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

To the Bank of America 2025 Leveraged Finance Conference. I'm Ana Goshko. I cover technology and telecom on the research credit side, and we're thrilled to have Diebold Nixdorf with us this morning, and we have Octavio Marquez, the company's Chief Executive Officer; and Tom Timko, the company's Chief Financial Officer. So Octavio and Tom, thank you so much.

My pleasure.

So without further ado, I don't know if you'd like to make any opening comments or we could jump right into Q&A.

So Ana, why don't we just jump into Q&A. We're very excited to be hearing Mr. [indiscernible] say that in over $0.25 billion at the spend to Bank of America [ATMs] every week. So we're very deep tuning.

Okay. Good. Maybe yes, I think what's the Mark Twain quote reports of my demise have been great at manager. We talk about cash usage as part of our talk this morning. So just in case we have anyone in the audience that's newer to the Diebold story or just needs a quick refresh. It'd be great if you could just use a minute or 2 to just give a brief summary of the business.

So we have 2 business segments that we serve, one is financial services in banking, where we have [indiscernible] need to consumption our ATMs lower cash flow cycles. But more globally or providing services and software to keep that ATM and branch infrastructure running. The other segment that we cover is [ written ] where we provide self-checkout solutions, point-of-sale solutions and more importantly, the software tool in that infrastructure as well as the services to keep that running.

Okay. Great. So I'll go more in depth, both on banking and retail and then talk about some financial and strategic topic. So banking, I believe that's around 70% of revenue, low 70% of revenue. ATMs, can you just talk about your market position and your geographic presence?

[indiscernible] direct presence and about a little bit over 60 of those and we have an installed base of ATMs globally growing [800, 000] ATM. That makes us the #1 company globally with approximately 33% market share, 34%, 35% market share. So that is our banking business. And again, some of the [indiscernible] financial institution here from technology, whether it's custom reports for the services or simply on some of the new just ATM networks in [indiscernible] one of them being adopted from [indiscernible] some other leading banks in the U.S. and as well as globally.

Okay. And then the revenue split between product, which is the hardware but then services and software.

Yes. So when you look at our business this year, somewhere around $3.8 billion, $2.2 billion versus that is services revenue, $1.6 billion, $1.7 billion will be product revenue. So the beautiful business model is that this service revenue is recurring in nature, a close $2.2 billion, approximately [ 78% ] of it is recurring. It's long-term interest. The average life of an ATM [indiscernible] device depending on [indiscernible] anywhere from 3 to 7 years. And throughout that period, we have an ongoing service contract to maintain to update those devices, but provides great stability for the company with very good visibility on our revenue [indiscernible] since $2.2 billion of almost guaranteed at the beginning of the year. The nice thing about the hrdware business that we have is the attach rate for the services. If you think about banking, somewhere between 90%, 95-plus percent every time we sell that piece of here you get that annuity stream, Retail is a little bit less, it's the same type of attachment rate.

Okay. And then so switching just for the intro to retail. So it's about 30-ish percent of revenue, high 20%, 30%. And then the 2 main areas are point of sale and then the self-checkouts. So I think your geographic mix is a little different than it is on the banking side. You [indiscernible] talk about that.

[indiscernible] global business. Retail business a little bit over $1 billion. We do over [ $900 ] million a year. So we're the #1 provider of point-of-sales technologies self checkout in the European market. which is worth -- but unfortunately, the European market is not the biggest [indiscernible] biggest retail [indiscernible] in the world is the U.S. So we were lucky enough that as Europe started adopting self-service in both grocers and general merchandising. We were developing a [indiscernible] with the sales. So that's how we over the past, I would say, 3 years, we captured the #1 position in the telecom space in point-of-sales base in Europe. The good news for us is as we build this new technology, this new [self-checkout] technology, there's no software technology linked to [indiscernible] capabilities, that gave us that leading market position the ability to recognize [indiscernible] produce at the self check out, the ability to do age verification when restricted products like alcohol or the ability to prevent [indiscernible] self-checkout and the point of sale helped us really gain the low position in Europe. And we were very fortunate on many of these large European retailers think of companies like [indiscernible], IKEA, H&M, as they expand globally as they the global footprint, they reduce our technology. So we were just following on large European customers as they expanded globally. Late last year in 2024, once we had very solid business in Europe, the #1 position, and we're confident on our plans we started investing in creating a good sales force the U.S. It's just following [indiscernible] customers but actually being value focused on winning new customers [indiscernible]. We've been going on throughout this year. We're very excited about [indiscernible] in solution is being costed some of the largest grocers in the country. And we have even been something of the fashion retailers, think of the [indiscernible] you'll see that now. So quite obviously moving away just motions where it started, and it's moving into [indiscernible] closing in independent maybe stalling for our filing. So we're really excited because [indiscernible] for us since we enter the U.S. market.

