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

Okay. Let's go ahead and get started. Good morning, and welcome. I'm very pleased to be joined by Octavio Marquez, CEO of Diebold Nixdorf and Thomas Timko, CFO. Thank you both for being here with us today.

Thank you. Our pleasure.

All right. A couple of quick disclaimers before we begin. You'll be hearing forward-looking statements during today's presentation. These statements reflect the expectations and beliefs of management as of today and are subject to risks that could cause actual results to differ materially from these statements. You can find additional information on these risk factors in the company's periodic and annual filings with the SEC. Participants should also be mindful that subsequent events may render this information to be out of date. We will also discuss certain non-GAAP financial measures today. Reconciliations between GAAP and non-GAAP measures can be found in the company's most recent earnings presentation. Okay, with that out of the way, Octavio, for those newer to the Diebold story, can you start with a high-level overview of the company, its core markets and where you see the most opportunity over the next few years, and then Tom, similarly, can you walk through your high-level priorities and opportunities for the company?

Sure. So thank you, George, and thanks for hosting us today. Of course, so at the end, we serve two primary markets, banking and retail. So those are two end markets. And each of those, we see very different opportunities. In banking, we have a global franchise. We basically do business with every global bank. And when you think of the banking industry, banks are looking to how do they make their branch infrastructure more efficient. And we've taken the approach with our solutions, which we call Banking Automation Solutions to not just look at the ATM channel, which is probably what you've known Diebold Nixdorf in the past. But looking holistically at how do we make that branch network more efficient as banks move the smaller footprint, more selling in the branch and more automation. We've developed recycling ATMs, teller cash recyclers, a suite of software to really help manage that cash ecosystem at the branch level, whether it's the ATM, the teller line or the vault, clearly creating a lot of efficiency. And when you think that running a branch network is 60% of a bank's expense, it's a very strong value proposition. In retail, we have a different opportunity. We have a very strong European franchise, where we're #1 in self-checkout, #1 in point of sales across Europe, but we still have a very small presence in the U.S. market. So all our efforts are now tailored at how do we expand that very strong European franchise into the U.S. market. Self-checkout is kind of our leading solution, but our point-of-sale software point-of-sale terminals plus our service capabilities to really look at the complete store as a technology hub for new consumer experiences, new selling of products, I think that, that's what really differentiates us. So those are our two main areas, I think, in banking expanding our service capability and our product offering to really address that end-to-end cash ecosystem at the branch level and in retail, truly expanding into the North America market where we've invested heavily in the team. We have very targeted approach. We're doing significant proof of concepts with our AI solutions around shrink that unfortunately has proven to be one of the more popular topics with retailers in the U.S., how to prevent shrink, not just that self-checkout, we can prevent shrink in the point-of-sale terminal, shrink in the aisles. So again, those are the areas where I'm very optimistic that we will continue to grow our business.

Yes. Thanks, George. So I've been here about a little bit over a year now. So the first priority out of the gate for me was taking what was a very small tactical team in finance and turning that more into a strategic business partner. So the level of analytics, the level of discipline, the level of discussion that we have right now is far more robust than it's been in the past about how we make operational decisions and how we allocate capital. So first and foremost, coming out of Q2. That was our third consecutive quarter of free cash flow, right? That doesn't sound like an impressive feat. But for this company and for that matter, most of those against who we compete, positive free cash flow in the first half of the year is an event. And we've now been able to sort of turn that event into what we think is a very sustainable and repeatable process. We also came out and raised our guidance, well, reaffirmed the range, but said we're going to be at the high end, right? And the culture that Octavio is fostering is really a say-do culture. So if we come out and say something, we're going to execute towards accomplishing that. And I think one of the things that separates us from the old Diebold is -- in addition to that is how we react in certain circumstances. If it's -- this year, we've been telling everybody the second half is going to be 55% of revenue, and we're now managing our DIO much better instead of just building that and sitting on that inventory, right? which has allowed us to really generate free cash flow. So we're very focused on the free cash flow aspect of things. I will say our prize, if you will, is what we talked about on our 3-year strategic plan, which is to be able to generate $800 million of free cash flow, which is about -- I think when I said this originally at our IR meeting in February, about half our market cap. The good or bad news is depending on whether you bought in, is now it's only about 1/3, right? But still, like if you look at '27 for us, mid-single-digit growth from a revenue perspective, up from low single digits, EBITDA of 15%, I think $600 million and then free cash flow conversion of over 60%. So I think [ 375 ] to 400-ish range. And the good news is that, that's all well within our control. That's core businesses. The strategic initiatives that Octavio talked about and just execution. And then lastly, coming up with our capital allocation that we walked everybody through, it's -- it's really focused on a couple of core principles, one of which is -- one of the foundations to that allocation strategy is a 1.5x net debt leverage ratio by far the best balance sheet in the industry. And that is something that we intend to keep, right? We don't intend to grow it. In fact, if EBITDA grows the way we think it will, we would expect that to shrink over time. And right now, the other mean of capital allocation is for us and returns -- returning to shareholders is stock buyback. So we announced our first $100 million buyback program through the second quarter of this year. We bought back $38 million, got $62 million to go. And we would expect to sort of continue that. We don't think that there's a better investment that we can make than buying back our own stock given where we think the value really should be.

