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

Good morning, everyone. Thank you for joining us today. I'm Matt Summerville of the publishing analyst here at D.A. Davidson focused on Diebold Nixdorf. Sitting with me here today is Octavio Marquez, he became Diebold's President and CEO earlier this year, having joined the company in 2014, most recently before becoming CEO, he ran the company's banking business. With that, I think we're just going to go ahead and jump right into the Q&A here from [ flyer side ] and Octavio, I thought it would make probably a lot of sense just out of the gate to maybe start with the balance sheet and what the game plan is with respect to the upcoming refinancing, the importance of the ABL you're standing up to the overall structure and timing and then how you think about the go-forward taking some deleveraging?

Okay. Thank you, Matt, and [ wow ] you didn't give me a real chance, so you're just jumping into it. So that's good. So probably I'll just -- before I answer all those questions, take just a brief step back to just for the benefit of some of the members in the audience, Diebold Nixdorf were a company that's focused basically in 2 industries, financial services and retail. And we provide automation for banks as they rethink their branch footprint by deploying self-service technologies. And in retail, we're very focused on the self-checkout experience or the checkout journey with our customers. So we provide significant self-checkout solutions in the market. So whenever you had some of the grocers and you will be using some of our technology whenever you're depositing or withdrawing cash out of branch you're probably using one of our technologies. With that said, this year was a year that we've been restructuring our company and refocusing our company. Through the pandemic, at the beginning of this year, we experienced significant supply chain disruptions. Plus we had the unfortunate events in Europe with Russia and Ukraine that forced us to divest almost $100 million of business that we conducted in both Russia and Ukraine. Plus a couple of years ago, we acquired our biggest competitor in Europe in a $2 billion acquisition. That's how we get to how we're going to deleverage. And we needed to deal with the maturity of some of the bonds that we had that are a product of that acquisition. So as you can imagine, the environment where we have a disrupted supply chain and you have to deal with $2-plus billion of debt and refinance that in today's environment. clearly created a little bit of a warm welcome for me as a CEO to the company. So everything aligned so that I could really prove that I deserve to have this job. With that said, Matt, one of the important things is first throughout this period, demand for our solutions is as strong as it's ever been. So we have the biggest product backlog that we've had in the company's history. So we're starting the year with roughly 80% of our revenue. I don't want to say secured because in today's world, nothing is secured, but 80% of our revenue back with firm customer orders for both our checkout solutions in our recycling ATM solution. So we feel very good going on about the future. We clearly had to work on refinancing our debt. This $2 billion plus of debt that we had. We're in the final stages and knock on wood, we're in the final, I would say, paperwork to have this done by end of December. The importance of this is that throughout the past 9 months, we've probably been dealing with some of the most sophisticated lenders in the world and some of our banking partners. And they have reviewed our strategy, our plans on how we plan to run the company going forward. We've taken significant actions in improving our cost structure, improving our supply chain and manufacturing. We've moved part of our manufacturing back to the U.S. Yesterday, I was with some of our lenders sharing the progress that we've made in our Ohio manufacturing. You and me has now Ohio residents. When I ran Global Banking, I was an Amsterdam resident. Now I'm a proud Cleveland resident. But sharing with them how we've now move some of our Asian and European production back into the U.S., how that's going to support our plans forward. And I tell you all this story because as people were looking at our financials that our plans for the future, all our lenders and our bankers felt comfortable enough to extend maturities on our debt to give us the runway necessary to actually prove out our model. So next year, we expect revenue -- our revenues to go from $3.5 billion to $3.85 billion. Our EBITDA to almost double to $470 million. So we do have a very promising future. And again, I'm optimistic because we have the customer orders and the customer demand for that. So that is the plan going forward, Matt. So first, we need to complete our refinancing offers that, as I said, our -- in the administrative process, as I hope there are no lawyers in this room. But since we have paper going back and forth between the lawyers and they charge by the hour, every day, I see a new red line of some document that needs to have a comma turned into a period or something like that. But clearly, as we refinance that, that should eliminate this overhang that we've had around the uncertainty about us being able to refinance and really focuses on running the business, which continues to have very strong demand from both our banking and retail customers and really executing on the plan that we've laid forward to get our company back to the $500-plus millions of EBITDA by 2024.

