Q4 2023 Diebold Nixdorf Inc Earnings Call
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Alex: Diebold Nixdorf Diebold Nixdorf Diebold Nixdorf Diebold Nixdorf, www.dieboldnixdorf.com Thanks for watching! Hello and welcome to the Q4 2023 Diebold Nixdorf Earnings Call. My name is Alex, and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press start followed by 1 on your telephone keypad. I'll now hand it over to your host, Christopher Sikora, to begin. Please go ahead.
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Hello, and welcome to the Q4 'twenty to 'twenty three deep old Nick still findings cool my name is Alec somebody cool Thanks, Nicole Ste.
If you'd like to ask a question at the end of the presentation you compress style led by one on your telephone keypad.
I'll now hand over to your host Christopher <unk> to begin. Please go ahead.
Christopher Sikora: Hello, everyone, and welcome to our fourth quarter and full year 2023 earnings call. To accompany our prepared remarks, we have posted our slide presentation in 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. However, participants should be mindful that subsequent events may render this information out of date.
Hello, everyone and welcome to our fourth quarter and full year 2023 earnings call.
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.
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Participants should be mindful of that subsequent events may render this information to be out of date.
Christopher Sikora: 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, I'll turn the call over to Octavio. Thank you, Chris, and thank you all for joining us. To get things started today, I wanted to give our chairperson, Pat Byrne, another opportunity to share some opening remarks. Pat and the broader board have been in place for about four months. We have spent that time working closely together to establish our governance framework and align around longer-term objectives for the company. So today, I thought it would again be appropriate for Pat to kick us off with some of his early takeaways from working with Diebold Nixdorf. Afterward, Jim and I will walk you through our quarterly results. Pat, over to you.
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.
To get things started today I wanted to give our chair Pat Byrne another opportunity to share some opening remarks.
Pat in the broader board have been in place for about four months now we have spent that time working closely together to establish our governance framework.
And align around longer term objectives for the company.
So today I thought it would again be appropriate for a path to kick us off with some of his early takeaways working with Diebold nixdorf.
Afterwards, Jim and I will walk you through our quarterly results.
Over to you.
Octavio: Thanks, Octavio. I'll just make a few comments to provide an update on the board's progress and give you a sense of our excitement for the future of Diebold. We've been working together as a new board of directors for several months now and are making very good progress as we complete fiscal year 2023 and set priorities and objectives for fiscal 2024. We're also building strong governance and board oversight, and the board and management team are working well together, focused on running the company towards consistent and improving operating results, while also building the flywheel that leads to accelerating profitable growth, margin expansion, and free cash flow conversion. Akavi and his team are entering 2024 with real momentum and with clear priorities for both operations and the multi-year transformation agenda.
Thanks, Octavio I'll just make a few comments to provide an update on the board progress and give you a sense of our excitement for the future of Diebold.
We've been working together as a new board of directors for several months now and we're making very good progress as we completed fiscal year 2023, and set priorities and objectives for fiscal 2024. We're also building strong governance and board oversight and the board and management team are working well together focused on.
Rather the company towards consistent and improving operating results. While also building a flywheel that leads to accelerating profitable growth margin expansion and free cash flow conversion.
<unk> and his team are entering 2024 with real momentum.
Clear priorities for both operations and multiyear transformation agenda.
Pat Byrne: As I mentioned last quarter, we believe that Diebold's market position in both banking and retail, built on strong customer relationships and innovative technology, puts us in a strong position to win in the marketplace going forward. We're confident in our 2024 guidance and the long-term outlook for the company. We intend to share our views of the market, the Diebold opportunities, and our long-term plans and targets at a 2024 Investor Day. We're currently planning on doing this Investor Day in the middle of the year, and we'll keep you updated on our plans. We're excited about the future of Diebold and working closely with Octavio and his team to drive long-term shareholder value. Now, I'll turn it over to Octavio and to Jim. Thank you, Pat.
As I mentioned last quarter, we believe that the diebold market position in both banking and retail built on strong customer relationships and innovative technology puts us in a strong position to win in the marketplace going forward.
We're confident in our 2020 for guidance and the long term outlook for the company, we intend to share our views of the market the diebold opportunities and our long term plans and targets in 2020 for an Investor day. We're currently planning on doing this investor day in the middle of the year and we will keep you updated on our plans.
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We're excited about the future of Diebold and working closely with Octavio and his team to drive long term shareholder value now I will turn it over to a <unk> to Jim.
Thank you Pat.
Octavio: We appreciate you being with us and sharing your thoughts today. We're looking forward to continuing working with you and the board on the journey ahead. So now, starting on slide four, we have highlighted four areas that summarize our positive results in four. First, we continue winning in the market with our leading self-service and automation technology. Our customers are continually striving to improve the customer experience and lower operational costs. We are seeing consistent install-based refresh activity as customers are increasingly replacing legacy solutions with our new technology.
We appreciate you being with us and sharing your thoughts today.
We're looking forward to continue working with you and the board on the journey ahead.
So now starting on slide four we have highlighted four areas that summarized our positive results in the fourth quarter.
First we continue winning in the market with our leading self service and automation technology.
Our customers are continually striving to improve customer experience and lower operational costs.
We are seeing consistent installed base refresh activity as customers are increasingly replacing legacy solutions with our new technology.
