Diebold Nixdorf Incorporated Common stock

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

Thank you, Olivia, and welcome, everyone, to Diebold-Nixdorf's third quarter earnings call for 2020. Joining me today are Gerard Schmidt, President and Chief Executive Officer, and Jeff Rutherford, Chief Financial Officer. To accompany our prepared remarks today, we have posted slides to the investor relations page of dboldmixdorf.com. Later this afternoon, a replay of our webcast will be available on the IR website. Slide two of our presentation today 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've reconciled each non-GAAP metric to its most directly comparable GAAP metric. Over 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that our forward-looking information is current as of today, and subsequent events may render this information to be out of date.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 with that, I'll pass the microphone to Gerard.

Good morning, everyone. I'm pleased to join you today to discuss another solid quarter of financial results as we continue to deliver progress against our plans and demonstrate the resiliency of our model. I am pleased with how our business is performing, especially in the face of a dynamic and highly uncertain macro environment characterized by rising infection rates and lockdown restrictions in certain markets. Our company has learned how to manage through these challenges and support our customers. Against this backdrop, we will continue to execute on our strategy and are confident in our ability to advance the business in 2021. I'll discuss this further in my remarks today. Let me begin on slide three with our key messages. Business activity improved in the third quarter as we continue to deliver essential solutions for financial institutions and retailers. We delivered solid year-on-year and sequential improvements to orders, led by a strong rebound in order activity for our products, as customers continue to value our latest ATMs, self-checkout, and point-of-sale devices. Revenue also improved as the global economy began to recover from a difficult second quarter, and installation activity experienced fewer and less impactful delays. I'm incredibly proud of how our teams have responded to the challenges of this year. Our ability to manage during a difficult time provides us with confidence as we work through the next wave of the pandemic. In the quarter, we again expanded profit margins, mainly through our continued execution of our D&R initiatives. And once again, we are reporting strong year-on-year increases to gross profit, operating profit, and adjusted EBITDA, all while delivering solidly for our customers. With a solid backlog and operating momentum, we are tightening our 2020 outlook to the high end of our prior range. We're looking forward to a solid fourth quarter, despite a tough year and year comp. And looking into 2021, our focus will be on the continued resiliency of the organization and a balance of improved free cash flow conversion and top line growth. On slide four, I'll discuss our third quarter results. We increased our backlog by 9% in the quarter on the heels of strong order growth of 7% during the third quarter with broad-based gains in both banking and retail. In our banking business, our customers have strongly reinforced the strategic relevancy of their self-service channels, and we're benefiting from ongoing investments as banks upgrade their self-service capabilities with heightened interest in cash recycling, automated deposits, and cardless transactions. We experienced broad-based order growth across our banking segments, especially as we book orders for our next generation DN series ATMs, including orders from a top 10 bank in the US, a top five bank in France, and a large order in Egypt. In the retail segment, customers are investing in automation and greater self-serve capability, We're seeing strong demand for our modular open architecture self-checkout solutions, which improve the in-store experience with faster, low-touch transactions. These solutions benefit retailers through higher checkout availability and lower operating costs. During the fourth quarter, we secured a milestone new self-checkout deal with a pan-European grocery store operator, who operates the second largest fleet of self-checkout devices in the world. Our five-year agreement consists of providing approximately 14,000 self-checkout devices and providing related services at approximately 6,800 locations. This is the largest self-checkout win in the company's history. This win builds on our third quarter success, which included a number of wins at one of the largest supermarkets in Germany, totaling 19 million for point-of-sale self-checkout and electronic shelf labeling solutions. We also booked a new $7 million contract with a US-based discount retailer for self-checkout products and cash management software. Because of the strong business case for self-checkout and low penetration rates globally, we believe the circular growth trend will continue for several years. Another important win in retail was a new software opportunity valued at approximately $6 million with a global fuel and convenience company, which will benefit more than 900 stores in the United Kingdom and South Africa. We're also pleased with new services contract wins in the quarter. We signed new contracts to service