Understood. I appreciate that Octavio. Maybe just to put a finer point on some of the things you're speaking to from a demand standpoint. Banking for those of you in the room and online represents about 70% of Diebold's revenue. So maybe let's start with banking. Can you talk maybe across the 4 geographic regions you participate what the key go-forward demand drivers are in those regions and how you're positioned to capitalize [indiscernible].

Sure. So I'll start with the America side, I think or North America, our biggest and most profitable market. So North America, and most of you are probably New Yorkers. So when I talk about ATMs and cash, you say, "Hey, that is going away. That is never going to happen." The reality of the world is that cash is one of the most resilient payment methods. And while it's not growing, it's not decreasing. And if you talk to any of your -- or the people that run operations in the banks, cash deposits are actually increasing and they're increasing at the ATM at a significant pace. So in North America, one of the things that is working in our favor is most banks are looking at ways on how do they transform their branch footprint. So how do I turn my branch from a service center or do I have tellers, people handling cash into a sales office, where I can provide advisory services where I can create a better relationship with my client. But I still need to cater to many of my small medium businesses, some clients that still need branch services. But remember, a teller transaction done at a human teller, depending on the bank probably costs more than $20 per transaction. A transaction done at the ATM costs less than $1. So the more transactions you can move from the human teller to the ATM, the better off you are as a banker. And also, that allows you to change the footprint of your branch, build smaller branches, but create more automation. So again, as you're creating more automation, we see that as a strong tailwind for us. We've also introduced something called recycling technology, which I won't bore you with it, but it just means that cash that gets deposited in the machine is the same cash that gets dispensed to you. I bet most of you didn't know that when you -- if you ever deposit something in the ATM, somebody has to go and take it out. And as people are taking cash out, somebody needs to go and put that cash in. So again, in a perfect world, the same amount would come in, same amount comes out into your reality, even if you can just balance a little bit or eliminate the need for people to touch that cash, it's one of the biggest expenses banks [ sell ]. So banks in the U.S., believe it or not, had an adopted recycling technology. So whereas that technology has been fairly prevalent in Europe and in Asia, it wasn't a technology that was adopted by U.S. banks. The reason for that is that it requires some changes in your back-end systems to account for the -- how the cash is deposited and then dispense. But now we're seeing strong demand from the top banks in the U.S. for these recycling solutions. So we feel very strong that demand in the future as banks are renewing their ATM fleets as they rethink their branch footprint, we have a strong backlog of orders for this recycling technology. So this will provide for us a good runway in the coming years as every bank will realize the benefits of recycling technology. I have the opportunity, and I'll try to be brief, but you know me, I always like to get excited about the future of the company. I had the opportunity in September to meet with probably 120 banks in Las Vegas. And I have one of the top banks in the U.S. shared with their colleagues and these other 100 financial institutions, how this particular large bank is deploying our recycling technology and how the payback was in less than 18 months. So they're buying this device and by the savings they can achieve in less than 18 months, they were getting the payback on their investment. So clearly, I see us, this gains traction and this will be a big catalyst for us in North America. Latin America has always been a cash economy and will continue being a cash economy for the foreseeable future. And locally for us, we have a leading market position there with over 70% market share across Brazil and the Spanish-speaking Latin America countries. So as my -- as banks there continue working on digital inclusion and they do use the ATM as a digital inclusion mechanism as they can deploy ATMs remotely. And we expect to demand to continue there. Europe will be a little bit more challenging as the European economy slowed down, banks are also reducing their footprint and they're taking the decision to pull their ATMs together. So think about large banks deciding to combine their ATMs. I lived in the Netherlands for a couple of years. And there, the 3 main banks, Rabo, ING and ABN AMRO decided that instead of having 3 ATMs in the same street, they would only have 2, but they would share them among the 3 banks. Again, I don't foresee our -- like our large financial institutions in the U.S. are reaching an agreement like that. But that's a reality that is happening in Europe. While in the first instance might seem negative. For us, it will be neutral, I would say, because as banks reduce the amount of ATMs, they have to renew those fleets. So we will have a strong opportunity to renew those fleets. And our last market, Asia Pacific, which is our smallest market, it remains a very competitive market, dominated by Chinese and Asian manufacturers. So there, we're very conscious of where we compete, and we don't -- we believe we have a superior IP, superior technology. So we try not to compete on price. So we do have significant clients there, but there are large banks that really value the -- what our technology can offer both on the hardware and software side.