Demand remains high for our ATM cash recycling and retail self checkout solutions, which are also establishing recurring service revenue and additional software business with a high attach rate.
Octavio: Demand remains high for our ATM cash recycling and retail self-checkout solutions, which are also establishing recurring service revenue and additional software business with a high attach rate. We remain focused on driving innovation that our customers need. The team introduced our AI-powered, dynamic, smart vision shrink-reduction solution as we build on our retail self-checkout technology deployed in the market. This solution addresses shrink-related challenges in retail, using AI and computer vision technology to reduce loss during check-ins.
We remain focused on driving innovation that our customers need.
The team introduced our AI powered by NAMIC smart position strength reduction solution as we build on our retail self checkout technology deployed into the market.
This solution address this shrink related challenges in retail using AI and computer vision technology to reduce lost during checkout.
On the banking side, our teller cash Recyclers has started shipping in North America.
Octavio: On the banking side, our Teller Cast Recycler has started shipping in North America. VN's in-branch cash recycling solution supports end-to-end automation across the entire cash ecosystem at the branch, from ATMs to the teller. We continue to view branch automation as a meaningful growth opportunity. With over 70,000 bank branches in the U.S. alone and a consistent drive by banks to reduce operating expenses, we know this offering meets the needs of our customers. Once again, we had another quarter of strong performance as our team remained focused on customers and continued to improve our operational execution. The team can be proud that in each quarter of 2023, we grew revenue and profitability on a year-over-year basis. Our improved operational execution helped us meet expectations for the year and position us well moving into 2020. Lastly, we achieved another milestone by paying down $200 million of our higher-cost term loan and securing a new revolving credit facility.
And in branch cash recycling solution supports end to end automation across the entire cash ecosystem at the branch.
Atms to the Teller line.
We continue to view branch automation as a meaningful growth opportunity.
With over 70000 bank branches in the U S alone.
The consistent drive by banks to reduce operating expenses, we know this offering meets the needs of our customers.
Once again, we had another quarter of strong performance as our team remained focused on customers and continue to improve our operational execution.
The teams can be proud that in each quarter of 2023, we grew revenue and profitability on a year over year basis our.
Our improved operational execution helped us meet expectations for the year and positioned us well moving into 2024.
Lastly, we achieved another milestone by paying down $200 million off our higher cost term loan and securing a new revolving credit facility.
Octavio: This will provide us with the flexibility we need to manage the seasonality of our business at a lower cost. In addition, we were able to do this because we generated fourth-quarter free cash flow of $150 million and ended the year with more than $600 million in cash and short-term investments on our balance. Turning to slide five.
This will provide us with the flexibility we need to manage the seasonality of our business at a lower cost.
In addition, we were able to do this because we generated fourth quarter free cash flow of $150 million and ended the year with more than $600 million in cash and short term investments on our balance sheet.
Turning to slide five.
I want to highlight regional trends.
Octavio: I want to highlight regional trends. We operate a balanced global business, and each of our regions contributed to revenue growth in 2020. In North America, we continue to see strong adoption of cash recycling technology driving our banking business, as well as more retail wins with our self-checkout solution in quick service restaurants. We see additional runway for both these offerings in North America and expect them to be a significant part of our growth story going forward. Additionally, we continue to focus on customer service and quality, with higher investment in our service business. In Latin America, cash usage remains strong.
We operate a balanced global business in each of our regions contributed to revenue growth in 2022.
In North America, we continued to see strong adoption of cash recycling technology, driving our banking business.
Well, it's more retail wins with our self checkout solution in the quick service restaurant space.
We see additional runway for both these offerings in North America, and expect it to be a significant part of our growth story going forward.
Additionally, we continue to focus on customer service and quality.
With higher investments in our service business.
In Latin America cash usage remains strong supporting demand for both our DN series cash dispensers and cash recyclers.
Octavio: Supporting demand for both our DN Series cash dispensers and cash recyclers. Growth in Latin America service revenue was a bright spot in 2023 as we continue benefiting from a growing installed base in the region. In Europe, we continue to see an overall stable market for banks.
Growth in Latin America service revenue was a bright spot in 2023, as we continue benefiting from a growing installed base in the region.
In Europe, we continue to see an overall stable market for banking.
Octavio: In retail, most of our self-checkout shipments represent new placements in the market. This has helped grow our installed base and supported our recurring service business in Asia-Pacific, the Middle East, and Africa. We are seeing broad growth with our products across the entire region, especially in the Middle East and Africa. We also ended the year on a strong note in India, as we delivered about 5,000 units in-country after re-entering that market with a local manufacturing presence in 2020.
In retail most of our self checkout shipments represent new placements in the market. This has helped grow our installed base and supports our recurring service business.
In Asia Pacific Middle East and Africa.
We are seeing broad growth with our products across the entire region with strength in the middle East and Africa.
We also ended the year on a strong note in India as we delivered about 5000 units in country. After re entering that market with local manufacturing presence in 2023.
Octavio: Now to our full-year financial performance on slide two. Throughout the year, we delivered significantly improved performance by profitably growing revenue, expanding gross margins, and driving cost distribution. This focus is clearly evident in our performance, with total revenue of 9%, gross margin expansion of 160 basis points, and operating expenses down 2% compared to the prior year, resulting in operating profit growing approximately 75%. The old year adjusted EBITDA of $401 million is up 43% compared to the prior year, and adjusted even the margin expanded 300 basis points to 10.7%. We finished the year in line with our expectations and at the high end of our previously communicate While I am pleased with our 2023 performance, which demonstrates that we are taking the right steps, we know that we can build upon this and further improve in 2024. With that, I will hand the call over to Jim. Thank you, Octavio.
