic payments offering, we are continuing to scale our debit platform at a top 10 global bank. We are processing nearly 1 million transactions each day and are expanding its capabilities from the branch and IVR channels to include all transactions across more than 15,000 ATMs over the next few months. By the end of this year, we expect to process over 5 million transactions per day. We are encouraged by our progress and we'll continue to invest in our advanced capabilities in order to better position the company for growth. I mentioned earlier, demand has been very strong. We're experiencing a more difficult supply chain environment.

Slide 5 highlights some examples of what we and many other technology companies are seeing. The chart on the left illustrates our global maritime shipping has become less reliable due to limited container capacity. This trend combined with challenges with drop in labor and trucking capacity or adding operational challenges the deal but our risk mitigation actions are currently proving effective. Strong global demand for logistics is also driving higher freight costs, increasing the need for expedited freight solutions. On the right side of Slide 5, we show how strong global demand for semiconductor chips is running well ahead of supply, which is extending our procurement cycles for pressure. Demand for chips is being driven by strong economic activity across multiple sectors as well as the higher demand for electronic devices to support a global hybrid work environment. Because our products are among the most sophisticated on the markets and highly visible, semiconductor chips are important components in our devices. While we have detailed plans to procure the semiconductors, needed to fulfill our strong demand, continued execution to keep the model. Additionally, broad brushed economic growth is driving up the cost of key input materials, such as steel, plastics, and other electronic components.

Jeff will discuss the financial implications of these factors in his comments. Before I hand the call over to Jeff, it's worth repeating that we're seeing a solid demand environment for our differentiated hardware, services, and software solutions. -- Focus with managing global supply chain complexities to fulfill customer demand. Over to you, Jeff.

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Thank you, and good morning, everyone. I will begin on Slide 6 with a more detailed discussion of our second quarter results and key variances versus the prior-year period. Where applicable, I will also make comparisons to our first quarter results for 2021. Total revenue for the second quarter of 2021 was $944 million, an increase of over second quarter 2020 of 6% as reported and 2.5% excluding a foreign currency benefit of $46 million and $16 million in back from the divested business. Adjusted for foreign currency and divestitures product revenue increased 5%, service increased 2%, and software results --. During the quarter, approximately $30 million of revenue was delayed due to extended transport time. This primarily impacted our Americas Banking segment and reduced total revenue growth by approximately 300 basis points. On a sequential basis, total revenue was unchanged.

Non-GAAP gross profit for the second quarter was $262 million or a decrease of approximately $2 million versus the prior-year period on lower gross margins of 27.7%. Gross profit in the prior year included approximately $17 million benefit from non-recurring cost saves. Service margins declined 130 basis points versus the prior-year period, which benefited from meaningful cost benefits of lower labor and spare parts usage during the second quarter lockdown. When compared with our expectations, second quarter service margins were in line or slightly higher than in the first quarter of 2021. Product gross margins were down 350 basis points versus the prior-year period, due primarily to $8 million of higher freight and input costs and $5 million from an unfavorable geographic mix of banking products. In addition, the aforementioned revenue delays contributed to the unfavorable mix.

Software gross margins increased by 170 basis points versus the prior-year period due to better contract management and resource utilization. On a sequential basis, gross profit margins declined 130 basis points in the quarter due to the unfavorable mix and higher freight costs. Operating expense of $199 million for the quarter increased $33 million versus the prior year $5 million sequentially. When compared with the prior year, key variances include normalization of non-recurring SG&A cost savings from the second quarter 2020 lockdown of approximately $16 million. Planned investments to support the company's growth initiatives in managed services and software of approximately $8 million and unfavorable foreign currency headwinds net of DN Now cost reduction. When compared with our first quarter operating expense increased slightly, due to the timing of our growth investments. The net result was operating profit of $63 million and operating margin of 6.7% in the quarter. The same trends drove adjusted EBITDA of $86 million and adjusted EBITDA margin of 9.1% in the quarter.

Starting on Slide 7, I will discuss our segment highlights. Eurasia Banking product order growth increased 39% versus the prior-year period as we realized market share gains from our next generation DN Series ATMs. Segment revenue of $326 million decreased 3% versus the prio-year period, and 7% after adjusting for foreign currency benefit of $24 million and a $12 million in bank from these divestures. We experienced lower product revenue in the Mediterranean countries, which was expected. Segment gross profit decreased to $94 million year-over-year and included foreign currency benefits of $10 million and divestiture impact of $4 million. Gross margin up 28.8% was down 150 basis points, a certain cost savings from the prior year did not recur as previously stated and our revenue included a higher mix of lower-margin geography.

