Diebold Nixdorf, Incorporated (DBD) Earnings Call Transcript & Summary

We're live, okay. All right. Well, we'll get started then in that case. Okay. Great. Welcome everyone to the second session here of the second day of our 24th Annual Crédit Suisse Technology Conference. This is a 4-day event running Monday through Thursday. We're very happy to be continuing the conversation this morning with Gerrard Schmid. Gerrard is President and CEO of Diebold Nixdorf. Gerrard joined the company in February 2018. Previously, he had been the CEO of D+H, and he's also managed Lloyds retail banking unit. So before we get into some of the basic overviews of the company, I wanted to start by first thanking Gerrard for being here and then also allowing him some time to give a little bit more context around his background, some of his prior roles and, of course, his current role. Gerrard, thanks again for being with us this morning.

Tim, thank you for the opportunity. It's our pleasure to be here today. So you covered a lot of my background, but at a high level, I have been involved in the financial technology landscape for most of the past 20 years either as a CEO of a technology provider to banks around the world or as a senior executive at banks in the U.K. and in Canada. So I've seen both end of the continuum. As you rightfully put it, I've been CEO of Diebold Nixdorf since early. And in our -- my time with the company, we've been executing on a very, very fundamental transformation of the operating model that the company is currently successfully executing against and certainly look forward to getting into more details. Before I do, perhaps just a brief overview of the company for those who may be less familiar with us. Today, we are a market leader in banking in the ATM space. We have #1 market share globally with about 31% of all ATMs on the planet coming from Diebold Nixdorf. That business, where we sell hardware, software and services to banks, account for about 75% of our revenues. The other big part of our business is in the retail sector. We generate roughly $1 billion of revenue per year, primarily selling point-of-sale and self-checkout devices to large European retailers. And those are the 2 sectors where we're well positioned to compete on a go-forward basis.

Okay. Excellent. Thank you, Gerrard. I want to also just mention to those in the audience that there's no Q&A function built into the system we're using today. But if you would like to have a question towards the end of the session, you can e-mail those through to me now, and my e-mail is [email protected], that's [email protected]. Okay. Great. Let's move on to the first core topic of the discussion today, which is the DN Now transformation. Gerrard, perhaps you could give a little context on this initiative and an update?

Certainly, Tim. When I joined the organization, it became very, very clear that there was a meaningful opportunity for us to take advantage of our global scale to change how we came to market, how we drove efficiencies in our operating model. We started off with what, at that point in time, was a $250 million cost program. We've subsequently upsized it several times, and it's now a $500 million cost program, and we're executing completely to plan against that. In 2019, we executed on $175 million of those savings, this year we'll deliver about $165 million and next year a further $160 million. And we've largely been executing flawlessly against plan, notwithstanding COVID. So we're extremely pleased with what this is delivering for the company. It's allowed us to reimagine our services business and substantially drive up our services gross margins. Through the same program, we've streamlined our product portfolio, streamlined our manufacturing footprint and through that increased our product gross margins. We've undertaken a software excellence program that's materially improved our software gross margins and, in parallel, streamlined our G&A capabilities through transforming our finance function. And as we look to next year, we will continue down that path of continuing to optimize both our gross margins as well as our G&A expenses.

Excellent. I just want to dig into one topic there. So in terms of some of the digital transformation initiatives, clearly, a topic that comes up a lot in terms of efforts along these lines. Maybe you could expand upon what that means and bring that to life for us with maybe perhaps a few examples of digital transformation in terms of before and after.