approximately 8,000 ATMs in Italy and 4,000 units in Thailand. Our contract with the Thai bank also includes a refresh of all ATMs plus software and professional services. And in the United States, we signed a $3 million managed service contract with Truliant Federal Credit Union for end-to-end managed services of their ATM channel. Changing over to our top line results, we delivered a sequential revenue improvement of approximately 12% in the quarter to $995 million. or a 5% constant currency year-over-year decline when normalizing for divestitures. Revenue improvements were driven by three factors. Firstly, an easing of unplanned reductions, which includes delays caused by the COVID-19 pandemic. Secondly, a weaker U.S. dollar, which provided a 1% tailwind versus the prior year period. And thirdly, diminishing account virtualization activity, which is now largely behind us. Let me now summarize our progress on our transformation journey that we launched in mid-2018. At that time, we set out to simplify and streamline our business, our solutions, and the way we conduct business in order to drive stronger profits and more sustainable cash flows. On slide five, you can see that we've been driving higher quality revenue through disciplined sales pursuits, by rationalizing low margin business, and through a series of non-core assets divestitures. At the same time, we launched about a dozen work streams under the D&L umbrella designed to scale our business, deliver higher gross profit margins, and reduce operating expenses. The chart on the right illustrates our progress. Over the past two years, we've increased our trailing 12-month adjusted EBITDA by more than 50%, from $301 million to $456 million. And we've expanded our adjusted EBITDA margin by about 5,000 basis points to 11.6%. In doing so, we've transitioned the company to a value creator, whereby our return on invested capital exceeds our weighted average cost of capital. This work has also driven substantially higher resiliency in our overall operating model and our ability to weather the challenging environment. Moving to slide six. Our execution of our DNR initiatives and higher quality revenue is driving meaningful profit margin expansion. Non-GAAP gross margins expanded 310 basis points during the quarter to 28.6%, led by strong gains in software and services. Our operating profit margin expanded by 280 basis points versus the prior year. And while Jeff will have more details on these financial results, I am pleased to report that these results are aligned with our framework provided at the beginning of the COVID crisis, namely that we expected to steadily improve our profit margins despite revenue pressure in 2020. On the right side of the slide, we list the key DNNOW activities that we're currently focused on that will drive current and future cost benefits. First, our digital transformation initiatives have kicked into high gear as we define key work streams across IT, HR, and finance during the quarter with our partner, Accenture. On the SG&A front, we continue to make good progress on streamlining our procurement third-party spend by about 10% year-on-year, closing underutilized real estate offices and transforming our enablement functions. Third, our software excellence activities are exceeding expectations as we generated best-ever gross margins of 49.7%, led by better utilization of our professional services, streamlining third-party labor, and more cost-effective global delivery services. Equally as important, we continue to build momentum with DN series ATMs. I'm pleased to report that we've completed over 110 DN series bank certifications and anticipate hitting critical mass for shipments in 2021. Our next generation machines are performing exceptionally well relative to the competition and relative to our prior models. As a result, we're pleased with order growth and the sales pipeline, which is building nicely. By virtue of the progress in our DNR program, we're increasing our total savings target from 470 million to approximately 500 million through 2021, with incremental savings coming primarily from software services and G&A efficiencies. Early today, I referenced that our focus was increasingly shifting to a balanced agenda. Slide seven highlights some of the key elements of our digital strategy that underpins our belief that we're well positioned to be competitively differentiated as we move into 2021. These digitally enabled assets sit at the center of our strategy to expand revenues looking forward. We are bringing digitally enabled hardware, services and software to our customers, which meet their demands for greater flexibility and optionality to meet the demands of the market. Fast improvements in performance levels, and a more scalable cost structure. Our investments in the areas such as our digitally enabled service offering, the AllConnect data engine, allow us to deliver step changes in functionality and value, and is one of the main reasons why we're energized by our future growth opportunities. Our digital strategy extends to our own internal capabilities too, to ensure we become more efficient and deliver better capabilities to our employees. across finance, IT, HR, and sales. We're deploying digital tools to enhance our operating efficiency through the use of cloud-based applications, self-service portals, and automation. I'm not sure if others are hearing it.