Maybe spend a couple of focused on the retail business and somewhat of a similar fashion that I think it makes sense to talk about some of the key secular underpinnings that you see with respect to self-checkout. And I've been very bullish on self-checkout for a number of years and still am. Looking out into the future. But I'd like to hear your thoughts on that. And then how the macro setup in '23 will impact or not the point-of-sale side of the business?

Yes. So our retail business is roughly 30% of the company. But when I break down that by geography, 90% of that business comes from here. So we have a very, very small footprint in the -- I would say outside of Europe, where we are the leader in providing both point-of-sale and self-checkout to large European retailers. Outside of Europe, we have a very small presence. So one of the first opportunities that we have is how do we take that large European presence that we have and expand globally. So how have we been doing that? We're doing that initially with the help of our customers. So many large European retailers and think about grocers that started in Europe and have now moved to the Americas and are opening thousands of stores. We're a little bit of growing with them into the North America market. So that will be a strong tailwind for us. We're growing with our European partners. We have clearly other large specialty retailers and fashion in furniture that have global footprints where we provide all those services. So they've helped us in this expansion. However, as we now are very focused in growing in the Americas and overall in checkout, remember, it's about the customer journey and checkout is one of the key points in the experience when you're buying something. We believe that regardless of the economic environment that we face in retail. Checkout, self-checkout provides a huge opportunity for growth. Why do I say that? When you go and buy something today, if you're -- and I'll start with grocer, if you're in a grocery store and you're buying a few products, I guarantee you that 90% of the time you use the self-checkout now. Something that was probably not -- and this is a change in demographics, it's a changing customer experience. You just feel better about that, whether it was the pandemic that told us not to be face to face or touching people, but it also creates a much better experience in the checkout. So we've gotten a retailer, I want to provide the best experience for you. So self-checkout is clearly a very important part of that journey. But think of the other side of the equation, what if we enter a recessionary environment, what if I need to continue to contain costs in my business? What are the biggest pressures that retailers have? Labor? So the self-checkout help you solve the labor problem. Luckily, a self-checkout can work 24 hours a day. It provides -- it's now well-accepted into the checkout experience. So when you think about it, we have the benefit of retailers trying to improve customer experience and self-checkout is a key to that. And then the other part of it, if you want to continue improving your cost position, self-checkout is also a very simple way to do that. So we feel very bullish that regardless of the outside environment, self-checkout will continue to be a growth driver for us. So it's the geographic expansion outside of Europe and then just the secular changes in the way consumers behave.

And then also just touch on how you're thinking about the point of sale business and the macro setup in the '23 which is the other part of retail.

Yes. So the other part of our business is point of sale, the traditional point of sale. And what I would tell you is the way we try to approach our customers, our retail customers, it's not a matter of, should you buy self-checkout or should you buy point of sale. It's what's the adequate mix for your store to be as successful as you can and create that unique experience when people are shopping there. So we try to approach it that both businesses are extremely important to us. Both have different growth rates. If you think about self-checkout, it started clearly in the grocery industry. But if you go to the airport today, you go to a Hudson or to one of those stores, and you go through self-checkout. If you go to the Home Depot, now you have self-checkout. I haven't seen it yet in the Americas, but when I was shopping in Europe, and I would go to some of the large fashion retailers, we are providing self-checkout solutions for fashion as well. So whether I was buying a jacket or a T-shirt, you now go and do that through self-checkout. I think is where we need to understand that it's more about the customer experience that retailers are trying to create as well as the cost advantages that having a balance between human tellers and self-checkout actually creates for retail clients.