Now to our full year financial performance on slide six.
Throughout the year, we delivered significantly improved performance by profitably growing revenue expanding gross margin and driving cost discipline.
This focus is clearly evident in our performance with total revenue up 9% gross margin expansion up 160 basis points and operating expenses down 2% compared to prior year.
Resulting in operating profit growing approximately 75%.
Full year, adjusted EBITDA of $401 million is up 43% compared to prior year.
And adjusted EBIT margin expanded 300 basis points to 10, 7%.
We finished the year in line with our expectations and at the high end of our previously communicated outlook range.
While I am pleased with our 2023 performance, which demonstrates that we are taking the right steps. We know that we can build upon this and further improve in 2024.
With that I will hand, the call over to Jim.
Thank you Octavio starting on slide seven the fourth quarter was another period of continued improvement that was in line with our expectations.
Jim: Starting on slide 7, the fourth quarter was another period of continued improvement that was in line with our expectations. Revenue and profitability were up significantly both sequentially and compared to the prior year. The higher revenue with 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 $1.04 billion increased 7.6%, and gross margin expanded 340 basis points year-over-year. Strong product performance was the primary driver behind the gross margin expansion as we continue to derive benefits from our improved supply chain and pricing discipline. Q4-23 operating expense was up compared to the prior year period. However...
Revenue and profitability were up significantly both sequentially and compared to the prior year.
The higher revenue with gross margin expansion is falling through to the bottom line, resulting in strong year over year growth in operating profit and adjusted EBITDA.
Revenue of 1.04 billion increased seven 6% and gross margin expanded 340 basis points year over year.
Product performance was the primary driver behind the gross margin expansion as we continue to drive benefit from our improved supply chain and pricing discipline.
Q4, 23 operating expense was up compared to the prior year period.
However.
Jim: Note that the prior year period included a non-recurring adjustment that reduced variable compensation. If not for that adjustment, operating expenses would have been flat year over year. Looking at free cash flow, please note that in the prior year period, product deferred revenue was elevated relative to historical levels and has now been normalized. Q4'23 free cash flow of $150 million was up $66 million year-over-year driven by favorable EBITDA performance, better working capital efficiency, and meaningfully lower interest. Turning to slide 8, banking revenue of $750 million was up approximately 9% versus the prior year period, driven by product revenue growth of 19%. Approximately half of the growth came from higher volume, with the other half driven primarily by pricing and mix, with a small currency benefit.
Note that the prior year period included a nonrecurring adjustment that reduced variable compensation.
If not for that adjustment operating expenses would have been flat year over year.
Looking at free cash flow. Please note in the prior year period product deferred revenue was elevated relative to historical levels and has now been normalized.
<unk> hundred 23 free cash flow of $150 million was up $66 million year over year, driven by favorable EBITDA performance better working capital efficiency and meaningfully lower interest.
Turning to slide eight.
Banking revenue of $750 million was up approximately 9% versus the prior year period, driven by product revenue growth of 19%.
Approximately half of the growth came from higher volume with the other half driven primarily by pricing and mix with a small currency benefit.
Jim: We continue to have consistent demand for our DN series offering, and improved supply chain and logistics conditions have enabled us to deliver on this. Service revenue was up approximately 1% versus the prior year, driven by higher product installation revenue. As a reminder, ATM deliveries across the industry mostly represent replacement units in the market, so the high product installation activity we saw in the quarter should lead to a stable installed base going forward. Banking gross profit in the fourth quarter increased by $46 million year-over-year to $202 million.
We continue to have consistent demand for our DN series, offering and improved supply chain and logistics conditions have enabled us to deliver on this demand.
Service revenue was up approximately 1% versus the prior year driven by higher product installation revenue.
As a reminder, ATM deliveries across the industry, mostly represent replacement units in the market. So the high product installation activity, we saw in the quarter should lead to a stable installed base going forward.
Banking gross profit in the fourth quarter increased by $46 million year over year to $202 million.
Jim: This resulted in a banking gross margin of 27% in the quarter, which is up 430 basis points year over year. The significant gross margin expansion was due to the continuation of price increase realization, greater input cost control, and higher production volume in the quarter. Moving to slide nine.
This resulted in banking gross margin of 27% in the quarter, which is up 430 basis points year over year.
Significant gross margin expansion was due to the continuation of price increase realization greater input cost control and higher production volume in the quarter.
Moving to slide nine our retail revenue of $288 million was up four 5% versus the prior year as we continue to see strong service activity with new placements of self service units driving higher contract revenue solid growth in scope product revenue was offset by lower <unk> revenue.
Jim: Retail revenue of $288 million was up 4.5% versus the prior year as we continue to see strong service activity with new placements of self-service units driving higher contract revenue. Solid growth in SCO product revenue was offset by lower EPOZ revenue as retailers continue to transition toward higher-value self-checkout solutions. Retail gross profit in the fourth quarter increased year-over-year to $74 million.
As retailers continue to transition towards higher value.
Self checkout solutions.
Retail gross profit in the fourth quarter increased year over year to $74 million. This.