It's a great overview. Thank you for that. So over the past 2 years, Diebold has made some pretty significant changes, bringing in a number of new senior leaders, refreshing the Board. Can you talk about the most meaningful of these changes and how this has improved execution and accountability.

Yes. So I have my partner here, my most meaningful probably Tom, but clearly bringing a CFO with a return space mindset thinking Tom's experience in marquee companies like GE, GM, where he was instrumental in the great performance of those companies over time. I have brought that culture to Diebold, as he said, the say-do culture, whatever we say we're going to do, we're going to do it. So bringing in an experienced CFO like Tom has been clearly critical. I would say that the other part that's closer to the operations was the way I want to run Diebold is in this continuous improvement mindset. That we get better every week, we get better every quarter. And you can see that in the margin trajectory. When we started this journey two years ago, our product margins were in the low teens. Today, they're in the mid- to high 20s. And that has been achieved through our lean and discontinuous improvement mindset. So I brought in Frank Baur, who is our Chief Operating Officer or VP of Operational excellence, as I call him, to really drive that continuous improvement mindset. So between Tom, Frank, just striving to get the company better every quarter. We've improved margins significantly in product. We're focused on improving margins significantly in services. And we believe that we can achieve that in small increments every single quarter. And again, as Tom said, when we look at our 3-year price target, it's all within our control. It's just maintaining the improvement in our operations every quarter. And we feel very comfortable that we can achieve that. We've also refreshed our Board significantly. So I would say that from our original Board members two years ago until today, there's one that remains. And that Board refresh has been really focused on creating better governance, more transparency for our investors. The Board is led by Pat Byrne. Pat has been CEO of multiple companies, serves in many Boards. Has great career experience in operations as well. It's a strong lean practitioner, that also helps me as I implement lean across the enterprise. So I would tell you that those are the more significant changes as we try to make the company that's focused on returning value to investors, making sure we maintain the leadership position we have in the segments where we operate and something that's very dear to me. Also making Diebold Nixdorf a great place for our employees to develop their careers.

Makes sense. Now how is executive compensation aligned with longer-term shareholder value creation and absolute shareholder return.

Yes, it's 100% aligned. I would say our shareholders and our Board, we're very focused on that alignment. So to sort of give the room sort of an idea of what does that mean? The grants that we got originally coming out, we're not -- they weren't time-based. They're price, stock price based. So think about -- we don't vest until the stock price hit 65, and we don't vest again until the stock price hits 75 and then we do vest again until the, the stock price hits 95. And we believe with our ability to do just what we said we were going to do in our 3-year plan. If you just focus on that cash flow multiple, you're in excess of those amounts, right? Theoretically, that's what the math would tell you, coupled by a share buyback program. So I would say it's very closely aligned, and it's just something that we are very driven to go execute on, right? And it's not a new acquisition. We have very stable markets in which we operate, and we're taking advantage of that through our cash recyclers, our investments in AI and retail to help reduce shrink. So again, we think the opportunity to grow our business, increase our TAM is there for us as long as we remain focused on executing and delivering.

Yes. Makes sense. Let's dive into some of the segments, starting with the banking segment. So can you talk a little bit about what the key differentiators are with Diebold's banking solutions and what you see as the major drivers of the business going forward?

