Diebold Nixdorf, Incorporated (NYSE:DBD) Q3 2023 Earnings Call Transcript

Diebold Nixdorf, Incorporated (NYSE:DBD) Q3 2023 Earnings Call Transcript November 9, 2023

Operator: Hello everyone and welcome to the Q3 2023 Diebold Nixdorf Earnings Call. My name is Nadia and I will be coordinating the call today. [Operator Instructions] I will now hand over to your host, Chris Sikora, Investor Relations to begin. Chris, please.

Chris Sikora: 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 Participants should be mindful that subsequent events may render this information to be out of date.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 3, a reconciliation between GAAP and non-GAAP measures can be found in the supplemental schedules of the presentation. With that, we’ll turn the call over to Octavio.

A finance executive with a satisfied smile reviewing a pile of documents in their office.

Octavio Marquez: Thank you, Chris, and thank you all for joining us. Before we get started with our normal quarterly updates, I wanted to give our new Chair, Patrick 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 to some comments. Afterwards, Jim and me will walk you through our quarterly results. Pat, over to you.

Patrick Byrne: 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 Octavia and his team in this exciting new chapter for the company. Now, I’ll pass it back to Octavio and to Jim.

Octavio Marquez: 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 4, 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 cracking 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 5, 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. Through 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 customer. 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 API’s, the solution easily integrates into the most complex retail operating environment. Also during the third quarter, we began shipping higher volumes upwards DN Series EC1 [ph] 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, and 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 4-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 Tao [ph] Employees Credit Union, which includes DN series devices to optimize branch and ATM channel efficiency. On the retail side, we expanded our self-checkout installed base with our dynamic checkout software presence at a major supermarket chain located in Great Britain and Ireland with 19 million [ph] agreement. We continue to expand our North America business with new wind 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 7, 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 the record highs 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 position as 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.

Jim Barna: Thank you Octavio. Starting on Slide 8, 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 offering. 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 products from the impact of price adjustments and the benefits of discipline 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 in the North American market.

Moving to Slide 9, 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 attached 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 14. 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 markets. At year end 2022, the company had approximately $2.6 billion in gross debt, and approximately $2.3 billion of 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’re approximately 2.2 times levered based on Q3 trailing 12-month adjusted EBITDA. Our liquidity and cash flow profile are significantly improved.

We have a 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 at near-term maturities ranging from 2023 to 2026, and replaced it with $1.25 billion exit term loan maturing in 2028. Importantly, the exit term loan also allows for $200 million accordion [ph] basket to put in place a revolving credit facility in the near-term subjected 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 a 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 burned down [ph] on our elevated deferred revenue balance, approximately $30 million of vendor normalization payments, and approximately $21 million in 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.

Octavio Marquez: 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.

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Q&A Session

Operator: [Operator Instructions] And our first question is from Matt Summerville of D.A. Davidson & Co. Matt, please go ahead. Your line is open.

Matt Summerville: Thanks. Good morning, couple of questions. Octavio, can you maybe spend a couple of 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.

Octavio Marquez: Sorry about that, Matt. Siri was then trying to answer for me. So, probably you signed up like 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, we — some of the efforts that we did increasing production lines that are self-checkout are paying dividends. And as you saw, record number of self-checkout shipments; 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’d 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 [ph] family that will clearly help banks as they transform their branch environment by allowing the same components, the same cassettes 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 good about the demand on that. And as you saw, we’re also making continue to make inroads into the North American market with retail, with wins not only now from our European retailers that are establishing themselves in the America, but now winning some local customers. And to wrap things up, Asia Pacific; 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 production in India that will help us grow in that market — a market that shows great promise for us, and one that where 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 continue to ordering our products across the globe. So I’m excited about the future, Matt.

Matt Summerville: 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 what timeframe we should expect, for getting the fourth quarter seasonal bump you’re going to get? When do service margins get back into kind of the targeted range that the company had laid out in the not too distant past? And is there something that is structurally changed in that business whereby maybe that margin target doesn’t make sense anymore? Thank you.

Octavio Marquez: No, Matt. And thank you for your question. So when we think about services, as I mentioned in 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 improved 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 and all our service operations. With that said, you know that — 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 Matt where we’re shifting the mix of resources from external to internal resources that I mentioned in the prior quarter. So I will tell you that this is a process that 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 us our long-term goal remain achievable, and I’m — and I think that you will start seeing us trending towards those targets in the coming periods.

So there is nothing structurally different about our service market. I think that if anything, you know, this $2 billion business or $2.1 billion business that we have with 70% recurring revenue is a very resilient business where I want to keep investing and growing that business.

Matt Summerville: Got it. Thank you.

Operator: Thank you. [Operator Instructions] And our next question is from Matt [ph] of Wedbush. Matt, please go ahead. Your line is open.

Unidentified Analyst: Thanks for taking my question. I guess my first question is around the banking product gross margins. The improvement — I think you talked through 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 shifts are structural but how much further improvement you can get there or think you can get there on the product side?

Octavio Marquez: So Matt, we’re well on-track to what we have put out for the year and where we expect 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 we would be. As far as how much we can improve them, 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 gross margins as we go forward.

Unidentified Analyst: 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?

Jim Barna: Yes, Matt. It’s come out a little bit from prior quarters as we’ve accelerated backlog to revenue efforts. So it’s right around that $1.3 billion. So $1.25 billion to $1.3 billion range, as we exit the third quarter.