Jim: This resulted in a retail gross margin of 25.6% in the quarter, which is up 100 basis points compared to the prior year, driven mostly by product gross margin expansion from a favorable mix of higher SCO year, on slide 10. This is a more complete view of the changes in our cast position over the last five quarters that we wanted to share today, which is aligned to how we manage the business. In the past, we have had significant quarterly volatility in our free cash flow.
This resulted in retail gross margin of 25, 6% in the quarter, which is up 100 basis points compared to the prior year driven mostly by product gross margin expansion from a favorable mix of higher <unk> units.
On slide 10.
This is a more complete view of the changes in our cash position over the last five quarters that we wanted to share today, which is aligned to how we manage the business.
In the past, we have had significant quarterly volatility in our free cash flow aside.
Jim: Aside from the impacts related to the financial restructuring in 2023, these swings have historically been driven by a number of factors, including seasonality in our earnings, a working capital cycle that historically resulted in significant cash use through the first three quarters of the year, and payments related to restructuring and transformation efforts. We believe that, exiting 2023, we are now in a better position to more efficiently manage free cash flow and purge some of the historical volatility that has been present in our performance through improved commercial and operating rigor. Going forward, we will deliver meaningfully better free cash flow conversion as we manage working capital more efficiently, lower cash interest payments, and manage cash spent on restructuring and transformation initiatives with a strong focus on return. As Octavio mentioned in his opening, we paid down $200 million on our term loan and secured a revolving credit facility, which should result in approximately $15 million of savings in annual net interest.
Aside from the impacts related to the financial restructuring in 2023. These swings have historically been driven by a number of factors, including seasonality in our earnings our working capital cycle that historically resulted in significant cash used through the first three quarters of the year and payments related to restructuring and transformation efforts.
We believe that exiting 2023, we're now in a better position to more efficiently manage free cash flow and purged some of the historical volatility that has been present in our performance through improved commercial and operating rigor.
Going forward, we will deliver meaningfully better free cash flow conversion as we manage working capital more efficiently lower cash interest payments and manage cash spent on restructuring and transformation initiatives with a strong focus on returns.
As Octavio mentioned in his opening we paid down $200 million on our term loan and secured a revolving credit facility, which should result in approximately $15 million of savings in annual net interest.
Jim: This is just the beginning of the improvements we expect to realize, as we believe we have many opportunities ahead of us to show continuous improvement. Again, free cash flow was a source of $150 million in the quarter, which is up $66 million compared to the prior year period, and it is our expectation in each quarter of 2024 to show year-over-year improvement in free cash. Now, on slide 11, turning to our outlook for 2024. We expect to profitably grow revenue in the low single-digit range. We consider this to be a more normalized revenue growth rate for the company going forward, and we feel good about hitting this target due to our backlog visibility and the recurring nature of service and software revenue. We expect adjusted EBITDA to be in a range of $410 to $435 million, which is benefiting from continued gross margin expansion and disciplined operating expense control. Looking at the quarterly cadence for the year, we expect the split between the first half of the year and the second half of the year to be approximately 40% versus 60%, which reflects an initial improvement in our efforts to more linearize the year compared to 2023. Lastly, the Outlook contemplates free cash flow conversion of greater than 25%.
This is just the beginning of the improvements we expect to realize as we believe we have many opportunities ahead of us to show continuous improvement.
Again free cash flow was a source of $150 million in the quarter, which is up $66 million compared to the prior year period.
And it is our expectation in each quarter of 2024 to show year over year improvement in free cash flow.
On slide 11, turning to our outlook for 2024.
We expect to profitably grow revenue in the low single digit range. We consider this to be a more normalized revenue growth rate for the company going forward and we feel good about hitting this target due to our backlog visibility and recurring nature of service and software revenue.
We expect adjusted EBITDA to be in a range of $410 million to $435 million, which is benefiting from continued gross margin expansion and disciplined operating expense control.
Looking at the quarterly cadence for the year, we expect the split between the first half of the year and second half of the year to be approximately 40% versus 60%, which reflects an initial improvement in our efforts to more linearized a year compared to 2023.
Lastly, the outlook contemplates free cash flow conversion of greater than 25%.
Jim: As I mentioned, we plan to execute on working capital improvements and will continue to opportunistically lower debt costs, all while growing EBITDA and expanding margin to generate higher free cash flow conversions. To close my remarks, we are entering 2024 with improved operating momentum and are well positioned as we work to deliver on our, Now I will turn the call back to Octavio. Thanks, Jim. Wrapping things up on slide 12.
As I mentioned, we plan to execute on working capital improvements and we will continue to opportunistically lower debt costs, all while growing EBITDA and expanding margin to generate higher free cash flow conversion.
To close my remarks, we are entering 2024 with improved operating momentum and are well positioned as we work to deliver on our outlook.
Now I will turn the call back to Octavio.
Thanks, Jim.
Wrapping things up on slide 12.
Octavio: Let me walk you through an early view of our continuous improvement journey. It all starts with our people, who make Diebold Nixdorf a great company. We're taking a fresh perspective with several initiatives planned to reinforce that we're a people-first organization. We will empower our teams to drive continuous improvement through trust, transparency, and a shared commitment to excellence. The company strives to attract, develop, and retain exceptional talent as a result. A strong team will deliver profitable revenue growth, winning new customers, and increasing wallet share through crisp commercial execution. In addition, we will accelerate growth through focused innovation for our customers by executing on our R&D pipeline to maintain our technological leadership. We will continue expanding margin while exceeding customer expectations. Accelerating the adoption of remote diagnostics and resolution, simplifying our product set to reduce component cost and complexity, and implementing an industry-leading operating expense profile will drive improved profitability.