On Slide 8, Americas Banking product growth order -- product order growth was very strong and increased 44% versus the prior year, led by market share gains DN Series. Segment revenue decreased 6% to $313 million, primarily because of lower product revenue in North America, which included the aforementioned $30 million delay. When compared with our expectations Americas Banking is proportionally affected because of the physical distance between our customers and our primary manufacturing facilities for DN series ATMs which are located in Europe and Asia. Backlog in Americas Banking grew 45% year-over-year. Segment gross profit of $89 million was down $18 million due to cost savings in the prior-year period which did not recur an unfavorable geographic mix and higher freight and input costs, which I mentioned previously. The unfavorable mix reflects a larger revenue contribution from South America.

Moving on to Slide 9, our retail segment delivered a very strong performance. Product order growth of approximately 40%, was led by our self-checkout solution. Retail revenue of $305 million increased 38% as reported and 28% after adjusting for $19 million foreign currency benefit and the divestiture headwind of $1 million. Sales of our point of sale and self-checkout products, both increased significantly versus the prior year period. As our installed base increases, we are also generating growth from our services and software business. Retail gross profit increased 45% to $75 million. Due primarily to revenue growth, gross margin 140 basis points, reflecting increased revenue and a more favorable mix of self-checkout and solution.

On Slide 10, I will summarize our free cash flow performance and update our leverage and debt maturity schedules. Unlevered free cash flow used in the first half of $62 million increased versus the prior-year period, due to decline in EBITDA, higher inventory investment needed to support strong demand, and increased safety stock, virtually offset by a reduction in the transformation and restructuring thing. The increase was slightly higher than our expectation. The company's cash balance as of June 30 reflects seasonal cash use. The company ended the quarter with $500 million of total liquidity, including $238 million of cash in short-term investments. At the end of the quarter, the company's leverage ratio was four times, well below our covenant maximum of six times. On the right side of this slide, we update our gross debt levels as of June period and no material debt maturities until November of 2023.

Slide 11 contains our updated outlook for 2021. Revenue of $4 billion to $4.1 billion is unchanged because of our strong order book and foreign currency benefits working to offset longer logistics scheduled with strong. We are modifying our adjusted EBIT followed by approximately $25 million to a range of $455 million to $475 million to reflect inflationary pressure on materials and in particular higher freight costs. Our free cash flow outlook is $120 million to $140 million and includes our revised profit outlook plus investments safety stock as global supply chains tight. Our outlook continues to reflect a material improvement in the Company's EBITDA to free cash flow conversion rate from 12% in 2020 to approximately 30% in 2021.

For our concluding remarks, I'll hand the call back to Gerrard.

Gerrard Schmid -- President and Chief Executive Officer

Thanks, Jeff. I'll close our call with Slide 12 and two key messages. First, our growth strategy is showing strong progress and we're experiencing solid customer demand for our digitally enabled and differentiated solutions with product orders up 40% and backlogs increasing 20%. We are realizing broad based market share gains with our DN Series ATMs. Customer adoption of our AllConnect Data Engine is accelerating. We're winning business contracts and adding to our payments capabilities. Our retail business continues to deliver strong growth from self checkout solutions and high service tax rates. Collectively, these accomplishments give us a high level of confidence in the enduring value of our solutions and our company's transformed business model.

The second key message is that Diebold Nixdorf and many other technology-based companies are confronting a more challenging supply chain environment globally. Our procurements, manufacturing, and operations teams are doing exceptional work to mitigate longer lead times on semiconductors and other components, prolonged transportation schedules, inflationary pressures on direct materials such as steel, plastics, and other electronics, and we will continue to work diligently with our suppliers to manage the volatility. These conditions plus higher freight costs are leading the company to adjust our 2021 outlook for profit and cash flow.

However, in closing, we are pleased with the company and the team's progress and executing our strategy of providing differentiated solutions that are yielding strong order growth as well as our ongoing efficiency gains in our business model, our improved cost discipline through our DN Now program, all of which are leading to strong free cash flow growth, high return on investment capital.

This concludes our prepared remarks and I'll hand the call back to the operator for our Q&A session.

Questions and Answers:

Operator

[Operator Instructions] Our first question today comes from Matt Summerville from D.A. Davidson. Matt, please go ahead. Your line is now open.

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

Thanks. Excuse me, morning, couple of questions. First on the negative side of things. The $25 million EBITDA take-down, it sounds like you're instituting some actions to try and mitigate that. So I guess I'm curious maybe what that gross number looks like in the $25 million is a net number and what are you doing in terms of mitigation and what can you do with price capture as well to help offset some of that.