Sure. When we think about digital transformation, Tim, for us, it includes how we go to market, our digital is embedded in our product offerings, but also internally, we're leveraging digital to become that much more efficient. So let me point out a few examples. In our go-to-market offerings, we now have the most IoT-enabled capability in our hardware platforms with our DN Series that we launched last year. But that capability allows us to extract meaningful data from every ATM, which allows us to have more visibility into what's impacting its performance than anyone else out there. So our go-to-market in hardware has incredibly focused on having a digital component to it. Within our services business, we have what's called our AllConnect Data Engine, which is a data analytics overlay, which allows us to, again, guide how we service over several hundred thousand machines that are out in the field through applying digital techniques and predictive modeling. When I think about our back-office functions, if you look at finance, we used to have a number of finance professionals modeling and forecasting our business. We're now much more heavily using predictive analytics to forecast based on historical trends and patterns. In our HR function, we used to have fairly archaic HR tools. We now have a lot of HR tools that are in the cloud. So the digital runs through everything that we do as an organization as a way to better deliver value to customers, but also drive more efficiencies to our customer -- to our organization.

Okay. Great. You really hit on something that I wanted to touch on. You sort of alluded to it there when you talked about HR, finance some of the transformation initiatives there. Maybe you could talk a little bit about the Accenture partnership and how you work with Accenture to help bring some of this to life and what your relationship is with them.

Yes. So certainly. So when I joined the organization, I wouldn't have described our finance and HR and IT tools as necessarily best-in-class. We've entered into a long-term, very deep relationship with Accenture to accelerate our journey to the cloud, to accelerate our path towards digital. What that entails is substantial investments into our IT platforms, both across finance, HR and IT. It involves moving a number of our data center applications to the cloud to be able to create more scalability and accelerate our time to market and our offers, and it also allows us to outsource a number of transactional low-value functions to players like Accenture. And through that overall relationship, it allows us to really move quickly in our path towards being digital. So it's certainly an important part of our strategy going forward.

Great. That's great context. All right. I think we can move on to -- and maybe we circle back to some of the DN Now transformation later when we get to some of the margins and cash flow topics. But for now, why don't we shift to some of the growth opportunities? There's a long list here. Why don't we start with some of the -- well, I'll allow you to take it however you like, clearly, but one topic of note would be the DN Series ATMs?

Yes. So before I get to the DN Series, when we think about 2021, I'd say we're entering the year on a fairly bullish stance as we think about the growth potential that's in front of the organization. And there's 3 buckets that our growth vectors focus on. The first is DN Series, which you made reference to. We believe we've got one of the most compelling ATM platforms on the planet, and we're seeing very strong evidence of customers certifying their machines -- our machines in their environments. We're seeing a very strong uptick in our order activity. So we certainly expect DN Series to be the dominant machine that we're shipping next year. We're also very energized by soft checkout in retail. There's no doubt that COVID has added a bit of a tailwind to the demand from retailers to have more automated checkout solutions. In the first half of 2020, we shipped more self-checkout devices than we did in all of 2019. And as we exit 2020, we anticipate very, very similar momentum and growth as we move through 2021. So that's really how we think about growth through the hardware side of our business. When we think about the services side of our business, through better leveraging our AllConnect Data Engine, we believe we can win more services business. And additionally, we continue to put a lot of emphasis on managed services activity, where banks increasingly are outsourcing broader aspects of their ATM business to scale-based players like Diebold Nixdorf. And then third, but certainly not least, with the growth that we expect to come from our software portfolio. This year, we launched the world's first cloud-native debit platform for one of the top 5 banks in the U.S. And as we take a look at payment systems across the world, we think there's a meaningful opportunity to take what we've done with a large U.S. bank and expand it through to other banks around the world. So for us, growth is broad, comes across both hardware, software and services looking forward.

Excellent. That was a great overview. There's a few points that I want to circle back on here. Let's start with a comment around the DN Series ATM. So there's an IoT and machine learning aspect there. Maybe that's another area where you could bring that to life for us and let us know what that looks like?