Yes. So as I said, George, initially, when you think of our bank's operations, 60% to 70% of their cost is running the branch network. And every bank is looking at how do I become more efficient in that branch network to upsell my customers, make them more as an advisory hub rather than a transaction hub, and the way to do that is by automating everything that -- every transaction that you can inside of the branch. Again, this is where I think we have a great opportunity because we don't talk just about how do you make the ATM channel better. We talk about how do you make the branch channel more efficient. And that includes the ATM recyclers. And again, for those of you that are probably not so familiar with the ATM technology. Our recycler just means that things that get deposited into the ATM, it's the same cash that gets dispensed back out. So we're in the fourth generation of that technology. So we're very proud that it's a mature technology that's helping back, but we're deploying that same technology at the teller line, where the teller now doesn't have to count cash, you avoid having the -- if you understand a little bit about bank branching tellers are constantly going to the vault to buy cash. And so you avoid that whole process, you make the teller line more efficient. Just a week ago, when we had our customer event in Nashville, where some of our customers that are deploying this technology were telling us that the productivity of their tellers has improved by 50%, which allows you to have a smaller footprint branch, less tellers and more people selling. So I think that when you look at that, there's clearly a very big efficiency play that our branch automation solutions play. But the other more important part is through our software, we connect this physical branch footprint into the digital channels. So the ATM can become part of a broader ecosystem of the different channels of a bank. You could start a loan application online, deposit, take out that money at the ATM or complete that transaction at the branch and that we do through our orchestration software that runs in some of the largest banks in the world and some of the largest banks here in the U.S. So I think that that's where we're very excited about that we built this comprehensive solution that solves a real-world problem for banks. How do I make this branch infrastructure more efficient. And it's a combination of our hardware, our software and our services. Remember, in banking, over 60-plus percent of our revenue in banking comes from services. So the more devices that we put inside the branch, the greater the attach rate, more services can be done with very little incremental cost because we're using common technology components across all the products that we're selling. I'll switch very quickly to retail. As I said, we invested very -- two years ago or three years ago when I became CEO, I gave the team in Europe, the challenge. We need to become #1 in self-service in Europe. That means growing our self-checkout portfolio. We were a distant #3. Today, we're #1. So we achieved that in two years, and it was a combination of creating a different experience in the self-checkout. One for the retailers building a more modular, more open architecture. Self-checkout has been around for many years, but it was usually a very tightly coupled solution. If you had hardware from one vendor, you needed to have software from that vendor. And you can -- and what we decided is we'll make our -- both our software, our POS software, our self-checkout software and hardware totally open and modular, so you're not really tied into using our hardware and our software, you can -- or you can make any combination. So that proved very beneficial as retailers were looking in Europe to deploy self-checkout and really innovate. And this open architecture really helped us do that. This past year, we've been very focused on, let's bring that to the U.S., which is, by the way, the largest self-checkout market in the world and where we have a very small market participation. So we hired a very experienced team at the beginning of the year. We made a plan where we targeted 40 large accounts, where today, we have 19 proof of concepts going on and 6 pilots. So we're very optimistic about the second half of the year and the first half of next year really having some significant wins. But what we're trying to differentiate in the U.S. is the use of our AI solutions in retail, as retailers rethink with what they're doing. So one of the challenges that retailers have in the U.S., more than any other region in the world is theft at checkout. So our AI solution can help retailers prevent theft at the checkout. We've developed approximately 25 different use cases on how theft happens at the self-checkout. And we can either stop the transaction, so there's an intervention from the staff store. Do different things to prevent that. We've moved that same technology to be able to detect theft as well in the manned lanes. Again, I didn't know a lot about this, but there's also a lot of theft that happens in retail through the [indiscernible]. So again, how do we deploy the same AI algorithms, computer vision to detect that and alert management at the stores. And lastly, we're deploying our AI computer vision solution to capture shrink also in the aisles. So connecting to the CCTV system inside a store, analyzing the consumer behavior, the patterns and really detecting when something anomalous happens, so that either lost prevention at the store or when they get to the checkout, we can -- that people can take an action. So this has proven to be a key selling point. On top of that, we have fresh produce recognition through computer vision. So if you've ever checked out at a self-checkout and you bought a lettuce, it's always a little of knowing that the screen stops and you have to choose what lettuce you want. Through computer vision, we can identify what product you're actually buying -- and for some age restricted items, and this depends a little bit on jurisdictions, but we can automate age recognition through our computer vision technology so that if you're buying alcohol or cigarettes, or any restricted product, you can -- the transaction flow can just go through this liberate staff makes a frictionless journey for the consumer. So we're very excited that these solutions are really combined with the hardware, the software are really providing a key differentiator for us in the U.S. market.