Understood. Maybe just to step back from the individual business segments. Talk about what the company is doing from a cost reduction standpoint, heading into your tenure as CEO, the company has gone through this multiyear program referred to as DM that I think probably had a little bit more to do with acquisition integration and getting culture structure optimized, if you will. What's this next leg. And I think you've identified upwards of $175-or-so million thus far, what ultimately can that number look like? So maybe just speak to what you're doing from a cost standpoint at present.

Yes. So clearly, whenever you combine companies, there are cost overlap. So when we started this journey a couple of years ago, we were very focused on how do we integrate the companies and where can we reduce cost in that integration. That got us to us a certain point. What I'm very focused on right now is how do we make the company more efficient, not just clearly, as we become more efficient, you reduce cost, but how do we use technology and how do we use process to become more efficient. And to that, for the past 6 months, we've been able to reduce about $120 million of head count costs without affecting any of our customers, and this is just by the use of technology by reducing still redundancies that exist. And another thing, when you think about us, think of us a $3.9 billion company, there is a lot of money that we spend every day. So we've also been very focused on eliminating or reducing our indirect spend. So when you think about it, when you integrate a European -- primarily a European company, with an American global company, suppliers and how you manage suppliers is -- I was surprised that we have over 10,000 suppliers. So we've been very focused on how do we rationalize that supplier base, how do we become better partners to those suppliers, how do we actually do a better job of managing those suppliers to our benefit. And we believe that there's at least $70 million that we will get to the next couple -- remember, when you have a supplier relationship, you have to go through a contract cycle to get the benefit. But we believe that we will by middle of next year, have taken out of the business approximately $190 million of cost.

Understood. I want to spend a minute, and you touched on some of the supply chain logistics-related challenges that the company is spend encountering and you're not the only one that's encountered those challenges. So it's not -- these are problems that many companies have been dealing with. With your response in terms of how you're pivoting your manufacturing strategy. I want to compare and contrast your manufacturing of strategies pre-COVID and how it looks now and basically how you can drive more supply chain efficiency and ultimately get your product margins back to where you [ want ].

Sure. So -- and again, I won't bore you with all the tragedies that have happened in the supply chains of the world. But at a very high level, manufacturing in the past or supply chains became very, very distributed globally. But you also had very centralized manufacturing. So even though we have suppliers all over the world for components, our manufacturing facilities were centered around our German manufacturing operation. So we had a big factory in Germany, and we decided to consolidate most of our manufacturing operations in Germany. This worked very well for us, particularly since we were developing new products, we have our own IP and our products, so it was very important for us to have that centralized environment. And in the world where you could buy components in Asia, shipped them to Germany, there was ample shipping lanes. Cost was not an issue. And then we could build in Germany and ship throughout the world. That worked fairly well for us. I guess that looking back probably not the best setup in the world. So what have we done? So first, we've decided to bring back some of that manufacturing into the U.S. So everything that needs to be that we sell into the U.S., our most profitable and important market will be manufactured out of our North Canton, Ohio facility. So the first thing was, how do we move some of that manufacturing outside of Germany and into Ohio, and that part is done, we will start the year with our manufacturing operation fully functional. The other part that is very important to me. When you think of a supply chain, you can't just think of the manufacturing part. You need to think of all the inputs and outputs that go before you get things into the factory and after you get things out of the factory. So we are actively working and diversifying our component supplier base out of Asia and developing suppliers in North America and in Europe. So I think that's very important, not just for us, but also as a geopolitical since we don't know what will happen to the world to have, at least for those key components, a more diversified base. And I would say that the last part that is getting product to customers, if we build in North America and we deliver in North America, we avoid these 30 days of sailing that our products were having -- getting from Europe to the U.S. And again, that to us was a big disruptor in the past year. Normally, when we receive an order from a customer to when we deliver the product, that's a cycle that should be less than 90 days. All of last year, we were dealing with lead times of 210 days. So you can imagine what that did to our capital structure, our working capital. But again, as we reshape manufacturing that problem goes away.

