Diebold Nixdorf Incorporated Common stock

Good morning, good afternoon all. My name is Adam and I will be your conference operator today. At this time, I would like to welcome everyone to the Deep World Next Talk third quarter 2021 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad. To withdraw, please press star two. Ms. Machuska, you may begin your conference.

Great. Thank you, Adam. Hello, everyone, and welcome to our third quarter 2021 earnings call. I'm Christine Marchesco, Vice President of Investor Relations for Diebold Nixor. And on the call with me today is President and Chief Executive Officer and Jeff Rutherford, Chief Financial Officer. To accompany our prepared remarks, we have posted our press release and earnings presentation to the Investor Relations section of our corporate website. Later this morning, we will post a replay of this webcast. Before we begin, I will remind all participants that during this call, you will hear forward-looking statements, including the guidance we will be providing for full year 2021. These statements reflect the expectations and beliefs of our management team as of the time of this call, but they are subject to risks and uncertainties that could cause actual results to differ materially from these statements. Additional information on these factors can be found in the company's periodic and annual filings with the FCC. Participants should be mindful that subsequent events may render this information to be out of date. We will also be discussing certain non-GAAP financial measures on today's call. A reconciliation between GAAP and non-GAAP measures can be found in the supplemental schedules of our earnings presentation slides, as well as in the tables of today's earnings release. And now I'll hand the call over to Gerard.

Thank you, Christine, and welcome to the team. Good morning, everyone. Thank you for joining our third quarter 2021 earnings call. I am pleased to say that customer demand for our solutions remained robust in Q3, despite supply chain constraints, logistics, and inflationary headwinds. I'm encouraged by the support of our customers and the innovative spirit of our workforce as we navigate ongoing supply chain challenges. Most of all, I'm encouraged by how our company is positioned to offer solutions and growth opportunities for our customers who are addressing rapidly changing consumer demands and difficult competitive landscapes. More than ever, consumers are not only embracing but expecting self-service solutions, whether it's at a bank, grocery store, or retailer. And more than ever, we are committed to helping our customers deliver more digital, flexible, and effective consumer journeys. In banking, consumer preferences are shifting away from the traditional teller window towards ATMs with more omnichannel functionality. At the same time, banks are looking for more self-service options to meet consumer needs with fewer tellers and fewer branch locations. This ongoing shift towards reducing the branch footprint and optimizing their real estate is crucial, and our ATMs are helping our banking customers to continue providing the same level of customer service. including customer outreach through marketing, while at the same time making better use of their available space. In retail, the pandemic resulted in more focused shopping experiences and growth in e-commerce, while at the same time, as cited by recent studies, 75% or more of consumer purchases globally are still happening in the physical store. It's important to understand, however, that while consumers prefer physical shopping, they also prefer lower-touch options during the purchase process. Our self-checkout offerings create a safe, convenient, and lower-friction shopping experience, providing theft protection, produce scanning, and market-leading camera technology to assist in age-restricted purchases. In short, what we're seeing is that consumers and retailers alike are embracing self-checkout. according to rbr the self-checkout install base will reach nearly 1.6 million terminals by 2026 almost tripling the global install base as on the end of 2020 indeed we believe automation provides much needed cost efficiencies for the retailer and a more efficient shopping experience for the consumer at the last mile of the store we believe the accelerating demand for self-service and automation signals a structural change to the way business will be done going forward and gives us a long runway of opportunity. I'd like to now provide remarks around our third quarter performance. Although demand remains strong in Q3, fulfillment of product orders shifted from Q3 to Q4 and from Q4 to 2022 as we continue to work through supply constraints and logistics challenges. Our order entry continues to exceed our original models, and our backlog increased approximately 19% versus the same period last year. Revenue for the quarter was down 4% as a portion of revenue has shifted out to future quarters due to the temporary supply constraints and logistics challenges we're currently facing. Our retail segment continues to perform well with growth in revenue of 10% as compared to third quarter 2020. Moving on to our business highlights, starting with Bank AIM. Momentum for our BN series ATMs continued in Q3 as a growing percentage of our total orders were for these next generation devices. And we see this trend continuing based on our orders for Q4 and early 2022. Additionally, the DN Series is now live and fully certified in over 60 countries globally, contributing to our market expansion in this space. I'd like to highlight some notable DN Series wins for the third quarter. We secured a contract for over $12 million with Banco Azteca in Mexico, including our DN Series cash recyclers, a new service contract, and software