Right. Those are great applications of AI and computer vision. Let's talk a little bit more about the ATM side of the business. Would you -- could you characterize where we are in the ATM refresh cycle and in terms of revenue growth? And how many ATMs would you say, get refreshed in any given year?

Yes. So let's -- we take a big-picture approach. There's roughly 2 million ATMs in the world. And that number has been steady for the past probably 10 years. So it's not a huge growth market. It's more of a replacement market. It's not a shrinking market, but every year, it will grow 1%, be flat, grow up 1%, 2%. Of those 2 million, we have an installed base of 800,000 ATMs roughly. So far, we've upgraded to our new recycler, DN Series ATMs, roughly 250,000 so far. We refreshed approximately 60,000 to 70,000 every year. So just within our own installed base, if we were to continue at the same pace that we're going, we still have probably 5 years of very steady demand before the first generation of ATMs that we shipped a year ago needs to be refreshed. Think of the ATM as having a useful life of between 5 to 7 years. That's kind of the life cycle that banks run their ATMs. The important part is that all these endpoints come with a service contract. 95-plus percent of every ATM that we sell has a service contract attached to it. So we sell the ATM, but then we have a 5- to 7-year annuity on the service side. And we're very -- that provides a lot of stability for our business. And that's one of the things that Tom is helping us do. Make sure that we can predict that revenue stream accurately that we manage margins correctly so that we can have a very accurate, if we know that the hardware will be refreshed at this rate, but we have the strong service annuity, it really provides a very stable platform for us to invest in things like the Branch Automation Solutions, creating new devices inside of the branch to add to that service offering and hardware offering.

Right. I actually want to dive in more into the Branch Automation Solutions. Can you talk a little bit more about what drives a bank to adopt BAS and whether this is more of a top-down or a bottom-up process?

So I would say every CEO of a bank credit union that I talked to, there's two key things that they talk about. One is how do I become more efficient operations. The efficiency ratio in banking is kind of one of the key metrics that every CEO is measured against. The other one is how do I make my consumers buy more products or how can I upsell more products. So those are the -- regardless of the size of the bank, you hear those two themes constantly. Our Branch Automation Solutions help in both ways. As branch rethinks of their branch footprint. Again, nobody is building a marquee branch in downtown San Francisco with teller lines, marble floors, everybody is thinking, how can I build smaller branches and closer to consumers that instead of a transaction hub are actually a sales and marketing hub for us, an advice center for us. With Branch Automation Solutions, we can automate roughly 90 plus percent of any human transaction, whether it's done at the ATM or whether it's done at the teller, with the teller cash recycler, which really creates significant operational efficiency transaction that we can automate. If you were to do it at the teller line, it would probably -- and I'm using U.S. data, but in the U.S., probably every transaction costs $8 at the teller line. If you do it through automation at the ATM or using teller cash recyclers that cost drops to below $1. So we truly create operational leverage for banks and operational efficiency there. The other part is, as you're avoiding the need to have vaults and cash vault in a branch since you have in these devices that are interchangeable, you can move money around between the devices, you really liberate the branch staff to do more selling. So when you ask me, so a top-down or bottom-up decision, I think that the operations people love it, because it really simplifies operations at the branch. And I think that when you're talking to the head of a retail bank, they say, yes, this is great because it helps me sell more. So I think it's a combination of operations and retail banking that really come together to push these solutions.

Makes sense. Let's talk a little bit more about your retail segment strategy to push more into North America. So you've seen a lot of success internationally. What steps are you guys taking to replicate that success here in North America and what industries are the most attractive for you to target.