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Yeah. Good morning, Matt. So at a high level. Let us break it down into two components, direct material inflation, as well as freight inflation. On the direct material side, we continue to work very aggressively with our supplier base to look for various mitigating efforts. I tell you that we can mitigate meaningful amounts of inflationary pressure materials that where it's more of a challenge for us right now is on the freight side there, just given the massive demand for C-capacity in particular, we're seeing more pressure on that front. In terms of the second part of your question, we continue to look at our entire portfolio of the solutions and we'll continue to execute on adjusting our value to our customers to reflect a clearly increasing inflation environment.

Gerrard Schmid -- President and Chief Executive Officer

Yeah, and the other thing I would add, Matt --

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

I'm sorry, Matt. So this Jeff. A majority of our adjustments related to logistics. We have time and we have the people that are working on the inputs and the other aspects of price increases. There is nothing we can do to though, but we're going to have to pay that to get the product discretionary two we're going to have to pay the rate cost to do that.

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

Got it. Obviously orders up against I would assume a somewhat easy comparison relative to 2020 with that 40%. So maybe I was wondering if you could put that into context maybe what the comparison would have looked like versus the second quarter of '19 and then relative to I guess what kind of outgrowth do you feel you're delivering relative to underlying demand in both banking and retail to help illustrate your share gain? Thank you.

Gerrard Schmid -- President and Chief Executive Officer

Yeah, Matt, I would say the most important comment I made in my earnings script today related to the absolute dollar value of sales activity relative to oil price and this was the highest level of sales activity in four-years. And while the comp against last year was easier, what's more important is we are withstanding relative that I think is the best in the past few years slightly higher than any other quarter. And it was broad-based across Americas Banking, Eurasia Banking, and Retail, in all cases each of those segments delivering roughly 40% growth some higher some a little bit around that range. And we can see clear evidence that on the banking side, we're winning market share because where we're seeing the growth coming from this from the news in our installed base and also net new customers at the start we bought there ATMs elsewhere. And we're seeing that broad-based across as I mentioned earlier on at the top 10 bank in the U.S., the top 25 bank in the U.S. as well as several examples in Eurasia, Latin America, and elsewhere.

And on the retail side, while we are benefiting from a broad expansion for self-checkout adoption we also see market share takeaways as we mentioned earlier on the very important win for us would be large U.K.-based retailer with 1,000 stores where we displaced a competitor. So I think there is meaningful evidence emerging that our products are sharing very, very well and adding value to our customers.

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Yeah. The other thing I would add to that Matt would be when we looking at -- when we look at order entry for the second quarter, don't forget, we had strong product revenue in the back half of 2020. So, and we're comping against that and we're also seeing a very strong conversion in the DN Series. So the product side of the equation is strong, which increases the issues relative to supply chain and moving logistics, but also don't forget that market share gains contribute to services contract base and after the three-month lag to service contract. So strong product unit growth results in strong services contracts base.

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

I appreciate that. Thank you, guys.

Operator

Thank you. Our next question comes from Paul Cheng from JP Morgan. Paul, please go ahead.

Paul Chung -- JP Morgan -- Analyst

Hi, thanks for taking my questions. So can you talk about the DN Series win at a top 10 bank in the U.S.? What kind of drove that way and if you could expand on pricing there as well and how that impacted the win and what particular features of the DN Series is attracting customers and displacing competition? Thanks.

Gerrard Schmid -- President and Chief Executive Officer

Yeah. Good morning, Paul. So the predominant capability secured the win for that top 10 bank was not pricing, it was our cash recycling capability. [Indecipherable] generation technology there and feel that we are distinctively markedly using cash recycling that we own our own in that space. That particular top 10 banks is looking to reduce their overall cash handling costs and cash recycling these have been important to enable us to do that. What we've seen in this quarter was an order that was several hundred machines and scale. We expect that to expand quite substantially with that top 10 banks. So I think we are very, very well-positioned and that particular institution was not a historical customer of Diebold Nixdorf. And as I said, pricing was not a meaningful factor in the equation.

Paul Coster -- J. P. Morgan -- Analyst

Got you. And then just on gross margins, how should we think about the second half of the year? The push out of $30 million in revenues. Does that provide you some scale benefits in the second half and any comments on seasonality of gross margin that would be helpful. I assume and freight cost way in the second half and maybe start to normalize maybe in '22 is that the right way to think about it?

Gerrard Schmid -- President and Chief Executive Officer

Yeah, I would say, let's take the freight cost first, as we expect that to continue through the balance of 2021 and especially as we need to get through the holidays, right. And that's what's foggy the -- especially from Asia and we think it's going to last sometime through the Chinese New Year and then we'll get some relief, and hopefully, it will normalize. But we expect it to continue to bounce in 2021. From a margin perspective, we do anticipate and based upon the strong order entry we're receiving and we're going to see strength and product revenues in the back half of the year. Even comparing to the strong back half and product revenue, we had last year and it's two fold, its banking and it's also the strong product growth in retail. So one of the things to remember in the back half of the year, we do have a headwind in logistics, but we have a tailwind and conversion to DN Series from Legacy ATMs. And our expectation is that we won't see a lift in back half margins of prior year margins, because of that mix into self-checkout from POS and from Legacy ATMs and the DN series ATMs.

