Diebold Nixdorf Incorporated Common stock

Hello and welcome to the Diebold Nixdorf Inc. second quarter 2021 earnings call. My name is Emma and I'll be operating the call today. If you wish to ask a question at the end of the presentation, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two to cancel your request. I'll now hand over to Steve Veristek, Vice President, Investor Relations. Please go ahead, Steve.

Thank you, Emma, and welcome everyone to Diebold-Mixdorf's second quarter earnings call for 2021. Joining me on today's call are Gerard Schmidt, 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 Diebold-Mixdorf.com. Our remarks are being recorded today and cannot 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 two, 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 earnings. On slide three, I will remind all our participants that certain comments made today will be forward-looking 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 STC files. 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that our forward-looking information is current as of today, and subsequent events may render this information to be out of date.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 hand the call over to Gerard.

Good morning, everyone, and thanks for joining us today for another update. 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 supply environment that had a modest impact on our banking business late in the quarter. Since we expect these conditions will continue, we're adjusting our 2021 outlook for profit and cash flow. Slide three highlights how we're leveraging our competitive differentiation to gain market share and grow our business. During the quarter, we delivered 6% revenue growth, spearheaded by a 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-based, with 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 ATM 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 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 contractor at both a top 10 bank and a top 25 bank 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 dollars for dn series dynamic software licenses and maintenance in indonesia we want contracts to refresh more than 2 200 legacy atms with dn series and our dynamic 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 point to improving market share for Diebold Nextoff as customers recognize the distinctive value of BN series to their digital agendas. We also experienced an increase of 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 remotely identifying root causes and are being more prescriptive with our response. 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 ACDUs will increase 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 agreement to replace a competitor's self-checkout solutions at a multinational clothing and home product retailer based in the UK. And we're 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 a contract valued at nearly $4 million for a large multinational retailer to automate checkout and reduce fraud at the self-checkout counter using artificial intelligence and image recognition. Slide four contains an overview of our growth strategy, beginning with our foundational strengths in 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 these core businesses. Strength in our core offering enables high 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 across stores in Asia and Europe. Our partnership will accelerate AS Watson's offline plus online retail technology deployment in support of a great shopping experience and convenient checkout process. One of our software highlights in the quarter was a multi-year agreement with Nedbank for more than 4,000 DynamicView software licenses in Africa. We were selected because of our multi-vendor approach, which improves ETM availability by constantly monitoring hardware and software performance through a single user interface. With respect to our new dynamic 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 the capabilities from the branch and IVR channels to include all transactions across more than 15,000 ETMs 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 will continue to invest in our advanced capabilities in order to better position the company for growth. I mentioned earlier, Band has been very strong we're experiencing a more difficult supply chain environment. Slide five highlights some examples of what we and many other technology companies are seeing. The chart on the left illustrates how global maritime shipping has become less reliable due to limited container capacity. This trend, combined with challenges in dock labor and trucking capacity, are adding operational challenges for DM, but our risk mitigation actions are currently proving effective. Strong global demand for logistics is also driving higher freight costs and increasing the need for expedited freight solutions. On the right side of slide five, we show how strong global demand for semiconductor chips is running well ahead of supply, which is extending our procurement cycles to inflationary pressure. Demand for chips has been driven by strong economic activity across multiple sectors, as well as a higher demand for electronic devices to support a global hybrid work environment. Because our products are among the most sophisticated on the market and highly digital, semiconductor chips are important components in our devices. While we have detailed plans to procure the semiconductors needed to fulfill a strong demand, Continued execution is key to 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. Our main focus is managing global supply chain complexities to fulfill customer demand. Over to you, Jeff. Thank you, and good morning, everyone. I will begin on slide six 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 a $16 million impact from divested businesses. Adjusted for foreign currency and divestitures, product revenue increased 5%, Service increased 2 percent and software was relatively flat. During the quarter, approximately $30 million of revenue was delayed due to extended transport times. This primarily impacted our American 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 savings. Service margins declined 130 basis points versus the prior year period, which benefited from meaningful cost benefits of lower labor costs and spare parts usage during the second quarter lockdown in 2020. When compared with our expectations, second quarter service margins were in line and were slightly higher than in the first quarter of 2021. Prior gross margins were down 350 basis points versus the prior year period, 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 decline 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 $5 million sequentially. When compared with the prior year, key variances include normalization of non-recurring SG&A costs, savings from the second quarter 2020 lockdown, of approximately $16 million. Planned investments to support the company's growth initiatives and managed services and software of approximately $8 million. And unfavorable foreign currency headwinds net of DNL cost reductions, 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 seven, I will discuss our segment highlights. Eurasia banking product order growth increased 39% versus the prior year period as we realized market share gains for my next-generation DN series APMs. Segment revenue of $326 million decreased 3% versus the prior year period, and 7% after adjusting for foreign currency benefit of $24 million and $12 million in bank from these domestic shares. 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 investor impact of $4 million. Gross margin of 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. Over on slide 8, America's banking product order growth was very strong and increased 44% versus the prior year, led by market share gains via the N-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, American 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 America's banking grew 45% year-over-year. Segment gross profit at $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 nine, 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 a $19 million foreign currency benefit and a divestiture headwind of $1 million. Sales of our point of sale and safe checkout products both increased significantly versus the prior 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 expected 140 basis points reflecting increased revenue and a more favorable mix of self-checkout solutions. On slide 10, I will summarize our free cash flow performance and update our leverage and debt maturity schedules. Unlevered free cash flow use 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, partially offset by reduction in transformation and restructuring payments. The increase was slightly higher than our expectations. The company's cash balance as of June 30th 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 more below our covenant maximum of six times. On the right side of this slide, we update our gross debt levels as of June 30th. Note, we have no material debt maturities until November of 2023. Slide 11 contains our updated outlook for 2021. Revenue of $4 to $4.1 billion is unchanged because of our strong order book and foreign currency benefits working to offset longer logistic schedules. We are modifying our adjusted EBITDA by approximately $25 million to a range of $455 to $475 million to reflect inflationary pressure on materials, and in particular, higher freight costs. Our free cash flow outlook is $120 to $140 million and includes our revised profit outlook plus investments we are making in our safety stock as global supply chains tighten. 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 Gerard. 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 backlog increasing 20%. We're 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 models. The second key message is that Diebold Nexdorf and many other technology-based companies are confronting a more challenging supply chain environment globally. Our procurement, manufacturing, and operations teams are doing exceptional work to mitigate longer lead times on same conductors 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 chain volatility. These conditions plus high 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 in executing our strategy of providing differentiated solutions that are yielding strong water growth, as well as our ongoing efficiency gains in our business model, our improved cost discipline through our D&L program, all of which are leading to strong free cash flow growth and return on invested capital. This concludes our prepared remarks, and I'll hand the call back to the operator for our Q&A session.