Diebold Nixdorf Incorporated Common stock

Diebold Nixdorf Earnings Call. My name is Nadia, and I'll be coordinating the call today. If you would like to ask a question, please press star 5 by 1 on your telephone keypad. I will now hand over to your host, Chris Acora, in Investor Relations to begin. Chris, please be ahead.

Hello, everyone, and welcome to our third quarter 2023 earnings call. To accompany our prepared remarks, we have posted our slide presentation to the Investor Relations section of our corporate website. Before we begin, I will remind all participants that during this call, you will hear forward-looking statements. These statements reflect the expectations and beliefs of our management team at the time of this call, but they are subject to risks 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annual filings with the SEC, Participants should be mindful that subsequent events may render this information to be out of date.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. As noted on slide three, a reconciliation between GAAP and non-GAAP measures can be found in the supplemental schedules of the presentation. With that, I'll turn the call over to Octavio.

Thank you, Chris, and thank you all for joining us. Before we get started with our normal quarterly update, I wanted to give our new chair, Pat Byrne, an opportunity to introduce himself on this call. After emerging from our debt restructuring process, we reconstituted the board of directors and are very excited about the governance, experience, and insight the board will bring to the company. So today, I thought it would be appropriate for Pat to kick us off with some comments. Afterwards, Jim and me will walk you through our quarterly results.

Pat, over to you. Thanks, Octavio. Speaking for all the directors, I can say we're all really excited to join the Diebold-Nixdorf team. And personally, it's a real honor to be leading the board as we support and guide the management team going forward. The board of directors that we've assembled has the right skills in both operational and financial expertise. to help guide the company to strong results. In our view, the company has a significant set of opportunities to create meaningful shareholder value going forward. Our goal is to work with Octavio and his team to focus on those opportunities and execute. We intend to finish 2023 strong, building on the Q3 sequential improvements, and define the operational and financial priorities for a strong 2024. I've been really impressed by the first engagements I've had with the Diebold Nixdorf team. There's a deep commitment to serving the customers and delivering for the company. The company has many long standing relationships across a large global customer base. The Diebold Nixdorf team has brought technologies that have demonstrated real improvements to efficiency in both banking and retail segments, while also helping our clients to better serve their customers. Our global team has demonstrated resiliency and remains committed to both serving the customer and delivering on results for the company. As we finish this year, we will set the 2024 operational and financial priorities, and we intend to share those priorities and the long-term targets for the company after that, likely in early 2024. The board looks forward to working with Octavio and his team in this exciting new chapter for the company. Now we'll pass it back to Octavio and to Jim.