Fascinating. So we have some follow-up questions, especially on the AI and kind of some tangible use cases that you started talking about. And let's just double back to the banking side and to retail. So overall, the growth outlook, I think, obviously, a key driver of growth is branch automation opportunities. So the DN Series cash recyclers, I think you guys talk about that a lot. I think that is where you're generating a lot of growth. Can you talk about what differentiates that product.

Yes. So just for the benefit of think of most [indiscernible]. When you think of ATMs seem like a very simple machine and there's low working than [indiscernible] really do understand how they work, deposit money and then money comes on the other side. Also those who in the past were too different, if you want to think about the 2 different [weakness] of the ATM. So you might ran out cash to dispense, but you would have a lot of cash that was deposited. Recycling as the name says just basically the same cash that's coming in is the same cash that's coming out. They create tremendous operational efficiencies for banks. When you think of a bank brand the expenses getting meaning money in and out [indiscernible] stable. So by use of recycling, we can really differentiate reduce the cost of moving cash inside of the branch. We're taking cash to the branch, pulling things. This cannot be recycling [indiscernible]. So that -- we believe that creates a very positive borrowing for our customers or customers that have important technologies with a 20% drop in the cost of [indiscernible] a branch, which just to give you an example of a branch in [indiscernible] just one of these departments get there and a cash [indiscernible] probably cost somewhere between $500 plus that they do. So you can imagine that quickly, one of the machines [indiscernible]. We've expanded that technology also to do it inside the branch [indiscernible] and also have is recycle. And this creates the ability to really [indiscernible] to more sellers. As both automating along sections or [indiscernible] money is done in the machines. So you're to tell our personnel to now be productive and be focused on servicing new customers will be able doing just a assumption than we've done at the ATM with the other cash recycling is going [indiscernible] for banks.

Okay. And then in terms of the growth outlook in ATM, so just a couple of questions to wrap together here. So where are we in the cycle of ATM refresh? And then with regard to the growth outlook, you already have high market share, but is the DN Series cash recyclers, is that allowing you to kind of increase or capture more market share?

So I always have to be focused on [indiscernible] that we believe we have a very differentiative product. Product that is very unique in the market. We've been -- we were pioneers in the recycling technology. Our product [indiscernible] the recycler, we put more info because the fourth generation recycle that we've built. So we believe it's a [indiscernible]. We look stores globally. So we're very fond of that. And as we look into the [indiscernible] growth algorithm. The ATM market overall globally is flattish on it's probably up 1% 1-year flattish another year. There is 2 million plus ATM in the world, and that's been the same for the past 5 years. We believe that will get the same beyond the coming years. But every bank is moving to recycling as traditionally in with recycling traditional ATM with recycling can become a lot more efficient. So we've seen that with recycling, we will continue to expand our market share position. And we've seen that in the U.S. one of the biggest is that we see [indiscernible]. The other important part is then once we take [indiscernible] the case but we is really resilient powerful payment [indiscernible]. Spent roughly and globally, the expenses were 98% of payments are done in cash, as like the presentation that around 17% to 18% of payments in [indiscernible]. And that was basically been the same for the past couple of years. Debit, credit [indiscernible] keep growing, but the amount of payments [indiscernible] financial remains stable. So [indiscernible], we see that with the site team and the things that we're doing [indiscernible]. And then as we look forward, the stable market, we believe we can expect 1% to 2% growth just based on [indiscernible] that's our [indiscernible] global economy inflation, probably 1% to 2% in the [indiscernible]. And then we developed what we call our branch automation solutions, which is based on ATM [indiscernible] recycling, lesser software and services that clearly create a better [indiscernible] for branch cash management. We believe that can give us another 1 to 1.5 point of growth. And then a very simple. There's the order [indiscernible] payment planted. And particularly in some of the Asian markets in gets in the Middle East markets, we launched a strategic [indiscernible]. I put this, I'll give you an example in India, India, the [indiscernible], the largest [indiscernible] statement of an [ 70,000 ] ATMs. They had 7,000 ATMs in [indiscernible]. We really weren't participating in that market. That's our same point we sell in the U.S. or in Europe or another pets really didn't fit to market requirements. So we set up a manufacturing facility in India in the country [indiscernible] ended to address that bucket. So our fit this product [indiscernible] Middle East, they think will allow us to really be more table, not another point of growth because we believe that the long-term algorithm for our banking business should be growing in the mid-single digits.

