Diebold Nixdorf Incorporated Common stock

Good day, and welcome to the Diebold Nixdorf-hosted second quarter 2020 earnings call. At this time, I would like to turn the conference over to Mr. Steve Rostec. Please go ahead.

Thank you, Olivia, and welcome everyone to Diebold Nixdorf's second quarter earnings call for 2020. Joining me today are Gerard Schmidt, President and Chief Executive Officer, and Jeff Rutherford, our Chief Financial Officer. For the benefit of all of our listeners, we've posted slides to the investor relations page of DieboldNixdorf.com, which will accompany our prepared remarks. And later this afternoon, a replay of our webcast will be made available on the same IR website. Slide two 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. In the supplemental schedules of our slides and the earnings release, we have reconciled each non-GAAP metric to its most directly comparable GAAP metric. On slide three, we remind all participants that certain comments may be characterized as forward-looking statements and that there are a number of factors which could cause actual results to differ materially from these statements. Additional information on these factors can be found in the company's SEC filings. Participants should be mindful that our forward-looking information is current as of today, and subsequent events may render this information to be out of date. And now I'll pass the mic over to Gerard.

Good morning, everyone. To support our recent debt refinancing, we pre-released results for April and May a few weeks back, and today's comments will build on those. Our June results reinforce a solid quarter. despite revenue headwinds primarily from COVID-19. On slide three, I'll make a few comments regarding our mid-year update. Our business showed strong resiliency this quarter, reinforcing the operating rigor and transformational work done to strengthen the company. Second quarter financial results were very good, especially when considering the widespread lockdowns from the COVID-19 pandemic and significant disruptions to economic activity. In this challenging environment, I'm extremely pleased to say that our operations were not impacted in a material way and our profits were materially higher year over year, led by substantial gains in margins. And despite difficult conditions, especially in April and early May, customer orders for our solutions continued with only modest year over year declines. Additionally, our visibility into booking levels for the second half have strengthened over the past several weeks. We are performing well in delivering essential services to our banking and retail customers. And of course, we're continually reviewing and modifying our practices to ensure that we protect the health and well-being of our employees against the backdrop of complex and different government approaches globally. The cadence of business activity improved as the second quarter progressed, and we experienced a steady rebound in self-service transactions. to the point where a number of markets have returned to pre-COVID levels. And we remain focused on executing our DNR transformation initiatives and incremental cost actions. Our results underpinned a successful capital raise and debt refinancing transaction in July. We issued 1.1 billion of secured notes to the US and European investors, and both offerings were oversubscribed. Jeff will take you through the detailed benefits of these transactions. However, the key takeaway is that we've extended our maturities by three years to create greater financial flexibility while reducing our cash interest expense for 2020 and improving our tax efficiency longer term. With the refinancing now complete, our priorities are focused on completing our DNR transformation and concentrating efforts on growth opportunities while sustaining the resiliency of our workforce. At the top of slide four, we reintroduce our framework for discussing the expected impact of the pandemic on our 2020 results. This was shared on our prior earnings call. We set an expectation for mild impacts to services and software revenue with more significant headwinds to product revenue. And we expected Q2 results would bear a disproportionate impact. Additionally, we signaled our confidence that gross margins would be improving as a result of our DNR initiatives and incremental cost actions. Our second quarter results, shown at the bottom of the slide, were squarely aligned with this framework. Excluding the impact of currency and divestiture-related activities, service revenue declined 11.8%, product revenue declined 30.7%, and software revenue grew 2.6%. Our services and product revenue reflect significant installation delays, resulting from the temporary closure of bank branches and retail stores in April and May, noticeable especially in Europe. As we moved through May and into June, installations increased nicely with far fewer delays. Software revenue growth in the quarter reflects solid demand for our software professional services activities. Turning to gross margins, our performance was strong and were modestly better than our expectations. Our gross services margin improved significantly by 470 basis points to 30.7% in the quarter due to our continued services modernization activities, as well as reduced costs from lower spare parts utilization and lower labor costs in some markets. Products gross margin increased in the quarter by 250 basis points versus the prior year, despite the drop in revenue. This highlights the substantial progress we've made in shifting to a more variable cost structure, as well as a beneficial mix of higher margin products. Software margins expanded by 940 basis points versus the prior year, reflecting strong performance from our software excellence program as well as a favorable mixed shift. A non-GAAP operating profit growth and operating margin expansion were both very strong for the second quarter. OP increased by 24 million year-over-year to 