Thank you, Pat. I speak on behalf of our team when I say welcome to the company, and we are ready for the journey ahead. Q3 was another quarter of strong performance as our team remained focused on customers, won in the market, and continued to improve our operational execution. As you can see on slide four, we have made meaningful progress against all three of the key operating priorities that we outlined at the beginning of the year, clearly evidenced by our quarterly results. In August, we completed the debt restructuring and emerged a stronger company with recapitalized balance sheets, enhanced liquidity, and a solid foundation moving forward. Our third quarter financial results demonstrate our commitment to continuous improvement with meaningful year-over-year and sequential growth in all key metrics. Through the third quarter, we are tracking towards the top half of our full-year financial outlook ranges for revenue and adjusted EBITDA, and we remain focused on delivering a strong fourth quarter to close the year. We continue winning in the market with our world-class solutions, and we have recently brought new innovative solutions to our customers that further solidify our position as a leader in self-service and automation and help us increase our addressable markets. Turning to slide five, before we go into the financials, I wanted to highlight some of the new product introductions we made in the quarter. In banking, we are helping banks optimize all cash touchpoints with consumers by expanding our recycling capabilities. True branch transformation requires end-to-end automation across the entire cash ecosystem. So we provide solutions not only at the ATM, but also at the teller line. This opens new revenue opportunities to us as we broaden our range of solutions, providing operational improvements to our banking customers. This quarter, we rolled out our teller cash recycler. that automates note handling and authentication for branch staff. In addition, we introduced the highest note capacity recycler currently in the market. The high capacity recycler is a strong asset to our banks and markets with heavy cash usage. Both these solutions drive branch transformation by simplifying cash handling and implementing end-to-end recycling solution at the branch level. On the retail side, We are enabling new checkout journeys as retailers continually adopt more self-service technology. Our dynamic retail cloud platform ensures a consistent checkout experience across multiple touchpoints. Built on open APIs, the solution easily integrates into the most complex retail operating environment. Also, during the third quarter, we began shipping higher volumes of our EN series EC1 checkout solution. Its modular design provides retailers a smooth transition from assisted checkout to full self-service checkout. We're very excited about the solutions we're bringing to market to meet our customer needs and strengthen our market position. Now to our financial performance. We had another solid quarter that was in line with our expectations. Both revenue and profitability were up significantly compared to the prior year and sequentially. The higher revenue and gross margin expansion is flowing through to the bottom line, resulting in strong year-over-year growth in operating profit and adjusted EBITDA. Revenue of $943 million increased 17%, and total gross margin expanded 70 basis points year-over-year. Strong product gross margin performance was driven by our improved supply chain and pricing discipline. Service gross margin is relatively flat compared to prior quarter, and we expect to see improvement in the fourth quarter. As we talked about in our last investor update, we have been focused on customer satisfaction and service quality, which has led to temporarily higher resource costs that will be normalized in the coming quarters. Adjusted EBITDA of $109 million is up 43% compared to the prior year. An adjusted EBITDA margin expanded 220 basis points to 11.6%. From a regional perspective, we are seeing strong double-digit revenue growth across all of our markets as we accelerate backlog conversion to revenue. We also continue to compete and win new business with notable wins both in banking and retail. For example, in banking, we renewed a major four-year service contract in Brazil valued at $65 million, covering 15,000 ATMs and nearly 4,000 branches. We also won a new managed services agreement at Texas Dow Employees Credit Union, which includes DN series devices to optimize branch and ATM channel efficiency. On the retail side, we expanded our self-checkout install base with a dynamic checkout software presence at a major supermarket chain located in Great Britain and Ireland with 19 million agreements. We continue to expand our North America business with new wins, including a $3 million contract to provide self-service kiosks for a major international brand in the quick service restaurant space. While I am pleased with our 2023 performance to date, we all know there is still much work to be done in the fourth quarter. This is another good quarter that we can build upon, and it reinforces we are taking the right steps to improve financial performance and operating momentum. On slide seven, clear evidence of our improved operating momentum can be seen in our banking and retail unit shipments. The third quarter represents a recent high in ATM unit production and a record high in quarterly self-checkout production. Our efforts Strengthening our supply chain and logistics environment combined with our normalized vendor relationships and the work we did to identify alternate components and deepen our supplier bench are paying dividends. The third quarter output positioned us well to achieve our ATM and self-checkout product revenue targets in the fourth quarter. With that, I will hand the call over to Jim to provide a deeper dive into the financials. Jim?