Understood. I was wondering…

[ Are you ] generally holding more inventory to protect against [ those disrupt ]?

So we did throughout this year. And if I showed you my balance sheet, you would think that we were crazy. But yes, we were doing a little bit of that at the beginning of the year because it's been such a fluid situation that if you think 12 months ago, the main issue that we had 12 months ago was component availability. So if I wanted to buy something, it didn't -- there was just no -- all use of simple example, microprocessors. If I wanted to buy a microprocessor, there was so much demand in the market that's something that costs the dollar was being sold for $100. And I'm not making that number up. That was the extent of the inflationary pressures that we had in some of the micro components. And the price was because you couldn't get today, if I go into the market, you can actually have pretty good availability of most of the raw material that we need. So that part of the equation is -- has solved itself. Prices haven't normalized yet, but at least availability has. The other very important part in any supply chain is all the logistics and transportation. 12 months ago, shipping lanes globally, getting product from point A to point B was not only very expensive, but very unpredictable. Shipping predictability, which is a measure that we use with less than 20%. That means that if I thought that something was going to arrive next day, only 20% of the time we were right when that were to [ ride ]. And this will then be affected. This is everybody. Shipping capacity is now getting back to the normal standards of predictability, availability is there and cost has come down approximately 30%. So we do see that as we move forward, all these settlements will allow us to, one, keep lower inventory levels, and have a more predictable and normalized cash flow and the operational cash for our business.

Perfect. I think you touched on this in your opening remarks, but again, I think it's something that I want to put a little bit of a finer point to just the level of visibility you have to your top line heading into '23 and how that would normally look in a given year, speak to the backlog trends you've observed where you expect to start the year out and how you feel overall about that level of visibility?

Yes. So as I started, we have a very simple business that sometimes we try to complicate. We build great technology, whether it's a self-checkout product, whether it's a touch software or an ATM with the software necessary to run that or our payment solution. It's a great technology. Customers buy it and they deploy that technology that creates a service annuity for us. An ATM remains in a branch for [ anywhere ] from 5 to 10 years. And it has a service contract attached to it for that period of time. Self-checkout is a very similar story. So our first goal is let's make sure we have the demand for those products. That's where this $1.4 billion backlog is. Next year, we have to do $1.8 billion in revenue. Every quarter, we sell approximately $400 million of products. So we need to make sure that we convert that $1.4 billion that [ customer ] -- and again, we don't consider anything backlog that is not a firm order from a customer. In many cases, customers prepay part of that product. And they've been waiting for us to deliver those products. So we need to make sure that we take that $1.4 billion and turn it into revenue and then sell a lot during Q1 to get those $400 million and turn them into revenue as quickly as we can and then start building our backlog for the future. So that's the visibility I have is roughly 80% of our product revenue is already done. On our service business, it's a $2.1 billion service business. 70% of that revenue is attached to long-term contracts. So every year, my contract with the banks is renewed, so that revenue is there. Where does the other 30% of my service revenue come from? One, it comes from my professional services, which is me installing the software that goes with the products I sell, whether it's a self-checkout or an ATM. So if I deliver on the products, I most certainly hopefully will deliver on the software that's needed to run on those products. Another part is the installation of the hardware that we also -- that our customers pay us to do. And then the last 10% is something that we call build work, which is when something goes wrong, that's unplanned and it's not covered by your maintenance contract, that client will call me and say, "Hey, somebody down make [ fan on you ] put a piece of gum in the ATM and it's not working. Can you come out and change that then take the gum out of the ATM, which we call bill work. And again, believe it or not, a lot of people do bad things. So we -- that's a constant business. I would say that's the only part that's variable in our business. The rest, we have very, very high visibility and confidence that we will achieve.