Yes. Certainly, yes. And a high level, non-technical level, we have multiple light diodes in those ATMs and those light diodes allow us to extract daily data from those machines. It's not consumer information, it's machine data that allows us to understand at a very, very granular level exactly how every component in that machine is performing. By extracting that data to the cloud, we run predictive analytics against that data, which allows us to look at patents across fleets of machines, it allows us to have a very granular view of when a machine is going to break down, which piece is going to break down, which allows us to achieve, quite frankly, availability levels that banks have never seen before, because we can drive performance to a level that the market can't reach without this technology. We have several thousand of these machines now operational in the field, and we're seeing performance levels substantially higher than anything we've seen with any of our historically high-performing legacy machines. So quite energized by what IoT technology can offer to our customers going forward.

Great. Another follow-up here related to the growth opportunities. You mentioned the cloud-native debit platform and helping banks. Maybe you could expand upon the software offering? What problems it's solving for banks? Who -- the types of customers that you're having with this offering? And just an overall overview of the -- of this product?

Sure. Let me take a step back and describe our software portfolio and the problems that it helped solving and I'll focus specifically on debit software. So historically, unsurprisingly, we've come from an ATM starting point, and we still have a very rich portfolio of ATM-centric software that allows banks to run the right applications on their machines plus monitor the performance of multiple machines, whether it's ours or somebody else's machines. So we have a very rich portfolio of market-leading multi-vendor software. I think that investors broadly understand that. As we look at the world post-COVID, we're seeing greater demand for other applications like video teller capability, contactless capabilities. So those are also built into our software solutions. The part that I was referring to related to debit software is really taking advantage of cloud technology to allow banks to process debit payments at a fraction of the cost that they were able to in the past. So historically, they would have invested in very expensive, on-premise, high availability processing platforms provided by a different software provider. Those technologies are quite aged. They're very, very inflexible. And by moving to our cloud-native software, we allow banks to introduce new debit solutions at a much faster pace and at a much lower total cost of ownership. And those debit transactions are debit transactions that might occur in a retail store, at a point-of-sale, it might occur on an IVR and an ATM in a branch. So think of it as a broad debit software that sits behind all channels and processes debit transactions.

Excellent. Are there any potential -- not potential, but who would you consider to be the key competitors for that offering?

Yes. I would say that the incumbent that we've displaced in a couple of places has been ECI, Tim. There are other players that are competing in and around debit. Players like Fiserv and FIS have some historical processing platforms, but they don't have contemporary cloud-native solutions.

Okay. Okay. Let's just talk a little bit more around the self-checkout offering. I know you referenced it earlier, but I'd like to dig into that a little bit longer. Just in terms of the -- you mentioned that this is sort of a growing secular trend. Maybe you could just dig into a little bit around the unit economics and just that offering some more?

Yes, sure. So let's first take a look at what's driving demand. Historically, a retailer, let's for example, a grocery store, would have had multiple checkout lanes, typically with a point-of-sale device for every checkout lane. Those checkout lanes have all been historically manned. Self-checkout allows those retailers to use less front-of-house labor, introduce more consumer choice to have more remote checkout options. That's in part what's fueling demand from retailers to invest in self-checkout. The unit economics are attractive to us for a couple of different reasons. It's a more complex device than a classic point-of-sale device, and therefore, it comes with a higher price point, we'll also generate stronger margins than we would have in our historical point-of-sale business, and as importantly, we also tend to attract a much, much higher services attach rate than we would have for our historical point-of-sale device. So we benefit from higher profits plus a stronger services revenue stream that comes off the tail of every self-checkout device. And part of why we believe this is secular is if you take a look at the penetration rates in markets like Europe, there's a wide dispersion of experiences even today, even though Europe was one of the earlier adopters of self-checkout. In the U.K., you typically will find one self-checkout device for every 15 point-of-sale devices. In Germany, that ratio is 1 to 145. So even within Europe is a wide dispersion and growth and penetration opportunity. And what COVID has done is it's accelerated retailers that were potentially sitting on the fence to engage with vendors like ourselves much more aggressively on the need to invest in self-checkout. So we see this as a secular trend that is likely to last for quite some time to come.