Thank you, Octavio. Starting on slide eight, banking revenue of $665 million was up approximately 15% versus the prior period, driven by ATM revenue growth of 31.5%. We continue to benefit from our supply chain and logistics improvement efforts, which is facilitating us capitalizing on demand for our DN series offerings. Service revenue was up approximately 6% versus the prior year, driven by higher revenue in both product-related service as well as end-to-end managed services. Banking gross profit in the third quarter increased by $20 million year-over-year to $164 million, with improved profitability and product from the impact of price adjustments and the benefits of disciplined cost management. This resulted in banking gross margin of 24.7% in the quarter, which is flat compared to the prior year and sequential quarter as we continue to invest in customer satisfaction efforts related to service and the North American market. Moving to slide nine, retail revenue of $278 million was up 24% versus the prior year, driven by higher self-checkout volume in the quarter, as this continues to be a driver of growth for the company. Service revenue year over year benefited from growth in product-related services as self-checkout unit shipments are primarily new placements in the market and carry a high service attach rate. Retail gross profit in the third quarter increased meaningfully year over year to $75 million. Both product and service contributed to the increase. This resulted in retail gross margin of 26.9% in the quarter which is up 210 basis points compared to the prior year and up 190 basis points over the sequential quarter. On slide 10, we wanted to reinforce that the third quarter represents another solid period of performance for us in 2023. On a year-to-date basis through the third quarter, we are driving meaningful improvements in revenue and profitability compared to the prior year. Most notably, Year-to-date operating profit is up $104 million compared to the prior year, almost double, as higher revenue and gross margin expansion are resulting in increased profitability. The revenue growth of $238 million over the same period has resulted in operating profit leverage of greater than 40% on that growth. Also, this shows that through Q3, we are tracking toward the top half of the full-year outlook ranges for revenue and adjusted EBITDA that were communicated during our investor update call on August 14th. On slide 11, a key priority in 2023 was fortifying the balance sheet and deleveraging. To accomplish this, the company completed an expedited debt restructuring process in August that materially delevered our capital structure. We have a healthier balance sheet and robust liquidity position that allows us to operate the company efficiently and better compete in our market. At year end 2022, the company had approximately $2.6 billion in gross debt and approximately $2.3 billion net debt. Now, at the end of the third quarter, the company has approximately $1.25 billion of gross debt and approximately $800 million of net debt. From a net leverage perspective, the company was approximately 8.5 times levered at year end 2022. Now, at Q3, we are approximately 2.2 times levered based on Q3 trailing 12-month adjusted EBITDA. Our liquidity and cash flow profile are significantly improved. We have liquidity of approximately $450 million as of the end of September. Annual interest expense has been reduced by over $100 million. The restructuring eliminated approximately $2.8 billion of debt outstanding at the time of filing, which had near-term maturities ranging from 2023 to 2026, and replaced it with a $1.25 billion exit term loan maturing in 2028. Importantly, the exit term loan also allows for a $200 million accordion basket to put in place a revolving credit facility in the near term, subject to a corresponding pay down of the term loan. We intend to execute on this expeditiously and expect that it will improve our cost of capital and provide additional flexibility. Moving on to slide 12. Let me walk you through free cash flow for the quarter. Free cash flow was the use of $95 million in the quarter. Similar to the prior quarter, excluding certain items, some that are non-recurring in nature, free cash flow would have been slightly positive. These non-recurring cash uses include $59 million of burndown on our elevated deferred revenue balance, approximately $30 million of vendor normalization payments, and approximately $21 million of fees associated with the debt restructuring. We expect significant free cash flow generation of greater than $145 million in the fourth quarter, which we expect to result in liquidity at the end of the year in excess of $600 million. Now, I will turn the call back over to Octavio.

Thanks, Jim. Moving to slide 13. As we conclude our prepared remarks, I wish to thank our customers for their ongoing support. We are committed to providing best-in-class solutions to help them achieve their business outcomes. I am incredibly proud of our Diebold Nixdorf employees. Our team has never lost focus on what is most important, our customers, all while driving and improving our operational execution. We have completed another quarter of meaningful improvement for the company, and we are well positioned to close the year strong. And with that, operator, please open the call for Jim and me to take some questions.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to retract your question, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. And our first question goes to Matt Somerville of DA Davidson and Co. Matt, please go ahead. Your line is open.

Thanks. Morning. A couple questions. Octavio, can you maybe spend a couple minutes talking more broadly about the demand environment as you see it today by region for both ATMs or both banking and retail, I should say? And then I have a follow-up.

Sorry. I didn't catch that. Did you?

Sorry about that, Matt. Siri was then trying to answer for me. So, Matt, probably you signed the slide. We tried to highlight the results by region, and you can see that we have strong double-digit growth in every region. So again, we still see a robust and strong demand environment for both recyclers and for our self-checkout solutions. What's more, some of the efforts that we did increasing production lines of self-checkout are paying dividends. And as you saw, record number of self-checkout Shipments, you know, the highest we've ever had in the company's history. So we're still confident around the demand and acceptance of our products in the market. So, I know you like to go through the different regions, but you can see North America had a very strong quarter. Once again, this is driven by the adoption of recycling technologies across some of the key banks in the U.S. and Canada. We expect that trend to continue. And as you saw in our remarks as well, we're expanding our product offerings with now a teller cash recycler. That is another member of the DN series family that will clearly help banks as they transform their branch environment by, you know, allowing the same components, the same cassette technology to be deployed across all cash points in the branch. So, we think it's a very unique thing for our North America market. Latin America, as you know, continues to grow, and we continue to see significant expansion as banks use the ATM as a way to touch more consumers' financial inclusion in the market. So, we expect demand in Latin America to remain strong. We always talk of Europe as a stable market, but as you can see, it was a market that also grew significantly. Part of that growth is driven by our strong retail footprint in Europe and the continued acceptance of self-checkout across most retailers globally. So, we feel we feel good about about the demand on that. And as you saw, we're also making continue to make inroads in the North America market with retail with with wins. Not only now from our European retailers that are establishing themselves in the America, but now winning some local local customers and to wrap things up Asia Pacific. That, you know, as I always say, Asia Pacific is an area of great opportunity. There's clearly always more business there than what we could probably have an appetite for basis on the profile. But if you recall, we also now have started the, you know. production in India that will help us grow in that market, a market that shows great promise for us, and one that we hadn't been focused previously. So again, I feel that the demand environment is very conducive to continuing growing our business, and our customers throughout all these processes have benefited us with continuing ordering our products across the globe. So I'm excited about the future, Matt.