Appreciate that. We have about 1.5 to 2 minutes left back topic. So I wanted to maybe close out talking about the service business. You've actually seen steady improvement in gross margins over the course of '22. Maybe talk about what your longer-term margin aspirations might look like for that business? And then I'd also like you to touch on one of the newer tangential opportunities that you've identified for services is EV charging infrastructure. So speak to how Diebold is addressing that opportunity.

Yes. So for the past couple of years, we've been in a journey of taking our service margins from the [ mid-25s to the low 30s ]. It's a $2 billion business, it's a significant improvement. This year, we had a dip in our margins based on inflationary pressures. But again, as we renegotiate our contracts, we incorporate inflation into our contracts with normalized things. We have a path to get back to those 32%, 33% margins by hopefully, before end of next year. And remember, we have to go through a renewal cycle to renegotiate our contracts. So we feel very confident about getting back to those levels of margins. However, I think that I have a service organization that's a global in nature because I operate in 60 different countries, and we manage very critical infrastructure, a very distributed infrastructure, which are ATMs and self-checkout point-of-sale devices. So one of the things that we've been looking at is how do we leverage this great asset that we have at this global service organization. What other technology is distributed and will become mission-critical very soon. And that's where we are betting a lot that EV charging will be one of those technologies where we can provide service to all these distributed service points, that will require significant availability because same as an ATM, if an EV charge point is not working, there is no revenue being generated by that if a self-checkout is not up and running, there's no checkout happening. When you think of EV charging and me having lived in Europe where there's EV chargers in every corner of the street, you need to make sure that those are up and running. It's a new industry. It's an industry that's just starting, and you cover a lot of the EV charging companies. But clearly, as the industry matures, the need for a reliable global service partner will start to materialize. In our retail business, we serve some of the largest fuel and convenience operators in the world. Actually, we serve most of them. What are those fuel operators doing? They're building EV charging infrastructures across the globe. Do you think that a large oil company will want to deal with one supplier in South Africa, another supplier in the Netherlands? Or will they want as they have in their current operations, one global supply where they can standardize service across their infrastructure and have one partner that they can rely on a global basis. And that's why we think that it's very important for us to enter the EV charging space right now because we can be that reliable service partner for all these companies in the future.

Are you expecting what kind of growth project with respect to [indiscernible].

So I will tell you that we started this probably late last year, we decided this is an area of focus for us. And we had zero charge points under contract. So we just -- this sounds like a cool thing to do. Let's go and do it. We will end the year with north of 30,000 charge points under contract. And again, this is being done primarily in Europe and with very few OEM and charge point operators. So there's still a huge market that needs to be addressed. I would tell you that the opportunity still is in early stages because different than banking and retail, where you have very strict SLAs where you have very clear metrics that you want to run against, in the EV charging space still many of these companies are figuring out exactly what the service model needs to be for them. So when they say, "Hey, do I need to be there in one hour to fix the device? Or do I need to be there next day." So we're still trying to navigate through that and every project is still a little bit unique in its way. Some companies want stricter SLA, so these are happier some other way. But we believe that if you start coming in at the ground level and shaping that it could be a very significant opportunity for us going forward.

And I think [indiscernible] here, have a quick question.

First and [indiscernible] you're looking at renegotiating the contracts with the service providers in the end user that they're not [indiscernible] they mention opportunity and service opportunity in the third [indiscernible].

Well, I'll give you a business card and go visit you tomorrow, and I'll cross-sell you everything I sell. I also sell some night self-checkouts if you want.

Yes. [indiscernible]. Also the challenges relate service standpoint also efficient [indiscernible].

Yes. Well, just to wrap that up because, clearly, in any service business, you need to keep innovating. And one of the things that we've done with our technology is my goal in service is never to go and repair a machine. So we've incorporated technology that allows us to do predictive maintenance, predictive analytics on failure rates of machines so that we can actually -- and don't have to wait for you to call me that something broke, we can actually figure out when something is going to broke and do that proactively and improve your experience of your consumers. And also, at the end of the day, it helps us improve service and save cost.

I appreciate that. Thank you so much, Octavio, for your time…

Thank you, Matt. Thank you. Thank you, everyone.