Paul Coster -- J. P. Morgan -- Analyst

Okay, great. And then last question on the retail side, very nice self-checkout contribution. How do we think about the seasonality for this business as well? Do you still have expectations for seasonal second 4Q and your order growth was quite strong, what's the timing of that recognition for that business as well? Thank you.

Gerrard Schmid -- President and Chief Executive Officer

Yeah, I would say, it's the same as what we just talked. We continue to see strong demand in self-checkout, but I think we can say it's a little above our expectations for both POS and self-checkout. We anticipated that the self-checkout demand will continue for some time. That's not only new self-checkout, we are also seeing market share gains in self-checkout. And self-checkout has the same unit ATM has, as we install self-checkout is extremely high conversion to services contract basis. So we continue to see as we roll in -- as we rollout self-checkout we're seeing high 90% attachment to service contracts.

Paul Coster -- J. P. Morgan -- Analyst

Okay, great. Thank you.

Operator

Thank you, Paul. Our next question today comes from Justin Bergner from G-Research. Justin, please go ahead.

Justin Bergner -- G-Research -- Analyst

Good morning, Gerrard. Good morning, Jeff.

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Good morning, Justin.

Gerrard Schmid -- President and Chief Executive Officer

Good morning, Justin.

Justin Bergner -- G-Research -- Analyst

A couple of questions. The reduction in the EBITDA guide due to supply chain pressures, is that essentially all within the Americas Banking segment or is there a modest piece of it that's relevant to Eurasia Banking and Retail?

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Yeah. So let's break it down to see different pieces, Justin. You've heard us say earlier on that we're seeing inflationary pressure growth in direct materials, but as well as we just direct material is pretty evenly spread across a whole three segments. However, it is a smaller part of the inflationary pressure given that we have procurement leverage to offset some of that. In terms of logistics cost, we do move goods around the world but in that particular case Eurasia -- sorry Americas Banking was just reported segments because of the sea container capacity constraints between Europe and U.S. growths.

Justin Bergner -- G-Research -- Analyst

Okay, understood. Now with respect to the shipments, I mean you talked about having to some cases pay for expedited freight, I mean can you delay some of these shipments with customers in order to avoid having to pay for expedited freight. I mean is that feasible option or not so much?

Gerrard Schmid -- President and Chief Executive Officer

Yeah, Justin, as Jeff said earlier, based on everything we're hearing from the market, we anticipate the logistics constraints globally. If you -- like the Chinese New Year. So we clearly continued to work with customers to make sure we meet their needs, softening was important part here. In some cases, we use expedited shipping for spare parts and other activities and clearly we are minimizing expedited shipping for wholesale ATMs given the weighted ATMs, but we have some flexibility to move things around, but I wouldn't say we're aiming to push things up to Chinese New Year.

Justin Bergner -- G-Research -- Analyst

Okay. And then with respect to the guide on the revenue side, I mean what can happen at this point to sort of allow you to hit the high end of the guide and I mean is it effectively the case that the volume of shipments is a little bit lower because there is an inflationary price offset, aiding your revenue or just help me understand sort of the contours of the maintained revenue guide if you can?

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Yeah, the revenue guide we are seeing a little bit of a tailwind from FX and it's built into the model but to achieve the revenue guide and this is why we are very highly confident we can do this. It's all based on demand and the ability to deliver that product to the customer base and our segments do a great job of managing that process. Once we manufacture a product and it belongs to the segments and the segments do a wonderful job in there in to do this, you have to think through that to get those products whether it's retail or banking to the customer for revenue recognition. So I -- we feel strongly only thing right that we are really dealing with here is what we've already talked about is the lead time and logistics, especially for the U.S.

Gerrard Schmid -- President and Chief Executive Officer

Yeah, broad-based supply chain volatility is really the only inhibitor to hitting our revenue guidance because the demand is on it.

Justin Bergner -- G-Research -- Analyst

Okay. Just one last one, any sort of update on sort of your debt financing priorities given the favorable interest rate environment? I know you've talked about in a couple of past calls.