So we're basically targeting grocers and general merchandising. And as I said, we targeted 40 very specific accounts, where we see them at that point in their life cycle where they're running on old technology, whether it's hardware or software because remember, we have multiple ways of winning. We can either win through the POS software, through the self-checkout to the point of sale, but targeting accounts where we see them at that point in the refresh cycle where they need to make a decision. These 40 accounts, we're running pilots, proof of concepts with them. So we're excited about that. And we built a very strong team. Our international success created a good footprint for us in the U.S. When you think of some of our marquee customers, think of companies like H&M, IKEA, Aldi and the grocery space that European retailers, but with a very strong presence in the U.S. So they allowed us to create a base of business. And now we're very focused on winning U.S. and Canadian customers to add to that base of business. As Tom said, we -- we believe that the plan that we put forward and how we're going to grow retail, we can grow retail continuously for multiple years, just winning a couple of customers. So as we said in our Q2 earnings call, Q3, we will see sequential growth in retail and year-over-year growth. And a lot of that is going to be fueled by our U.S. expansion.

Makes sense. Let's drill into some of the numbers. Tom, can you talk a little bit about how the company plans to achieve 4% to 6% top line growth by 2027 with the bridge to get there?

Yes. If you think about it, it's really coming from two distinct components. One is kind of what we're entitled to. If you think about just how the market is expanding and pricing associated to that. That's probably somewhere between 2% to 3% -- the other 2% to 3%, which gets us to that mid-single-digit growth, right, which is our ''27 target is going to come from some of these strategic initiatives that Octavio has talked about. So when you think about branch automation solutions, right, and you start to get the cash recycling not only at the ATM, but at the teller lines as well. That also opens up other suites, right, other additional value that we can add in terms of helping manage the cash, right? You think about a city like San Francisco to have some of the CIT guys come with the big trucks and the big guys, that's an expensive visit, right? It's hundreds to $1000, right, depending on where. So the refreshed technology that we have allows you to take these cartridges and go from the teller to the ATM, right? I mean if you think about it just years ago, all ATMs did was dispense and intake, right? It did not have that refresh technology. So that is innovation that we were able to bring about and drive into the market. And we continue to think that we can grow that into other opportunities for all the reasons that Octavio went into on the -- what the banks want to ultimately do at the branch. And the ROI on that proposition is really good, right, in terms of what the savings are, which is why we're starting to see some initial success. So then you think about Asia-Pac and other areas of the world, we're reentering that market. We've developed a fit-for-purpose ATM and fit-for-purpose can be defined in those markets as smaller footprint, much more energy efficient and deployable in numerous locations. So -- we're in the process of getting that certified. And I would say that, that represents a really significant growth opportunity for us to be able to expand. And then just -- you just talked about retail growing in North America with the AI and the shrink, right? Again, there's proof of concepts are real with some very big-box grocers, big-box retailers that would have a pretty dynamic sort of footprint, right? So again, we're feeling really positive about that. So you think about it, it's just our -- that stable market in banking and then our retail customer base, allowing 2% to 3% and then the other 2% to 3% comes from that right?

If you look at banking and retail, how would you say demand is trending between those two segments from a relative perspective? And what's your visibility into the backlog and inbound orders for the back half of this year and 2026.

Yes. We've had a couple of record quarters back to back for our business. So our backlog is 980. That's the highest it's been in years. So what does that do for us? -- that allows us to get about 9% of insight visibility into how we're going to round out the year. So if you're an investor, and you're following us, you understand that second half was pretty heavily weighted. So to have a backlog number like that, that sort of gives us visibility. It's probably 90-plus percent on the product side. Kind of -- we begin thinking about how can we deliver, when do we deliver and then it's on to '26 in terms of Q1 and Q2, et cetera. But it's that ability, right? And as Octavio mentioned on the product side, our ability to take an order and then process and ship that finished good was probably in excess of 180 days at one point. But because of the strategy that we've deployed in our local to local manufacturing, so you think about Germany, servicing Europe, you think about North Canton servicing, America, you think about our Brazil plant in servicing South American part of LATAM. And then we have a contractor in India who we use to help us develop those smaller footprints. That strategy has helped on not only the margin side, but a significant reduction in terms of being able to take an order and turn it and produce it, which is now probably 60 days, right? So -- and the margins have come through. I think when Octavio started lean in that introduction of the continuous improvement journey, product margins were 13%. Now there -- last quarter was a record for us at 28%, almost 29%. And when we think about what we can continue to deliver, right, with '27 and what we said about our 3-year plan, we expect to be able to grow product margins, 25, 50 basis points a year which is what we expect to see this year over that 3-year plan. And I would say service margins, that's probably our biggest opportunity. When you think about services is 70%, 75% of recurring revenue. If you think about where we ended last year at 26%. There's an opportunity, we believe that we can execute towards that allows us to see 50 or 100 basis points of growth in service margin over that time each year.