Let me walk you through an early view of our continuous improvement journey.
It all starts with our people.
We'll make diebold nixdorf, our great company.
We're taking a fresh perspective with several initiatives plan to reinforce that we're a people first organization.
We will empower our teams to drive continuous improvement.
Through trust transparency and a shared commitment to excellence.
The company strives to attract develop and retain exceptional people.
As a result.
A strong team will deliver profitable revenue growth, winning new customers and increasing wallet share through commercial execution.
In addition, we will accelerate growth through focused innovation for our customers by executing on our R&D pipeline to maintain our technology leadership.
We will continue expanding margin while exceeding customer expectations.
Accelerating the adoption of remote diagnostic and resolution simplifying our product set to reduce component cost and complexity and implementing an industry, leading operating expense profile will drive improved profitability.
Finally.
Operator: We will execute on the levers that Jim outlined earlier to improve free cash flow conversion. Improving quarterly linearity will continue to be an area of focus. These four components help us build the flywheel for our growth and continuous improvement and will help us better visualize and achieve our longer-term objectives. As we conclude our prepared remarks, I am excited about the future of Diebold Nixdorf as we start our continuous improvement journey. I look forward to sharing more with you throughout the year as we achieve this objective. Lastly, I wish to thank our customers for their ongoing support. We are committed to providing best-in-class solutions to help them achieve positive business outcomes, and I remain incredibly proud of our Diebold Nixdorf employees around the world.
We will execute on the levers that Jim outlined earlier to improve free cash flow conversion, improving quarterly linearity will continue to be an area of focus.
These four components.
US build the flywheel for our growth and continuous improvement.
And will help us better visualize and achieve our longer term objectives.
As we conclude our prepared remarks.
I am excited about the future of Diebold nixdorf.
As we start our continuous improvement journey.
I look forward to sharing more with you throughout the year as we achieved this objectives.
Lastly, I wish to thank our customers for their ongoing support.
We are committed to providing best in class solutions to help them achieve positive business outcomes.
And I remain incredibly proud of our diebold nixdorf employees around the world.
Operator: Our team continues to focus on what is most important, our customers, all while improving operational execution. And with that operator, please open the call for Jim and me to take questions. Thank you. As a reminder, if you'd like to ask a question, you can press star followed by one on the telephone keypad. If you'd like to remove your question, you can press star followed by 2.
Our team continues to focus on what is the most important.
Our customers all while improving operational execution.
And with that operator, please open the call for Jim and me to take the questions.
As a reminder, if you'd like to ask a question you can press star followed by one on the telephone keypad if you like.
<unk> for your question.
Matt Summerville: Please ensure you're unmuted locally when asking your question. Our first question for today comes from Matt Summerville of D.A. Davidson.
I would like to.
Please ensure your unlimited likely when asking your question.
Our first question from today comes from Matt Summerville of D. A Davidson.
Matt Summerville: Your line is now open, please go ahead. Thanks. Excuse me, a couple of questions. You talked a little bit about product gross margins in the prepared remarks. I'm curious about a couple of things, to that absolute level of 25 and a half, realizing their seasonality to the business. How sustainable is that relative trend in improvement?
Your line is open. Please go ahead.
Thanks, excuse me a couple of questions.
You talked a little bit about product gross margins.
In the prepared remarks, I'm curious couple of things.
That absolute level at 25, and a half realizing there is seasonality to the business how sustainable is that relative trend in <unk>.
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Is there still incremental price capture to be had as you're driving down I would expect to driving down backlog over the course of the year.
Octavio: Is there still incremental price capture to be had as you're driving down, I would expect, driving down backlog over the course of the year? And then you didn't address services gross margins, which are headed in the wrong direction. So talk a bit about that, and then I have a follow-up. Thanks.
And then you didn't address services gross margins those headed in the wrong direction. So talk a bit about that and then I have a follow up thank you.
Thank you, Matt So let me start with product. So we continue to see very.
Octavio: So, so let me start with the product. So we continue to see very, very strong demand for both our DN series recyclers and our DN series self-checkout solutions. So, we're, you know, I think that that's the good news, technology is being adopted by customers, customers like the product set, and they continue investing. You're right, there's a certain level of seasonality in our business.
Very strong demand for both our DN series Recyclers, our DN series self checkout solutions. So so.
I think that Thats. The good news technology is being adopted by customers customers like the product set and they continue investing in it.
Youre right Theres, a certain level of seasonality in our business. So you might see slight variations in our gross margin quarter over quarter, but I would tell you that our intention is to keep the trend that we've been on which is continue improving our overall gross margins.
Octavio: So you might see slight variations in our gross margin, you know, quarter over quarter, but I would tell you that our intention is to keep the trend that we've been on, which is to continue improving our overall gross margin. Even though we have made significant progress in our supply chain and our efficiency, you know, we're just at the beginning of our journey. I'm super excited as we announced, you know, a few weeks ago that we hired a new operating excellence leader for the company, Frank Bauer, who will help us on this journey and continue accelerating the improvement in all our operations. And that leads me to service.