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Yeah, reminder in our secured notes, there is a snowball provision taken in extensive to do anything before July of 22. Now that's based on interest -- remaining interest to July 22, so every day that number declines. We monitor the markets there are some things we've talked about, we will be having discussions with lenders and potential investors over the next 12-months timing. We're not ready to announce anything relative to timing, but we certainly are interested in the market. We will be rebalancing obviously great interest purposes talk about that ad nauseam in prior periods. So this will be both with the U.S. banks and investors and European banks and investors. So we'll be doing the groundwork over the next 12 months and when it's time to pull the trigger we'll pull the trigger.

Justin Bergner -- G-Research -- Analyst

Great, thank you.

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Sure.

Operator

Thank you. Our next question comes from Kartik Mehta from Northcoast Research. Please go ahead.

Kartik Mehta -- Northcoast Research -- Analyst

Thank you. Hey, good morning Gerrard and Jeff. Gerrard or Jeff can you --

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Good morning.

Kartik Mehta -- Northcoast Research -- Analyst

Good morning. Any concern at all that delays could cause a loss in orders. It doesn't sound like the delays are that much, but as we move out years -- through the year as we get into the fourth quarter, any concern that the orders could be delayed into 2022 or you could lose them?

Gerrard Schmid -- President and Chief Executive Officer

No, Kartik. We don't see any risk at this stage of losing orders and we worked very closely with our customers, our customers are acutely aware of these logistics constraints. We're not in this on our own, right, it's impacting every other. Probably look at the front page of the business section, the Wall Street Journal today book as well. So, no, I don't see that as being a likely outcome unless there is a material change in circumstances.

Kartik Mehta -- Northcoast Research -- Analyst

And any thoughts about potentially moving some manufacturing to the U.S. or do you think this is temporary and really no reason to kind of change of where your manufacturing or higher manufacturing?

Gerrard Schmid -- President and Chief Executive Officer

Yeah, Kartik. We are actually well underway sort of increasing our operational capacity in the U.S. to create some additional flexibility on our end to offset some of this pressure and we expect those operational gains to start to support us as we move through the second half of the year. So that certainly will used a little bit.

Kartik Mehta -- Northcoast Research -- Analyst

And that should help in 2022 as well, right, Gerrard?

Gerrard Schmid -- President and Chief Executive Officer

That's a bit right. But in 2022, we also expect logistics could be easing as well so but absolutely.

Kartik Mehta -- Northcoast Research -- Analyst

And then just one last question on one of the slides you talked about the Allconnect and the success you're having there. I'm wondering if you could talk about maybe the financial success that could have if it's already happening or right now you're still in investment mode for that and it will take up next year or the year after when really we'll start seeing the benefit?

Gerrard Schmid -- President and Chief Executive Officer

We are, Kartik. We are already starting to see some of the benefits of it as I said in my prepared remarks. We saw a 35% growth sequentially in the connection times and so we now have over 90,000 devices connected. Recall though that we have a small contract base that's north of 500,000 machines, so we're still relatively early in that journey. Yeah, that being said, for every device that we immediately start to see the benefits. So what you start to see is the improvements happened somewhat slowly just given that machine by machine but absolutely have starting to happen as well. We're seeing reduction in calls for each device connected and that's what gives us the confidence behind our earlier comments around longer-term expansion of our services margins is seeing that already.

Kartik Mehta -- Northcoast Research -- Analyst

Thank you very much. I appreciate it.

Operator

Thank you. Our next question comes from Ana Goshko from Bank of America. Please go ahead. Your line is open.

Ana Goshko -- Bank of American -- Analyst

Hi, good morning. Thanks very much. I have a few question on items impacting cash flow or free cash flow. So ahead of free cash flow guide was revised down intended but the EBITDA, but -- and there is reference to working capital used for inventory purchases as a result of the longer lead time. And is that expected to rebound or resolved in the second half, because I would think that that would potentially continue to be a drag on free cash flow and into the second half of the year? And then also just an update on what you're expecting for the total restructuring and other kinds of DN Now or transformation costs for the year?

Gerrard Schmid -- President and Chief Executive Officer

Yeah. Hi, Ana. From a transformation restructuring payments, it's still $59 that we anticipate spending in '21. Yeah, we're going to be up in inventory. We anticipate that mainly because we have -- in certain areas, we have lifted our restrictions on safety stock. We will have that inventory and we more than likely because of high demand will have more in-transit inventory at year-end than we would normally have. So, in all when we are modeling today is to be up somewhat in inventory, there are other triggers we will halt to offset that to get to where we have guided relative to cash flow. We haven't done for all the detail, but the bigger portions of it are they were anticipating more EBITDA as for our guidance and increase in inventory working capital. By the way that inventory working capital obviously is short-term and will reverse in the model in '22, so an increased '22. So what where we're at right now is that what we saw a deterioration in EBITDA and inventory we stick with the $50 million of restructuring payments in all other contributed low we will have somewhat a net positive impact against the one so to the guidance we provided today.