Makes sense. Now product margins, we are at a level now that we haven't seen in over a decade. Can you elaborate on what's really driving this and whether it's sustainable?

Yes, it's absolutely sustainable. That is the beauty of lean. Our manufacturing effect, our supply chain, just one back-to-back awards. This is our European group. And the amount of improvement that they're seeing year-over-year is a 30% improvement in quality. I'm trying to quote these numbers because the press release just came out today. So forgive me, but like a 25% improvement in on-time delivery. So -- and that's back to back. So lean is foundational for us. And the great thing about lean is -- yes, it happens at the factory floor and it allows us to continue to drive those product margins. Again, growth at 25 to 50 basis points a year, very sustainable. We have lots of opportunities for Kaizens and continuous learning, but it also applies to the functions as well. So I'll take finance, for example, we've been able to take our closing process and take days out of it, right, which helps get the right information to the right people at the right time. So we're all making better decisions in a more timely manner. And it applies everywhere, right? And you do have a culture that is brought into that. And once you -- that's why I love the continuous like the flywheel, right? Once you give individuals the empowerment and the taste of what success looks like, when you're on that lean journey, it becomes very sort of self-motivating and self-fulfilling. So the projects that come up, not only improve safety, but also profitability. We've got thousands of them going on at any point in time in either any function or manufacturing at the company.

Makes sense. Let's talk a little bit about tariffs. So can you describe your current tariff exposure and what you're doing to mitigate any expected tariff impact -- and also talk about your global manufacturing footprint and strategy, what plans you have to shift and adapt to the evolving tariff landscape.

Yes. So tariffs for us, as we've kind of discussed, is probably somewhere of about $5 million to $10 million or so of impact. And I think it's a competitive advantage for us from the perspective of what I spoke about, that local to local manufacturing footprint that we have. We, for instance, with the tariffs -- we have a [indiscernible] plant in Germany used to build subassemblies, we would send it over and put it in a production in Canton. It was already on the list to kind of shift, but the tariff certainly accelerated that. And now we're building everything soup to nuts in Canton as it relates to the ATMs. So we were able to mitigate that. I think our footprint kind of naturally mitigated that. And that is a difference from where we were 5, 10 years ago, right, as a company, where a lot came out of Germany and was the logistics of having to ship that around the world globally. We don't experience that anymore, right? And the improvements in supply chain has really sort of led to that. So from a tariff perspective, we've got to go deal with it. Certain parts are just going to be built in certain parts of the world because you just can't find them elsewhere. But we continue to either be able to react to that via pricing, via negotiations with our suppliers or kind of how we think about productivity initiatives through lean to offset that. So tariffs it's going to have an impact, but it's not outsized and it's something that we feel we can more than mitigate.

Makes sense. And then lastly, Tom, can you talk about the progress you've made on free cash flow generation and what your capital allocation priorities are?

Yes, laser focused on free cash flow generation. This year, we expect to double free cash flow or nearly double what we did last year. So that's the upper end of our guidance of about $210 million, which would be a 40% conversion. And I think next year, we're at 50% and the year after we're in 60, and honestly, we don't see that slowing down. We think that we'll continue to be able to do that year after year, and that's been a lot of focus for us on working capital. We still have a lot of opportunities in DIO, we're getting better every year, continuous improvement. And even from a payable perspective, right, there's opportunity. So it's a rich environment for us. And again, when you think about '27 cumulative cash flow, upwards of $800 million and the impact that has, right? That is why everybody is super focused, right? So the volume on the additional strategic streams helps -- but again, a lot of that free cash flow and that conversion is in our own wheelhouse to deliver.

Great. Well, thanks, Octavio and Tom for the great discussion. Please join me in thanking them both.