Even though we made significant progress.
And in our supply chain and our efficiency.
We're just at the beginning of our journey I'm Super excited as we announced a few weeks ago, we've hired a new offer operating.
Operating excellence leader for the company, Frank Power, who will help us in this journey and continue accelerating the improvement then in all our operations and that leads me to service.
Octavio: You know, our service business, and this is very important to me, is a people-driven business. So we need to make sure that we're delivering the highest quality for our customers and that we're creating an environment where all our people can thrive and be successful. So in Q4, and as we manage the portfolio of hardware, software, services, creating the solutions that we have, we've invested heavily in our service infrastructure, particularly in North America. And we're battling some of the secular trends around, you know, the difficulty of hiring people, the difficulty of retaining people.
Our service business and this is very important to me, it's a people driven business.
So we need to make sure that we're delivering the highest quality for our customers.
And that we're creating an environment, where all our people can thrive and be successful. So in Q4 and as we manage the portfolio of hardware software services, creating the solutions that we have.
We've invested heavily in our service infrastructure, particularly in North America.
So we are battling some of the secular trends around the <unk>.
<unk> of hiring people the difficulty of retaining people.
Octavio: But, you know, in this balance, we want to make sure that as we're battling those things, we're keeping the customer at the center of our actions and making sure we deliver excellent service to them. So our goal is, you know, we will continue working on improving our service margins. It's clearly an area of opportunity for the company. We're all aware of it.
And this balance we want to make sure that as we are battling those things we're keeping the customer at the center of our actions and making sure. We delivered excellent service to them. So our goal is we will continue working on improving our service margins Thats clearly an area of opportunity for the company, we're all aware of it.
Octavio: And we want to do that while we continue to improve our service. So our commitment for the year is to, you know, getting back to our historical service margin levels or as the year progresses, but doing that in a way that we continue serving our customers with excellence. Thank you.
And we want to do that while we continue to improve our service so our commitment for the year is too.
Getting back to our historical service margin levels as the year progresses, but doing that in a way that we continue serving our customers with excellence.
Thank you for that.
Octavio: And then I just want to ask you what your view is just for the market overall? I know Diebold's not going to disclose units anymore, but if we think about just the global ATM market, the global self-checkout market, what do you expect in terms of unit growth, roughly in 24 relative to 23? And how do you think about Diebold going forward in terms of your ability to reduce Diebold's reliance on hardware. Bye.
And then just.
What's your view just for the market overall, I know diebold is not going to disclose units anymore, but if we think about just the global ATM market. The global self checkout market. What do you expect in terms of unit growth roughly in 'twenty four relative to 'twenty, three and how do you think about diebold.
Going forward in terms of your ability to reduce diebold reliance on hardware cycles. Thank you.
So let me start with felt checkout. This time at retail this up very important business for us.
Octavio: So let me start with self-checkout this time, as retail is a very important business for us. So Matt, I think there is no doubt that consumer preferences keep shifting, and the ability to offer options at self-checkout, whether it's assisted self-checkout, self-checkout continues to be important. And there are, as I mentioned, new technologies that we keep adding to the self-checkout process to make that a frictionless thing, both for our retailers and for the consumers of our retailers. So really changing the way people shop and the experience at the self-checkout. So we see this market to be one of continuous growth. There is no doubt, whether it's labor, whether it's customer experience, self-checkout helps improve that.
So Matt I think there is no doubt that consumer preferences keep shifting and the ability to offer options that self checkout, whether it's assisted self checkout self checkout continues to be important and there is that as I mentioned, new technologies that we keep adding to the self checkout process to make that.
A frictionless thing both for our retailers and for the consumers up our retailers, so really changing the way people shop and the experience at the self checkout. So we can we see this market to be one of continuous growth. There is no whether it's labor whether it's customer experience self checkout helps improve that so we continue to see that market is growing.
Octavio: So we continue to see that market as growing at a very healthy clip. Remember, we've traditionally been a small provider, even though now we've gained a significant share, or at least that's what we believe will happen when the analysts report these things. Remember, as I mentioned in our remarks, every self-checkout that we deploy is basically a new location for us or has been for the past year. So we're growing and gaining on that market, and we see that market as continuing to expand. On the banking side. And again, that's why I tried, you know, I know you like this question about the markets. That's why I tried to add regional color.
At a very healthy very healthy clip.
Remember we've been traditionally a small provider, even though now we've gained significant share or at least that's what we believe will happen when the analyst report these things.
Our as I mentioned in our remarks every self checkout that we deploy is basically a new placement for us or has been for the past year. So we are growing and gaining that market and we see that market is continuing to expand on the banking side.
And again Thats why I tried.
I know you'd like this question around the market. So that's why I tried to add the regional color now.
Octavio: Now, you know, it's a varied business; there are clearly mature markets that are growing at a slow, slower rate; there are some markets that are growing at a faster rate. I would say, overall, I would characterize the market as one that is stable and growing, growing a couple percentage points one year, probably shrinking a couple percentage points the other year. So, what's important about this market is the shift that is happening towards higher-value products like recyclers that provide significant value for customers. And what's also important is that we see that when you think of the cash ecosystem at the branch level, you can't only just think about the ATM. You need to think about the teller line.