Ana Goshko -- Bank of American -- Analyst

Okay. Well, thank you for that.

Gerrard Schmid -- President and Chief Executive Officer

Sure.

Operator

Thank you. Our next question comes from Marla Backer from Sidoti and Co. Please go ahead. Your line is open.

Marla Backer -- Sidoti & Company -- Analyst

Thank you. So you talked earlier about one of the characteristics you see on the banking side in terms of driving some market share gains that you're experiencing being the cash recycling capability. Can you talk a little bit about what you're seeing in terms of projected consumer customer uptake on the video-enabled capability of the ATMs?

Gerrard Schmid -- President and Chief Executive Officer

Good morning, Marla. So video capability is certainly an attractive feature, but it seems to be predominantly focused on the U.S. and consumer and more notably among some of the mid-sized U.S. banks. We don't see broader adoption quite frankly due to different consumer preferences in Europe and other parts of the markets. So certainly unless material contributor then we've been for recycling will be broad business.

Marla Backer -- Sidoti & Company -- Analyst

Okay. I had --

Gerrard Schmid -- President and Chief Executive Officer

So, we are seeing however, customers within the U.S. market for that product.

Marla Backer -- Sidoti & Company -- Analyst

Okay. And in terms of you over this call and I think on the last call, you've talked about seeing service contracts growing in terms of the percentage of new product revenue. Can you give us a sense direction directionally what you're seeing in terms of that conversion like what percent of contracts for products being written today also include the service component versus, let us say, over the past two years?

Gerrard Schmid -- President and Chief Executive Officer

Yeah. So it's not. Let me start the answer and I'm sure, Jeff will join us as well. Since we do not write any market where we have our own direct services organization, the tax rate was services when we deploy hardware is exceptionally high typically north of 90% with a very even higher recurring renewal rate for our service contract. So, yeah, as Jeff was saying really on part of why we're so encouraged by our very high product growth is that fuels the higher services revenues. And we're seeing the model be pretty consistent, it's been pretty consistent for the past several quarters we could what's giving us confidence as we look into future quarters that our service revenue will flow once these machines are deployed.

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Ans it's even higher end self-checkout, I mean it's self-checkout is extremely high. We just review that in fact this week. Point of sale is more, it's less complicated device and our attachment rate for its services and point of sale is somewhere around 30%.

Marla Backer -- Sidoti & Company -- Analyst

And would you say that those metrics are higher today than they were two -- let us say two, three years ago, because service to service component is just becoming more important part of the overall business?

Gerrard Schmid -- President and Chief Executive Officer

Yeah, Marla. We've been in a lot of focus on making sure that services is one of our differentiated propositions. But as I said earlier, our attach rates in Banking as generally always been in the '90s. We've seen that largely be stable sometimes a little bit higher. As Jeff said on the retail front, we've seen a very, very strong uptick in tax rate and self-checkout is to more complicated bodies and steady around 30%. So I wouldn't say has been a material change in the tax rate in the few years. It differs by-product but the experience has been pretty consistent.

Marla Backer -- Sidoti & Company -- Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from Matt Bryson from Wedbush Securities. Matt, please go ahead. Your line is now open.

Matt Bryson -- Wedbush Securities -- Analyst

Good morning, and thanks for taking my questions. I've got two. The backlog growth number of 20% and the overall growth rate of 40%, those are both really impressive metrics. But I mean obviously other than retail, it's not flowing through and current revenues when you're looking for 35% growth for the year. It is not in 2021, I guess, typically I would think about that at some point, certainly your product revenue growth, your product revenue is growing at something like that rate once you start to convert those orders in the revenue. I guess, doesn't wait way to think about things and what's the timing on that when you see that conversion?

Gerrard Schmid -- President and Chief Executive Officer

Yeah, let me lead off for us do a couple of high-level comments. So as Matt pointed out that net 40% was against the lighter weight what's more important for us is the absolute level of auditors were strong. We fully expect to show very strong product revenue this year as we fulfill these orders. I can see slowing in Q3 and Q4. Yeah, obviously we -- I can tell you, as Jeff said earlier on, we have a very, very high degree of confidence in our revenue guide for this year, provided we can fulfill new orders as we would logistics and supply chain complexities.