Thanks for that color, Octavio. Maybe if you guys can comment a little bit on services gross margin and how long we should expect or over what timeframe we should expect for getting the fourth quarter seasonal bumps you're going to get. When do service margins get back into the targeted range that the company had laid out in the not too distant past. And is there something that has structurally changed in that business whereby maybe that margin target doesn't make sense anymore? Thank you.

No, Matt, and thank you for the question. So, when we think about services, as I mentioned the prior quarter, Our main focus in our service operation globally is improved quality and customer satisfaction. Service is the best predictor of future success. Happy customers buy more. And as you've seen, customers continue buying from us, so I want to make sure that we continue this trend of improve service quality, which will lead to improved customer satisfaction, and more orders for us in the future. So my focus and that of our entire service team is let's make sure that we're improving quality across the globe in all our service operations. With that said, you know, that means that we're shifting our model. As we grow our service business, we have become reliant on using third parties in certain markets. We're scaling back the use of third parties as we believe that service quality is better when we are providing the services. So, we're in that transition map where we're shifting the mix of resources from external to internal resources, as I mentioned in the prior quarter. So, I would tell you that this is, you know, this is a process as we hire our people, we maintain the third parties as we train them and make them proficient. So, I would say that you will start seeing the benefits in Q4 and the targets that we have outlined as our long term goals remain achievable. And I think that you will start seeing us trending towards those targets in the coming periods. So there's nothing structurally different about our service market. I think that it's anything, you know, this $2 billion business or $2.1 billion business that we have with 70% recurring revenue. It's a very resilient business where, you know, I want to keep investing and growing that business.

Got it. Thank you.

Thank you. And as a reminder, if you would like to ask a question, please press star, fill it by one on your telephone keypad. And our next question goes to Matt Bison of Wedlish. Matt, please go ahead. Your line is open.

Thanks for taking my question. I guess my first question is around the banking product risk margins, the improvement. I think you talked to improved supply chain and pricing discipline. I guess, correcting some past issues. Can you give us some color around exactly how much, well, I'm assuming these shifts are structural, but how much further improvement you can get there or think you can get there on the product side?

So, Matt, we're well on track to what we have put out for the year on where we expected gross margins to end. So, we're well on track to achieve those product gross margins that we highlighted. If anything, we're running a little bit ahead of where we thought that we would be. As far as how much we can improve them, you know, hopefully next time we speak, we will lay out for you guys our multi-year roadmap. But clearly, as we become more disciplined in our pricing, as we've now fortified important parts of our supply chain, diversified supplier base, there is still opportunity for us to keep improving our product growth margins as we go forward.

Thanks, Octavio. And then the last few quarters, you've been giving us a backlog number. Is there any chance you can give us an update there?

Yeah, Matt, it's come down a little bit from prior quarter as we've accelerated backlog to revenue efforts. So it's right around that $1.3 billion, so $1.25, $1.3 billion range as we exit the third quarter.

yeah matt probably an important thing to to remember is we still have elevated backlog levels our long-term goal is to have a backlog of roughly two a little bit over two quarters of product revenue and backlog at any given time that would provide greater efficiency in our operations you know as jim said we're north of one point two one point three billion you know almost one point two and that one point two one point two and a half billion dollars we need to still keep accelerating deliveries and get that backlog to a more normalized level. So there's still opportunity to accelerate our backlog conversion.