licenses. expanding across 500 branches. With this win, over 75% of Banco Azteca's fleet is now composed of DN devices. In Greece, we displaced a competitor and doubled our presence at Piraeus Bank. Approximately 200 branches and 40 off-premise locations will be equipped with our modern technology, including our DN series cash recyclers. The introduction of cash recycling is a significant change for this market, which had not previously had recycling capabilities by branch ATMs. We earned this win based on the higher mechanical reliability of our hardware, the higher capacity of our ATMs, and our greener, more environmentally sustainable profile. This win also includes a five-year maintenance coverage contract. And lastly, we built a competitive win with Standard Chartered Bank Malaysia upgrading all of their legacy devices to our DN series, increasing their fleet to consist of 100% DN series ATMs. We continue to see growth in demand for our AllConnect data engine with a number of connected ATMs increasing approximately 23% sequentially in Q3 2021. This is a significant milestone for us as more than 100,000 banking self-service devices are connected to this solution, which leverages real-time Internet of Things connections from our deployed devices and has consistently reduced customer downtime by as much as 50%, resulting in greater than 99% uptime. This drives multiple business benefits, such as higher end-user satisfaction, lower total cost of ownership, and increased operational efficiencies. I'm proud to share that we also were awarded Technology and Service Industry Association's 2021 Star Award for Best Practices in the Delivery of Field Services for our AllConnect data engine. We believe that demand for our differentiated market reading solutions that meet the needs of today's consumer will remain solid. This is especially evident in our robust pipeline, our healthy backlog, the main successes of our sales team in Q3, and the growth in our AllConnect data engine. Moving on to our retail business. We continue to see strong demand for our self-checkout products as retailers look to default next door. for comprehensive solutions that provide favorable consumer experiences and cost efficiency as they face staffing challenges and tough performance comparisons. We secured a competitive takeaway with an Italian retailer who replaced a competitor's advices with our DN series self-checkout solutions, along with our full self-checkout suite and other offerings from our retailer solution portfolio. we also expanded an important customer relationship with a large multi-country retailer in europe which included a competitive takeaway with scope devices this wind secures a strategic rollout of self-checkout devices beginning with two stores before expanding to 300 stores in 13 countries and an eventual full row rollout of 2 500 stores in 15 countries over the span of two to three years additionally this retailer signed a three-year services and maintenance contract we're well positioned for growth in retail services in the third quarter we want a contract renewal with a large global petal convenience store for the malaysia sites this was a significant renewal totaling over 16 million dollars for our systems and services including point of sale, help desk support, software, and other solutions. Overall, we feel confident in the strength of our retail business as our large global retail customers have reconfirmed their commitment to their store formats. While some retailers are considering fewer locations, they all remain focused on increasing the level of automation and technology investment per store. Additionally, in 2021, we're seeing growth in the absolute number of our self-checkout devices on a year-on-a-year basis, and we anticipate that our retail business will end the year above our pre-pandemic levels witnessed in 2019. Our core portfolio continues to benefit from the industry trends I discussed earlier around consumers' desire for more self-service options in banking and retail resulting in our customers' needs for more automation and greater cost efficiencies. It also lends itself to layering on additional offerings with large addressable markets, such as managed services, software, our dynamic payments platform, and other adjacencies that provide a trajectory for sustainable growth for the future of our business. We are particularly proud of the progress we have made with our retail and banking customers. We recently received the results from our annual customer satisfaction survey, and I am delighted that our customers are awarding us some of the highest levels of Net Promoter Scores we've seen, reinforcing what has now been a multi-year trend of improving results. Turning now to our growth initiatives. In managed services, we continue to move forward on securing more new business and remain in productive discussions with multiple financial institutions. We also see a promising pipeline for managed services in 2022. In Q3 in North America, we were awarded a large managed services agreement with a Tier 1 financial institution, including a large order of DN series ATMs. We continue to scale our debit and credit platforms with our dynamic payments offering at a top 10 global bank across more than 17,000 ATMs. As we continue to implement and scale our existing customers on our payments platform, our go-to-market team is growing a strong, qualified sales pipeline for 2022. Additionally, I'm pleased to announce our entry into a new horizontal electric vehicle charging stations this is a natural fit for our services business with our global network of 8 000 experienced service technicians and the similarities between atms and ev charging stations there are an estimated one and a half to two million public charging stations needed in the