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Yeah, I agree, and it's -- as I said earlier, we -- don't forget, we've had strong especially fourth quarter last year. We've had strong product and because of our lead times and the relationship to your question relative to order entry and delivery, we track that by customer by product. So we have high visibility in all those orders as and when they're going to be delivered. We get to a certain point in the and the segments will remind us that basically we've got all we're going to have for the year. And so when we look at our order entry we can directly relate that to revenue recognition. So we track that, we track it monthly, we track it daily. There is a high level of confidence to Gerrard point, that's why we can call out $30 million for the second quarter because we have that for revenue recognition in the second quarter when it didn't happen it's adjusted out of our forecast. So we track conversion of order to revenue recognition very closely as we track the conversion of installed ATMs and self-checkout in the contract base. This is a -- the base of this model is very unit economics selling.

Matt Bryson -- Wedbush Securities -- Analyst

Thanks. Again for taking question, Jeff, I think you much on call it as we shift over to DN Series you see some benefit on the product gross margin side, which is exceeding that important costs notwithstanding or I guess my question there is, you talked about 70% I think investment costs 70% orders are for the DN Series products. I guess can you give us some color on what the percentages in terms of shipments and when timing wise we might expect shipments percentages to reflect that 70% or percentage? And then lastly, just in terms of the magnitude of benefit or how we should be modeling the benefit, any color at all in terms of how that flows into the gross margin line when you're getting closer to fully transition to the DN Series parts?

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Yeah, well, we're in the middle of very high turnover from legacy ATMs to DN Series and then the reason being as Gerrard discussed earlier, it's better equipment. It's a better ATM. It's more efficient. It's very self-diagnostic -- all the reasons it's connected to all ends. It's very efficient and it's more efficient to manufacture, that's what we'll say. I mean we have competitive issues here and we're not going to give all of our information, but let us just say it's a better ATM that is more economical to --

Gerrard Schmid -- President and Chief Executive Officer

And I would say, just give a bit more color on that. Jeff mentioned that the conversion rate is a slight as you start to look to H2, you will start to the year unfold in our product gross margins as DN Series becomes a bigger and bigger percent of what we're shipping. So that's certain forms part of our view around our confidence around EBITDA range in our gross profit rate and that we've made the statement that DN Series is going to be in excess of 50% of shipments this year and you can imagine with the 20% percent of the order book in the first half. That is going to flow through product revenue and product gross margin in the second half and then have an incremental benefit as it reaches a higher level in 2022.

Matt Bryson -- Wedbush Securities -- Analyst

Thanks for the color.

Gerrard Schmid -- President and Chief Executive Officer

Sure.

Operator

Thank you. Our next question comes from Rob Jost from Invesco. Please go ahead, Rob. Your line is now open.

Robert Jost -- Invesco -- Analyst

Hi, thanks. Wanted to follow up on that last question, have you quantified the emerging legacy ATM?

Gerrard Schmid -- President and Chief Executive Officer

For comparative reasons, we are not going to Rob.

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Obviously for internal modeling purposes, we have all that information. We're just -- it's just not something we want to discuss. We don't want to discuss the unit cost of our ATMs.

Robert Jost -- Invesco -- Analyst

Sure. OK. Wanted to make sure. But as I said in if we talk about the checkout, the comment on slide is that this is regarding higher software and services. And so, but in the follow up expanded like a business I guess I just wanted to, if I could dig in a little bit here and understand is like the self-checkout. Is there something unique about what you selling now that is crowding I guess software, it sounds like service are very very --.

Gerrard Schmid -- President and Chief Executive Officer

Rob, you broke up there a little bit. So I will take the crack at answering that. So, historically, if you go back a couple of years self-checkout was a much more part of the retail portfolio we see exception strong builds on the front it also historically services attach rates and point of sale were low in the 30% range. Self-checkout is a substantially more complex device which is what's driving a much higher service tax rate in our favor. The tax rate is typically north of 35%. So a heavy incremental self-checkout we've seen we sell increasingly drives up our recurring services revenue. So we fully expect to see ongoing strong growth self-checkout services revenue line. Software also gets back below as our customers look to deploy both point of sale and self-checkout technologies do lined us for software to power those devices. So again this is a model where strong activity on the hardware front full-screen activity on services and software.

Robert Jost -- Invesco -- Analyst

Okay. No, that's enough for the question. And then my last question was just around the pressure you faced in both on the logistics, as well as -- I heard you say that you expect this to Alaska grew the New Year, a Chinese New Year, I'm thinking around where you think it might mitigate a little bit, but do you, which way are things trending at this point, are they still going up our unit stable environment. I'm just trying to get a feel for how to think about the next quarter?

Gerrard Schmid -- President and Chief Executive Officer

Yeah, so let me break it into two different pieces. On the freight side, the inflationary pressures are high. We're modeling a modest uptick above what we're still in Q2 to the balance of the year on freight costs we should be quite high and then are anticipating them to abates. Yeah, hopefully around the Chinese New Year, so that's one factor. The other factor which I commented on in my prepared remarks is semiconductor demand is exceptionally high, right. I anticipate that that may tighten through the year but rather than abates. And that one may tighten somewhat further into 2022. Yeah, it's a much smaller inflationary pressure on us. That's one from availability pricing for us and inflationary aggressive pricing for us. So while a lot of this call has focused on the logistics side, I would just broadly say the overall supply chain environment is probably -- not probably, definitively more complex than we've seen it in years.