Excellent. And then just one clarification, if you will. I think of the non-GAAP EPS number, there was a large tax included. Could you just give a bit more color around that?

Yeah, that, Matt, and, you know, this quarter, I think a little bit, there's a lot going on, obviously, from an accounting standpoint with fresh starts and evaluation efforts that had to go into that, as well as the impacts associated with the plan with respect to the reorg items. And so that's essentially the impact from a tax perspective once taking off the valuation allowance in the U.S. relative to the going concern moving away and us reassessing those and running that year-to-date tax impact through the third quarter. So as I said, there's a lot going on there, so happy to spend some more time there as necessary. But that's the catch-up from non-GAAP perspective considering all of the other things happening related to Fresh Start Accounting and the accounting group plan.

Awesome. Thanks for the call, Jim. That's all I got. Sure.

Thank you. And we have a follow-up question from Matt Somerville of DA Davidson & Co. Matt, please go ahead. Your line is open.

Excuse me. A couple questions. OpEx is down $14 million quarter-on-quarter. I think year-to-date down 20-ish million. Talk to me about the sustainability there. What recess from a comp standpoint in 24, how we should be thinking about OPEX moving in the next year, given some of the moving pieces there?

So, Matt, you know, I think that the way we need to think about, you know, OPEX is there, you know, We've reset incentive compensation in our plan to the appropriate level. Next year, clearly, we will still have to deal with labor inflation, but we're working on how we offset that with efficiencies in our operation. So, what I would tell you is that we believe that the level that we're at is a sustainable level where any increases due to wage inflation and others, we will be able to offset with efficiency in our operation, and that is our focus. You know, we really want to maintain our SG&A, our total office, you know, at this level, and any increase needs to be offset with efficiency. And, you know, and we feel comfortable that we will be able to achieve that in the coming years.

And then maybe just talk, you know, bigger picture. I've obviously followed Diebold a long time. Every new CEO or newer CEO that's taken over at Diebold has unleashed sort of a multi-hundred million dollar incremental sort of cost out program. And I know you've done some of that, but I guess I'm curious, Octavio, is there more structural cost outs still to be had at Diebold? And if so, could you elaborate on that a little bit? Thank you.

So, so, Matt, you know, I, I always stress the way I want to run the company and and again, I'm one of the many fields that you covered and that's I always joke with you hope that you cover me for many, many years to come. But the way I want to run the company is with the mindset of continuous improvement. So, we don't have 1 program, or I don't want to run a program that's focused in the short term. I want to run a program where the company keeps improving quarter over quarter year over year, because we will always find additional deficiencies in our business model. We will respond to changes in the market. We will respond to to customer preferences. But we need to be a nimble enough organization that's always thinking, how do we can improve? So, you know, so to your point, will we take some, you know, will we make a big, a big new program? My answer to you is, we will always be looking for efficiency in our operations, but it needs to be. a consistent improvement. It's not a one-time thing. It's quarter over quarter. We need to improve year over year. We need to improve. And as Pat said in his remarks, there's ample opportunities for us to keep improving our operation. And we're focused on that, making sure that we're operating in the most efficient way possible.

Got it. And then maybe just one more. Over to the retail business, self-checkout obviously doing very well for you guys. EPA shipments down, what does that sort of infer from a macro standpoint and how should we be thinking about EPAs in 2024?

Obviously, Matt, I always want to have a healthy EPA business where it's an important part of the business, but we are clearly seeing, and this is part of our strategy, a shift to self-service. Epos is an easier decision to delay by customers to replace. Self-checkout is a necessity. So all our efforts are focused on how do we accelerate self-checkout. But again, you will see that we also will have a keen eye on accelerating growth on Epos as we go forward. So, I would tell you that if you're thinking macroeconomically, self-checkout continues to be one of those drivers that helps retailers on the cost side of the equation, but also, very importantly, in creating a better customer experience at the checkout. So, I would say that we will continue pushing very hard to grow our self-checkout while maintaining or slightly growing our EPOS business.

Thanks, Octavio. That's it.

Thank you. We have no further questions. And I'll hand back to Chris for any closing comments.

Yeah, thank you. Thanks again for the time today. And please feel free to reach out to me in investor relations if you have any questions. Thanks.

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.