A very business Theres clearly mature markets that are growing at a slower at a slower rate. There are some markets that are growing at a faster rate I would say overall I would say.
I would characterize the market as one that is stable and growing growing a couple percentage points, one year, probably shrinking a couple percentage points the other year. So.
What's important about this market is the shift that is happening towards higher value products like recyclers that provide significant value for customers and what's also important is that we view that when you think of the cash ecosystem at the branch level you can't only just think about the ATM you need to think about the teller line.
Octavio: As banks think of a different way to serve customers, it's all about this cash ecosystem in the branch. And we've now entered with our teller cash recycler into this market. So that should help us, you know, accelerate a little bit of the growth that we that probably a flattish ATM market will provide in the in the coming years. So that's kind of the view on the market. What are we doing to, you know, you know, again, I don't think we have undue reliance on hardware services or software. We have a solution set that basically gets bought in conjunction by customers. So no customer wants an ATM or, you know, they want an ATM. They want the service associated with that. They want the software associated with that.
Banks think of a different way to serve customers. It's all about this cash ecosystem in the branch and we've now entered with our teller cash recycler into this market so that should help us.
Accelerate a little bit of the growth that we that probably a flattish ATM market won't provide ends up in the coming years. So thats kind of view on the market what are we doing to.
Again, I don't think we have undue reliance on hardware services or software. We have a solution set that basically gets bought in conjunction by customers. So no customer wants an ATM or are they.
They want that ATM they want the service associated with that they want the software associated with that so clearly.
Octavio: So clearly, as we package these components together, we will allow customers to either buy the components individually, buy them in a predefined solution for them, or buy them as a service. We keep growing as well in our managed services business, allowing customers to outsource important parts of their operation to us. So as we provide customers with this flexibility of choice, we see that some of them might opt to move to more of an outsourced model, while others might remain committed to running their own operations as they drive significant value from our technology. So I would say that we're optimistic that, by providing customer choice, we can continue driving growth in our business. Thanks for having me.
As we package. These components together, we will allow customers to either buy the components individually by them and so look pre defined solution for them or by the massive service, we keep growing as well in our managed services business, allowing customers to outsource important parts of their operation to us so.
As we provide customers this flexibility of choice, we see that some of them might opt to move to more of an outsourced model, while others might remain committed to them running their own operations as they drive significant value from our technology. So I would say that we're optimistic that we will have for that by providing customer choice. We can we can continue.
<unk> growth in our in our business.
Thanks Octavio.
Thank you.
Octavio: Thank you. As a reminder, if you'd like to ask a question, that star floats by 1 on your telephone keypad. Our next question comes from Matt Bryson of Wedbush Securities. Now that your line is now open, please go ahead.
As a reminder, I should like to ask a question perhaps style influenced by one on your telephone keypad.
Our next question comes from matched pricing of Wedbush Securities.
Your line is now open. Please go ahead.
Thanks for letting me ask a question.
Matt Bryson: Thanks for letting me ask a question. The 40% 60% split in terms of free cash flow, any chance you can give us kind of a similar split or a way to think about how revenues might progress through 2024? Yeah, thanks.
The 40% 60% split.
In terms of free cash flow interest you can give us kind of a similar split or a way to think about.
How revenues might progress through 'twenty.
2024.
Yeah. Thanks, Thanks, Matt.
Jim: Thanks, Matt. Um, what I would say is that the relative split on that revenue is going to roughly align. I think that as we think about that cadence, right, that they're roughly going to fall in line with each other. So I wouldn't expect there to be a material deviation in terms of how we, you know, how we think about revenue, and then it kind of flows through to EBITDA and then to free cash flow. So again, not precise numbers, right, given the fact that we're not giving quarterly guidance, but I would think about those as being fairly welcome. Got it, and Eve...
What I would say is that the relative split on that on revenue.
Is going to roughly aligned.
That as we think about.
That cadence right that they are roughly going to fall in line with each other so I wouldn't expect for there to be.
A material deviation in terms of how we how we think about revenue and then it's.
Kind of as flow through to EBITDA, and then to free cash flow. So again not precise numbers right. Given the fact that we're not we're not giving quarterly guidance, but I would think about those as being.
As being fairly well correlated.
Got it.
If revenues don't don't dip somewhat for product shipments down so much can we expect that the benefit.
Jim: Revenues don't dip so much, or product shipments don't dip so much. Can we expect that the benefit on the gross margin line from having higher volumes will continue? kind throughout the course of 2024? Or is there something of a dip in the first half as revenues are a little bit higher or a little bit lower, and then it picks back up in the second half? Are you talking about gross margins on products, just to make sure that I understand the margins on the ATM side in particular. Yeah, I wouldn't expect there to be a dip in the first half as you laid out.
On the gross margin line from having higher volumes continues kind of throughout the course of <unk>.
2024 or.
Is there something of a dip in the first half as revenues are a little bit higher or a little bit lower and then it picks back up in the back half.
Are you talking about Youre talking about product gross margins just to make sure I understand the gross margins on the ATM side in particular.
Yeah, I wouldn't expect for there.
For there to be a dip in the first half as you lay out I think that as Octavio just said right.
Jim: I think that, as Octavio just said, there's certainly seasonality when we think about what the fourth quarter yielded on the product versus margin side. But as we move into 24, when we think about the quarters in 23, we would expect there to be improvement on a quarterly basis. And for us to be in, call it the low 20s on a fairly consistent basis.
