Q3 2023 Diebold Nixdorf Inc Earnings Call
Okay.
Hello, everyone and welcome to the key Street 2023 D boat Nixdorf, adding school my name is not yet and I'll be coordinating the call today.
If you would like to ask a question. Please press star one on your telephone keypad I will now hand over to your highest Chrissie Cooper Investor Relations to begin Chris Please.
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 companys 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Participants should be mindful that subsequent events may render this information to be out of date.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.
Note on slide three a reconciliation between GAAP and non-GAAP measures.
We found in the supplemental schedules of the presentation with that I will 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 at Bern and opportunity to introduce himself on this call.
After emerging from our debt restructuring profit, we reconstituted the board of directors and are very excited about the governance.
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Inside the board will bring to the company.
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, I'll caveat 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 as 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.
Tend 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 bold next or team has brought technologies that have demonstrated a 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 our results for the company.
As we finish this year, we will set the 2020 for 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 I'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 one in the market and continue to improve our operational execution.
As you can see on slide four we have made meaningful progress against all three of our 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 emerge a stronger company with recapitalized balance sheet enhance 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.
We remain focused on delivering a strong fourth quarter to close the year.
We continue winning in the market.
With our World class solution, and we have recently brought new innovative solutions to our customers, but 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've made in the quarter.
In banking.
We are helping banks optimized all touch points 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.
The open 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 recyclers that automate note handling and authentication for Brian staff and.
In addition, we introduced the highest capacity recycler currently in the market.
High capacity recycler, it's a strong asset toward banked in 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 journey as retailers continually adopt more self service technology.
By NAMIC retail cloud platform.
First our consistent checkout experience across multiple touch points.
Built on open Apis.
Solution easily integrates into the most complex retail operating environment.
Also during the third quarter, we began shipping higher volumes suffered.
In theory EC one checkout solution.
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 resources cost 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 our major four year service contract in Brazil valued at $65 million.
Covering 15000, Atms and nearly 4000 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 installed base with a buy NAMIC checkout software.
Breath and at a major supermarket chain located in Great Britain, and Ireland with 19 million agreement.
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 our recent high in ATM unit production and a record high in quarterly self checkout production.
Our efforts strengthening our supply chain and logistics environment.
Bind with our normalized vendor relationships and the work we did to identify alternate component and deepen our supplier bench are paying dividend.
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.
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 continued to invest in customer satisfaction efforts related to service and then 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 units 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 towards 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.
Complicit in the.
The company completed an expedited debt restructuring process in August that materially Delever, 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 net debt.
Now at the end of the third quarter. The company has approximately $125 billion of gross debt and approximately $800 million of net debt.
From a net leverage perspective, the company was approximately eight five times elaborate at year end 2022 now at Q3 were approximately two two 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 at near term maturities ranging from 2023 to 2026 and replaced it with a $1 billion to $5 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 paydown of the term loan we.
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.
That are nonrecurring in nature free cash flow would have been slightly positive.
These nonrecurring cash uses include.
<unk> $59 million of burn down 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.
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 HSN keypad. If you would like to attract your question. Please press star one to ask a question opinions youll need to Nike.
And our first question that you have some available of D. A davidson.
Matt. Please go ahead your line is open.
Thanks.
Good morning couple of questions. Just 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 are both banking and retail I should say and then I'll have a follow up.
Alright, thank you.
Thank you.
Sorry about that theory with them trying to answer for me.
So probably you signs of life.
We tried to highlight the results by region as you can see that we have strong double digit growth in every region.
So again, we still see a robust.
Strong demand environment for both recyclers and for ourselves checkout solutions, what's more we some of the efforts that we've been increasing production lines of self checkout are paying dividends and as you saw record number of cells.
Self checkout shipments is the highest we've ever had in the company's history.
We're still confident around the demand and acceptance of our products into 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.
In the U S and Canada.
Expect that trend to continue and as you saw in our remarks as well, we're expanding our product offering with now a teller cash recycler that as another member of the DN series family that will clearly help banks as they transform their back to the branch environment.
Along the same components are the same.
Apologies to be deployed across all touch points with the brand. So we think it's a very unique thing for us for our North America market Latin America.
<unk> continues to grow and we continue to see significant expansion. This banks use the Atms are.
The way to touch more consumers.
Financial inclusion in the market. So we expect them and in Latin America remains strong.
We always thought of Europe is 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 the demand on that and as you saw we're also making.
Continue to make inroads into the North American 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.
To wrap things up with Asia Pacific.
Right.
I always say Asia Pacific is scenario, great opportunity, there's clearly always more business there than what we could probably have an appetite for based on the profile, but if you recall. We also now have started.
Production.
<unk> in India that will help us grow in that market a market that shows great promise for us and one that we haven't been focused.
So again.
I feel that the demand environment is very conducive to being able to.
Continuing growing our business and that our customers throughout the process.
Benefit us with continue can you ordering our products across the globe.
I am excited about the future of that.
Thanks for that color Octavio may.
Maybe if you guys can comment a little bit.
Services gross margin and how long, we should expect or over what timeframe. We should expect forgetting the fourth quarter seasonal bumps youre going to get when your service margins could get back into kind of the targeted range that the company had laid out in the not too distant past.
Is there something that has structurally changed in that business, whereby maybe that margin target doesn't make sense anymore. Thank you.
Okay.
No. Thank you for the question so.
So when we when we think about services as I mentioned in the prior quarter.