98 million, an increase of 32%, and the company's OP margin was a best-ever 11% for the quarter, a significant increase of 460 basis points versus the prior year. Our strong performance illustrates how our DNR transformation initiatives are hitting their stride and that both our business and our employees are exemplifying a high degree of resiliency in this challenging environment. As a result, we are reiterating our 2020 outlook for revenue and adjusted EBITDA and increasing our free cash flow outlook to a range of $20 to $30 million. Slide 5 illustrates weekly transaction data from more than 50,000 ATMs located in more than 20 different countries. While there is no doubt that the government quarantines in March and April had a dampening effect on cash transactions, by June we saw transaction levels improve in most countries to pre-COVID levels as these economies reopened for business. Equally important is that third-party research expects cash withdrawals to recover from 2020 levels and grow 2% annually through 2025. The continued growth of cash over the long term is a favorable indicator for our banking solutions. New business in the quarter was resilient as we experienced modest declines in Eurasia banking and retail orders and a much more mild impact in the Americas. Key wins in the quarter included initial orders for our next generation DN series ATMs at a top 10 and a top 25 financial institution in the United States. In Egypt, we sold a bundle of 350 DN series with remote monitoring and cash deposit software. While the sales funnel for DN series is building nicely, COVID-19 has slowed down some of the certification work occurring in customer labs. We are continuing to scale our certification activities and have increased the number of customer projects from 240 at the beginning of the year to 400 by the end of March and 475 as of today. On the retail side of our business, we were pleased to win a three-year contract for managed services and products contract with AS Watson, one of the world's largest health and beauty retailers. in support of the company's digital transformation strategy. We also secured a new $17 million managed services contract to expand self-checkout solutions at one of Europe's largest home finishing retailers. Continued business wins like these provide confidence in the long-term strategic importance of self-service solutions. On slide six, we highlight key components of our value creation journey. Starting on the left side, our initiatives to drive operating margin expansion, as we've articulated in the past, are well underway and include services modernization, software excellence, simplifying the product portfolio and manufacturing footprint, harvesting G&A efficiencies, and transforming and digitizing our back office functions of IT, HR, and finance. Over the past 18 months, We have demonstrated how these initiatives are driving higher profits and cash flow, even as we've experienced challenging business conditions due to COVID. So far, we have realized about 60% of the DNR targeted savings of $470 million. And our team remains keenly focused on realizing the remaining 190 million of savings between now and the end of 2021. Our cash payments for restructuring and DNR transformation actions are tracking to about $100 million for 2020, and we expect total program payments will be substantially complete by year-end, so that we will be realizing a higher conversion rate of adjusted EBITDA to free cash flow starting in 2021. Moving to the middle of the page, we continue to optimize the company's capital structure. Since Q3 of 2018, we have reduced our leverage from 6.5 times to mid-4s, and we remain focused on achieving a long-term target of three times net debt to adjusted EBITDA. As previously mentioned, we've extended over a billion dollars of maturities from 2022 out to 2025. Our recent refinancing included Euro-denominated debt, which improves our tax efficiency through improved deductibility of interest, which lowers our medium-term cash tax payments. Coupled with our cash on hand, we believe the company has sufficient liquidity to complete our DNR transformation and increasingly differentiate our solutions and pursue growth opportunities. Going forward, we will continue to monitor the capital markets for additional opportunities to further optimize our capital structure. Looking forward into 2021, we are very focused on the differentiation and enhancements we are making to our offerings to meet evolving customer demands. Within services, we have largely completed the work to eliminate lower-margin services contracts, and we're focusing on leveraging our market-leading product-related services, our IoT-enabled AllConnect data engine, and our managed services capabilities to grow services revenues. For products, we are well-equipped to gain share at Attractive Economics with our DN series and self-checkout solutions. Industry-wide self-checkout penetration remains in the mid to low single digits in our key markets, and there is significant runway in front of us for growth. To this point, the company shipped more self-checkout units in the first half of 2020 than we did in all of 2019. We're also looking to build on the recent software success as we see opportunities to increase our share of wallet with our dynamic software offering. Key opportunities include our multi-vendor software for ATM, our cloud-native debit platform, marketing, cash management, and forecasting modules. In the near term, we continue to monitor the evolution of COVID-19 across the globe. And while there may be some further country-specific contractions in business activity, our outlook contemplates a gradual recovery of economic activity through the end of the year. We're confident in the resilience of our model and anticipate somewhat stronger top-line momentum in 2021 and remain confident in our ability to create value for investors over the long term. With that, I'll hand the call over to Jeff Rutherford.