There is certainly seasonality when we think about what the fourth quarter yielded on the product gross margin side.
But as we move into.
We move into 'twenty four when we think about the quarters in 2003, we would expect for there to be improve.
Improvement on a quarterly basis and for us to be in call. It the low twenty's.
On a fairly consistent basis.
So no we did not.
Yeah.
Octavio: Okay, and I guess just on staying on that theme, I mean, when I think about those product growth margins, I think at one point, there was the hope that with the DN Now series, there'd be a bit of an expansion from here. Is there a longer-term goal that you can talk about there that you've talked about here?
Okay, and I guess just.
Staying on that theme.
Think about those product gross margins I think at one point, there there'd been a hope that.
With the DN now series there'd be a bit of an expansion from here is there a longer term goal.
Talk about there that you've talked about there.
So I'll take that one.
Octavio: So, what you'll see us talking about is this continuous improvement mindset that we're implementing in our company.
Matt So.
So we will use what youll see us talking about this continuous improvement mindset that we're implementing in our company.
So.
Where we are today is not the end the end goal that we have.
Octavio: Where we are today is not the end goal that we have. Our goal is to continuously improve revenues, margin, and free cash. So we're trying to create this flywheel effect in our company where you constantly see us taking small incremental steps but accelerating our progression.
Our goal is to continuously improve revenues margin and free cash flow. So we're trying to create this flywheel effect in our company, where you're constantly see us taking small incremental steps, but accelerating our progression. So.
Octavio: So, as Pat mentioned in his opening comments, we will have an investor day later in this first half of the year where we will highlight those longer-term goals. But again, the idea is we're at the beginning of the journey, not at the end of the journey. So from here on, you should expect us to continuously improve. And I guess the last one for me, Octavio, is...
As Pat mentioned in his in his opening comments, we will have an investor day. Later later in this first half of the year, where we will highlight those longer those longer term goals, but again. The idea is we're at the we're at the beginning of the journey not at the end of the journey. So from here on you should expect us.
To continuously improve.
And I guess the last one for me.
Matt Bryson: I'm............ Obviously impress, robust guide for, I think when we enter 2023, backlog will cover the entire year. For 2024, you're talking about backlog covering about three quarters of the year, you guys having very good visibility, but at the same time, kind of do you have confidence that as backlog works down, you're able to maintain revenue? at current levels, and there's not a dip once you work through backlog. I know that'd be like 2025, 2020, but I just talked about where Backlog is today and how you look at that. Sure Matt, probably the easiest answer is yes. I am confident that revenues will not dip as we accelerate backlog conversion. We still see a strong demand environment for all our products.
All right.
Obviously, an impressive Q4.
Relatively robust guide for 2024.
I think when we enter 2023 backlog cover the entire year for 2024, you're talking about.
Backlog covering about three quarters of the year. So you guys, having a very good visibility.
But at the same time.
Can you kind of do you have confidence that as backlog works down.
You are able to maintain revenues.
At current levels.
Once you work through backlog I know it'd be like 2025, 2026, but can you just talk to where backlog.
Is today so.
So get that moving forward.
Sure Matt So so probably the easiest answer is yes, I am confident that revenues will not the best we accelerated backlog conversion, we still see a strong demand environment for all our products. So revenue for the U S. You said three quarters of the Rev product revenue is covered by backlog.
Octavio: So, you know, revenue for the, as you said, three-quarters of product revenue is covered by backlog; we, you know, again, different regions have different rates of acceleration in orders, but we feel confident in the plan that we put forward. And remember, one of our goals is also to normalize our backlog, which also creates benefits in some of our working capital, inventory planning, and collections. So the goal that I've stated, you know, for quite some time now, and we're starting to get closer to that, is to have two to two and a half quarters of revenues in backlog at any given time. So when you think that we ended the year with 1.15, 1.2 billion dollars of backlog, you know, we could still probably normalize or reduce backlog as we accelerate revenue a little bit but then keep it consistent at that level.
<unk>.
We.
Again different regions have different rates of acceleration in orders, but but we feel confident in the plan that we put forward.
And remember one of our goals is also to normalize our backlog, which also creates.
If it's in and some of our working capital inventory planning collections. So the goal that I've stated for quite some time now and we're starting to get closer to that is to have two to two and a half quarter source of revenues in backlog at any given time. So when you think that we ended the year with one.
$151 2 billion.
Of backlog.
We still could probably normalized or reduce backlog as we accelerate revenue a little bit, but then keep it consistent at that level. So we're confident on how thats going to play out through the year.
Octavio: So we're confident about how that's going to play out through the year. Thank you so much for the call. Thank you. At this time, we currently have no further questions, so I'll hand you over to Chris Sikora for any further remarks. Thank you again for participating in today's call. If you have any questions, please feel free to reach out to me in Investor Relations, and have a good rest of your day. Thanks. Thank you for joining us on today's call. You may now disconnect your lines.
Thank you so much for the color.
At this time, we currently have no further questions. So I'll hand back to.
Chris.
Any further remarks.
Thank you again for participating in today's call. If you have any questions. Please feel free to reach out to me in Investor Relations and have a good rest of your day.
Thank you for Tonys sites Cool you may now disconnect your lines.
[music].
Yeah.
Yes.
Okay.
Okay.