united states and europe by 2025 And this is an approximate increase of over 200% from roughly 500,000 charging stations today, split between about 300,000 in Europe and 200,000 in the U.S. We are currently in discussions with the top EV charging station hardware companies and have already secured contracts for our solution with some of the key players in this space. This is a promising and rapidly growing market. and we look forward to sharing more on this new offering in future quarters. Now turning to another important area of our business, sustainability. Not only do we focus on attaining sustainable growth for our shareholders, we also focus on environmental sustainability of our facilities, practices, and processes. I'm proud to say that we were recently awarded Germany's Best Energy Scouts 2021, a German government initiative that encourages energy-saving opportunities. We installed a green roof constructed of regional grasses to improve energy savings at our Paderborn facility. Additionally, we included a solar panel system and added 36 charging ports for cars and e-bikes in parking areas. We consistently are working on initiatives that drive sustainable programs with the goal to have no adverse effects on public health or the communities where we operate. We look to upgrade our other facilities around the globe in sustainable green ways as part of our focus on our environmental, social, and governance commitments. Looking ahead to Q4, we remain confident in our market leadership and ability to close out the year strong on a year-over-year basis. As of today, our orders are 100% confirmed with customers committed to our products. We see negligible risk of lost sales with strong strength in demand for America's banking and retail business segments. Additionally, in Q4, for our banking segment, we are starting the quarter with a backlog of approximately $205 million higher than at the beginning of Q4 2020. Specifically for America's banking, we're seeing over a 50% increase in our backlog as we enter the fourth quarter 2021 as compared to the same time last year. We're working with all of our customers on a continuous basis to fulfill the high level of orders we're receiving on a timely basis. As part of this focus, we've taken steps to increase our stock of key components as well as pre-book vessels further in advance to accelerate revenue conversion from our backlog. Furthermore, on a year-over-year basis, our outlook remains robust as our confirmed orders for the first half of 2022 are above the levels for the first half of 2021 as of this same time last year. This forward-looking indicator affirms the demand we continue to receive from our growing customer base. While we continue to see significant opportunity in the market and in our ability to meet our customers' needs, we, like many global companies, are navigating inflationary pressures and supply chain logistics that continue to impact our business. As I discussed earlier, delays in delivering or in delivery of our products will cause some revenue to shift to future quarters thus we are revising our guidance for year end 2021 however i believe it is important to note that we see q3 broadly as a peak inflection point in supply chain disruptions our visibility into semiconductor chip markets has increased meaningfully providing us with a line of sight to many of the chip providers through the first half of 2022. Additionally, we have deployed other strategic tactics internally, such as shifting our production capacity, which will ease some of the dependencies we've previously had on logistics and shipping. I'm extremely proud of the work of our DN team to mitigate these issues. Before I turn the call over to Jeff to discuss the financial results around our performance and outlook, let me close by reinforcing my optimism around the robust demand we're experiencing for our solutions for the remainder of 2021 and the upcoming year while supply chain improvements take hold. We are squarely positioned to meet the needs of our customers and expand our base of banks and retailers as consumers continue to demand more access, more convenience, and more innovation through automation and self-service. Although supply chain challenges have led to a temporary pullback in performance, it's important to understand that we are doing everything possible to mitigate these challenges, and delivering for our customers remains a top priority. Thank you. And at this time, I'd like to turn it over to Jeff. Thank you, Gerard, and good morning, everyone. My prepared remarks will include references to certain non-GAAP metrics, such as gross profit, gross margin, and the justice of the debt. Total revenue for the third quarter of 2021 was $958 million, a decrease over third quarter 2020 of approximately 4%, as reported, and a decrease of 5%, excluding foreign currency benefit of $16 million, and an $8 million impact from divested businesses. Adjusted for foreign currency and divestitures, product revenue decreased 3%, services revenue decreased 6%, and software revenue decreased 3% compared to Q3 2020. During the quarter, approximately $90 million of revenue was delayed due to extended transport times and inbound technology component delays. This primarily impacted the U.S., Latin America, and certain APAC countries and reduced total revenue by approximately 900 basis points. On a sequential basis, total revenue increased approximately 2%. Non-GAAP gross profit for the third quarter was $263 million for a decrease of approximately $22 million versus the prior year period on lower gross margins of 27.4%. The deferral of revenue and non-billable inflation resulted in a reduction to third quarter gross margin of approximately $33 million. Service margins increased 40 basis points versus the prior year