Our main focus in our service operations globally has 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 who I want to make sure that we can continue this trend.
Improved service quality, which will lead to improved customer satisfaction more orders for us in the future. So my focus and that is why.
Our entire service team is let's make sure that we're improving quality across the globe in all of our service operations.
That said.
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That means that we're shifting our model as we grow our service business and the economy.
Come.
Reliance on using third parties in certain 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 that mix up resources from external to internal resources as I mentioned in the prior quarter.
So I would tell you that this is this is a process as we hire our people we maintained 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 goals remain achievable in IMAX.
Think that you will start seeing us.
Trending towards those targets.
The coming periods, so theres nothing structurally different about our service market I think that if anything.
$2 billion business are $2 $1 billion business that we have with 70% recurring revenue is a very resilient business.
I want to keep investing in growing that business.
Got it thank you.
Okay.
Thank you and as a reminder, if you would like to ask a question. Please press star followed by one on National Thank you Pat.
Our next question you guys see much bison of Wedbush.
Please go ahead your line is now.
Thanks for taking my question.
I guess my my first question is around the banking product gross margins.
The improvement I think you talked to.
Improved supply chain and pricing discipline.
I guess correcting some some past issues.
Can you give us some color around it.
Exactly how much 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 we're well on track to what we have put up for the year on where we expected gross margins. When so we're well on track to achieve those product gross margins that we 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 we can improve them. Hopefully next time, we speak we will lay out for you guys saw our multiyear roadmap, but clearly as we become more disciplined in our pricing. 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.
Thanks, Octavio and then the last.
The few quarters, you've been giving us a backlog number is is there any chance you can give us an update there.
Yeah.
Okay.
Yes, Matt.
It's come down a little bit from from prior quarter as we've accelerated backlog to revenue metrics.
It's right around that $1 $3 billion $1, five $1 $3 billion range as we exit the third quarter.
Yes, Matt probably an important thing to remember is we still have elevated backlog level. Our long term goal is to have a backlog of roughly two a little bit over two quarters of product revenue in backlog at any given time that would provide greater efficiency in our operations as Jim said, we're north of one two.
$1 3 billion, almost one two and $1 to $1 $2 $5 billion, we need to still keep accelerating deliveries and get that backlog to a more normalized level. So there's still opportunities to accelerate our backlog conversion.
Excellent and then just.
One clarification, if you will.
The non-GAAP EPS number.
A large tax.
Included can you just give a bit more color around that.
Yes that Matt and this quarter I think a little bit there's a lot going on obviously from an accounting standpoint with.
With fresh start and evaluation efforts that go into that as well as.
The impacts associated with the plan with respect to the re org 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 are reassessing nose, and running that year to date tax impact through.
Through the third quarter. So as I said, there is a lot going on there so happy to happy to spend.
More time, there is necessary, but that's the catch up from a non-GAAP perspective, considering all of the other things happening related to fresh start accounting and the accounting for the plan.
Awesome, Thanks for the color.
That's all I got.
Sure.
Okay.
Thank you and we have a follow up question from Matt Summerville of D. A Davidson.
Go ahead your line is open.
Thanks, Mike.
Couple of questions.
Opex was 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 'twenty four how we should be thinking about opex moving into next year, given some of the moving pieces there.
Okay.
So Matt I think thats the way, we need to think about Opex is there.
We've reset of incentive compensation and our plans 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 operations. 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 offer.
With efficiency in our operations.
Our focus.
We really want to maintain our our our SG&A our total opex.
At this level and any increased needs to be offset with efficiencies.
And we feel comfortable that we will we will be able to achieve that in the coming years.
Okay.
Hum.
Maybe just talk.
Bigger picture, obviously, followed diebold a long time.
Every new CEO or newer CEO, that's taken over at <unk> is on leashed sort of 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 out still to be had.
Diebold and if so could you elaborate on that a little bit. Thank you.
So soma.
I always stress the way I want to run the company and again one of the many Ceos that you've covered and I always joke with you hope that you've covered before many many years to come.
The way I want to run the company is with the mindset of continuous improvement. So we don't have one 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 efficiencies in our business model, we will respond to changes in the market.
We will respond to two customers.
Customer preferences, but we need to be nimble enough organization Thats always thinking how do we can continuously improve so so.
So to your point, we take summit, where we make a big Big New program. My answer to you is we will always be looking for efficiency in our operations, but it needs to be.
Consistent improvement that's not a onetime thing it's quarter over quarter, we need to improve year over year, we need to improve.
I've said in his remarks, theres ample opportunities for us to keep improving our operation and we're focused on 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.
<unk> shipments down what does that sort of infer from a macro standpoint, how should we be thinking about a pause in the 'twenty four.
Obviously, I always want to our LTE plus business.
It's an important part of the business, but we are clearly seeing and this is part of our strategy shift to self service. So.
The process, an easier decision to delay by customers to replace self checkout as 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 the books as we go forward. So I would tell you that if youre 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 so so I would say that we will continue pushing very hard to grow our self checkout, while maintaining or slightly growing or.
Each of our business.
Hi Tech savvy that's it.
Thank you we have no further questions I'll now hand back to Chris any closing comments.
Yes. Thank you. Thank you again for the time today and please feel free to reach out to Investor Relations. If you have any questions. Thanks.
Thank you. This now concludes today's call. Thank you for joining you may now disconnect your lines.
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Yeah.
Okay.
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Okay.