Robert Jost -- Invesco -- Analyst

Okay, thank you.

Operator

Thank you. Our final question today comes from Barry Haimes from Sage Asset Management. Please go ahead, Barry. Your line is now open.

Barry George Haimes -- Sage Asset Management -- Analyst

Great, thanks for taking my questions. So first one just it's not clear to me on these additional freight and other costs as to whether and how aggressively you're trying to raise price or put in surcharges to offset. So could you comment on that and to the extent you are trying to do that? Is there a point in time when you think you'll catch up on a dollars basis on price cost? That's the first question.

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Yeah, Barry. Yeah, obviously for competitive reasons I will be a little bit circumspect on that particular question, but I can tell you that across the board, across hardware services and software, yeah, we have implemented various measures to offset a bunch of this pressure that we're seeing. The flow-through effect of those measures started to be felt more notably in 2022. This timing of orders when they were priced, when things will be built, and when revenue is being recognized. So yeah, I'd say more broadly, yeah, we're bearing some of the inflationary at the second half of the year, we're continuing to take the incremental cost measures to offset that. But on the pricing front that tends to flow through into the following year.

Barry George Haimes -- Sage Asset Management -- Analyst

Got it. Second question is, just getting some of the free cash flow pieces for next year. And so without forecasting on you from and getting into any kind of an earnings forecast, but just in terms of other changes. So that the $50 million on the restructuring costs, as I recall, doesn't repeat next year. So that would be a 50 benefit and the $25 million reduction we've seen an EBITDA given that you think things might normalize earlier in the year. So again, everything our would that come back next year and then are there any other free cash flow pieces that we should be thinking about?

Jeffrey Rutherford -- Senior Vice President and Chief Financial Officer

Yeah. Yeah and it's a good question. We are not only assuming that in '22 at some point in time the availability of chiro capacity will improve, but then the cost will adjust also. So based on that, yes, it would come back, right. And then from a cash flow forecast perspective, we talked about it will be a little heavy in inventory than we originally modeled. That should come back, right. And also with what Gerrard said, relative to DN series final assembly capabilities closer in the U.S. that would help release some of the pressure on inventory. So we would assume that EBITDA would benefit and we would see a reduction and the long position we're taking in certain inventory categories. We will get that back to write the restructuring goals to zero. And then, ultimately, and this is the question I received earlier as we would anticipate if the debt markets hold that we'll be able to do something to reduce our interest payments going forward some time and sometime in '22, but that's yet to be determined and is dependent upon market conditions and availability within the market.

Barry George Haimes -- Sage Asset Management -- Analyst

Got it. That's very helpful. I appreciate it and last two questions, one is you've alluded, a couple of times to the extra inventory this year that you had to put on. Could you quantify what that number is? And then lastly, if not for the supply chain issues based on the strong order book would your sales guide has actually gone up instead of staying flat on the reforecast or is a lot of the order strength more for delivery in '22 and it's really more of a '22 impact? Thanks very much.

Gerrard Schmid -- President and Chief Executive Officer

Yeah. So the amount of inventory and I give to you as our second quarter was in the $20 million range, that $20 million to $25 million of range. And we would anticipate that level may continue through the end of the year. Yeah, the other question is a very interesting question. And I'm not going to -- I'm not going to say -- I'm not going to answer the way you asked, here's the way I'm going to answer, if we didn't have any supply chain issues we were anticipating having a very good points, above our own expectations.

Robert Jost -- Invesco -- Analyst

Got it. Fair enough. Thanks very much. Appreciate all the insights.

Gerrard Schmid -- President and Chief Executive Officer

Okay.

Operator

Thank you.

Gerrard Schmid -- President and Chief Executive Officer

I just want to say thanks to everybody for joining today's call and if you have follow-up questions please reach out to our Investor Relations. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 67 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

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

Paul Chung -- JP Morgan -- Analyst

Paul Coster -- J. P. Morgan -- Analyst

Justin Bergner -- G-Research -- Analyst

Kartik Mehta -- Northcoast Research -- Analyst

Ana Goshko -- Bank of American -- Analyst

Marla Backer -- Sidoti & Company -- Analyst

Matt Bryson -- Wedbush Securities -- Analyst

Robert Jost -- Invesco -- Analyst

Barry George Haimes -- Sage Asset Management -- Analyst

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