period, and we're in line with our expectations. Product gross margins were down approximately 180 basis points versus the prior year period, primarily due to $10 million as a result of inflationary pressures in supply chain logistics, partially offset by a favorable DM series versus legacy ATM and geographic costs from our mix. Software gross margins declined 500 basis points versus the prior year period. Excluding the impact of a prior year cost benefit of approximately $5 million that did not recur in 2021, software gross margins were down approximately 40 basis points due to unfavorable mix. Operating expense of $182 million for the quarter decreased approximately $14 million versus the prior year period and decreased $17 million sequentially. When compared with the prior year, key variances include reductions in variable compensation, partially offset by unfavorable effects, and investment and growth projects. When compared with our second quarter, operating expense decreased due to reductions in variable compensation. The net result was operating profit of $81 million and operating margin of 8.5% in the quarter. The same trends drove adjusted EBITDA of $103 million and adjusted EBITDA margin of 10.7% in the quarter. I will discuss our segment highlights. Eurasian banking revenue of $323 million decreased approximately 11% versus the prior period and 12% after adjusting to foreign currency benefits of $7 million and a $3 million impact from the festers. Lower revenue was primarily due to supply chain delays impacting timing of deliveries and installations of products with collateral impact to services and software revenue plus the termination of expired service contracts. As expected, following a strong order entry in Q2 and several non-recurring large orders in the prior year, segment product order growth decreased 35%. We are forecasting a strong order entry in Q4. Gross profit for the segment decreased to $98 million year-over-year and included favorable foreign currency benefits of $4 million and an unbearable divestiture impact of $1 million. Gross margin at 30.3% was down 50 basis points. The decrease was primarily due to inflationary pressures offset by our focus on cost management. America's banking revenue decreased $22 million, or approximately 6% to $347 million, primarily due to declines in software and services revenue due to the negative collateral impacts of unfavorable geographic mix of installations from North America to Latin America. America's banking continues to be disproportionately affected due to the location of our customers in our primary manufacturing facilities for DM series ATMs, which are located in Europe and Asia. However, we are working on mitigation strategies in our America's manufacturing operations to assist in manufacturing certain of the higher value cash recycling DM series ATMs. Backlog in America's banking grew 54% year-over-year as prior daughter growth saw another solid quarter and increased approximately 23% versus the prior year, led by market share gains via series APMs. Second, gross profit of $86 million was down $17 million due to lower revenues. Gross margin percentage declined due to impact of supply chain inflation and unfavorable geographic mix. as I previously noted. Our retail segment had another quarter of strong performance. Retail revenue of $288 million increased 10% year-over-year, as reported, and 8% after adjusting for $6 million currency benefit and an investor headline of $2 million. Demand for our point-of-sale and self-checkout continued to increase versus the prior year period, with product order growth of approximately 23%. Retail gross profit increased 15% to $79 million, driven by revenue growth. Gross margin expanded by 110 basis points, directly attributable to growth in self-checkout revenue. As we continue to look to optimize our portfolio and focus our core business segments, We made the decision to enter a share purchase agreement to sell our reverse vending business with an approximate deal close date targeted for year end. This business is less than 2% of our total annual retail revenues and no longer was a strategic fit for the segment going forward. Turning to our capital structure metrics. Unlevered free cash flow used in the quarter increased $121 million versus the prior year, primarily due to increases in inventory, which are necessary to support both Q4 production and delivery targets, as well as increases in critical components for 2022 orders. Company ended the quarter with $325 million of total liquidity. including $230 million of cash and short-term investments. The company's cash balance as of September 30th reflects increased inventory levels and interest payments made during the quarter. At the end of the quarter, the company's leverage ratio was 5.4 times, which continues to be below our covenant maximum of 6 times. In our presentation, we updated our gross debt levels as of September 30th. Turning to our updated outlook for 2021. We are revising our revenue range to 3.9 to 3.95 billion, which reflects approximately 120 million in revenue deferral from 2021 to 2022 due to the current supply chain challenges. Accordingly, we are revising our adjusted EBITDA outlook by approximately $40 million to a range of $415 to $435 million, taking into account the gross margin associated with the aforementioned revenue deferral and an incremental $20 million of supply chain related inflation over previous estimates. The total estimated impact of supply chain-related inflation is now approximately $45 million. Our free cash flow outlook is now $80 to $100 million, reflecting our revised EBITDA outlook and the net incremental working capital timing impact of the revenue deferral. I will now hand the call back to the operator for our Q&A session. Operator?