Great. Thank you so much for that overview of self-checkout and the secular trends. I think we should, in the interest of time here, move on to the topic of EBITDA conversion to free cash flow. We also -- you touched on this a little bit earlier in terms of some of the gross margin expansion you've been seeing via the DN Now transformation. Maybe we could tie the 2 together, talk a little bit about margins, how they've improved, and then a little bit around the free cash flow aspect as well.

Yes, certainly. There's no doubt that the DN Now has strongly contributed to material expansion in our operating margins. Over the past 2.5 years, we've shown an over 500 basis point expansion in operating profit margins directly attributable to our DN Now program. And as we look to 2021, we expect further expansion of our operating margins. I think that's probably the right segue to talk about free cash flow conversion because that is a material metric that we as a management team are focused on. As we take a look at 2021, there are 3 drivers that contribute to what we expect to be a material improvement in our free cash flow conversion. Set firstly, we expect higher EBITDA over 2020 levels. Second of all, we're anticipating an improvement in our net working capital position as things like days sales outstanding return to more normalized levels. And thirdly, we're expecting substantially lower restructuring expenses as the cash outflow to achieve the DN Now savings tapers off. So in 2020, we spent about $100 million of restructuring. In 2021, that's expected to be close towards $30 million. So those are the 3 drivers that allow us to have a lot of confidence around a material expansion in our free cash flow conversion.

That's excellent. Thank you for that overview and for tying it back to the DN Now transformation. We have, it looks like, just a few minutes left here. In that time, maybe we could -- and you touched on this earlier, Gerrard, but maybe we could expand a little bit further around the pandemic and what impact it has had on your business, some of the behavior changes you might be seeing within your portfolio, and generally, how your business is looking coming out of the pandemic.

Yes. Tim, it's hard to imagine that I'll be sitting here in December feeling nothing but absolute pride for how our team has performed through the pandemic. Yes, we, like many players, have seen a degradation in our revenues. We'll close the year down relative to our original expectations, but our operating profits and our EBITDA will be up substantially over 2019, which is a testament to the resiliency of our business model and how our team has contributed to those efforts around executing DN Now, even though many people are working remotely. From a demand perspective, we've already touched on what's going on in retail. We think that [SCO] is a long-term secular trend that's net positive for our organization. On the banking side, we are certainly seeing some of our banking customers talking about having fewer bank branches going forward. We think that's likely to be a net slightly positive impact on our ATM business as banks look to still have a physical presence in the bank branch markets that they choose to exit. There's very little correlation between bank branch closures and ATM reductions. If anything, COVID has strongly reinforced the strategic relevancy of ATMs as an important self-service channel for banks as they look to migrate ongoing transactions from branches to self-service channels. So net-net, even though it's been an incredibly complicated year, we're entering 2021, feeling fairly bullish about the company's prospects.

Excellent. You mentioned the increased importance of the self-serve aspect there, and you mentioned also some of the bank customers potentially talking about closing branches, if there's anything else there that you could just give in terms of what you're seeing in the market or your views on that trend? How much has that already started? How much is that more on the come? How much runway is there for that in terms of that increasing strategic importance of that self-served channel?

The pace at which banks close bank branches is definitely still on the come. It's much more in the conversation stage than the execution stage. And I'd also say that, that trend is not a consistent trend in every market. So in a number of emerging markets with large populations, you think of markets like Egypt, like Indonesia, like Brazil, there's more physical touch points being added rather than being reduced. So this phenomenon around branch closures is more of a European, North American phenomenon, but definitely still on the come.

Okay. Great. Thank you so much. Well, it looks like our time is about up here. In closing, I just wanted to thank you, Gerrard for spending this time with us today, providing us this great overview of the business. We hope you have a great day of meetings and look forward to inviting you back in the future. Thank you so much.

Thanks, Tim. Appreciate the time.