Okay. That's great. You've ramped a lot of my questions. That's great. So teller cash recyclers what's new and differentiated because you've really started to talk about the opportunity there?

So if you think of [indiscernible], [ Magarian ] as is a [indiscernible] technology [indiscernible] but when you think of how do I [indiscernible] the branch experience. How do I need people that have a branch or [product]. How can they be focused on selling products from serving customers rather than doing transactions. That an ATM, you can probably do now 90-plus percent of any transection that you need. But you still have a lot of small medium businesses that touh your branch. So automating the touch point at the teller with the teller cash recycle, you can really make the process to all those deposits almost what really more automated. Your tellers don't have to touch, it allows you to really change the format of the branch, but before you would have vault where you would keep cash, move it to a teller. Banking [indiscernible] selling and being from your vault. I think that putting [common] technology to teller [ common] technology at the ATM and the software both that infrastructure. We can move the cash from longer ways to [indiscernible] then once again, we like to branch more in. So people don't have out money to put into the ATM [indiscernible] the internal other line, the ATM really trading with public close East ecosystem where all the cash branches are commented for and it can become little more efficient.

Great. So switch to retail. So it was a good introduction. I mean you talked about your position in Europe and the strategic push more into the U.S. So you raised your AI-driven solutions. So what -- if you could just give us another use case of where you rolled this out? And in particular, its effectiveness in improving shrinkage, which I think has been a real Achilles heel for retail, particularly in the U.S. recently.

[indiscernible] highlighting [indiscernible].

Look, it is, we think, a very differentiated aspect to our. [indiscernible]. It's got the ability to -- when you're at the self-checkout, it's got 27 algorithms to [indiscernible]. On your wins conference try to think of 5 and if you get more than 5 you should probably trick yourself [indiscernible] when the business [indiscernible] enable next gen at the [indiscernible] we can develop with the closed caption [ TV systems ] within the supermarket, that track you from the minute that you walk in, obviously, there are regulations and privacy laws that you have to worry about [indiscernible] with and also not the high, right? If you [indiscernible] must get elsewhere, you could sense that and then when you go out, it kind of just falls the transaction, right? So we can go long as a go and get it in [indiscernible], let me help you now accept that. So we are seeing a second of 70%, and that's been sort of field tested now multiple times, and that average is very consistent across a lot of different usage. But it's not just about the [AIP] steam. It's sold out. We have [indiscernible], and we can help you consider in such a way that just makes it secure [indiscernible] and not only for you but for employees as well.

Okay. And then so it seems like you might be early inning on this in terms of the rollout, but where are you in getting traction on the rollout within your existing customers?

So tell you that in Europe [indiscernible] existing customers [indiscernible] successful deployments in the following sense [indiscernible] or again, where we 70% strength reduction plus grade employee [indiscernible]. So we're very excited about that. We're rolling out the groceries at the [indiscernible]. And particularly in the U.S., we are behind right now and the opening reversal data be them and proof of concepts going on with large grocers in the U.S. where we're testing this in some of the [indiscernible] stores getting really piloted and other solutions. We're excited about by -- hopefully by end of the year, the first ones in the U.S. with some of the more well-known brands here in [America].

Okay. And then is this what you're leading with as you kind of push more into North America to...

I would tell you in North America we have a very unique. Let me think itself [indiscernible]. We were able to win the #1 position in Europe [indiscernible] because we built a modular product and modular product and a modular [indiscernible]. So when you think of the U.S., we started holding itself after probably 25 years ago. And at that time, it was a very [indiscernible] solution. You use somebody's [indiscernible] need to use that same company software. Then today in the modern world, it seems almost absurd that you would be locked into a supplier [indiscernible] and software. But 25 years ago, it was [indiscernible]. Today, they will large gross revenue [indiscernible] to those 2 things and [indiscernible] that way. Our software can run any [indiscernible] from any other part suppliers work [indiscernible] 20 softwares. So when we body business as people look to make [indiscernible] we can start with winning the modular [indiscernible], modular [indiscernible]. And then we can add employees. So we can run both on [indiscernible] particular technology. So those are [indiscernible], I would say, the 3 things: The modular architecture and hardware and software and the ability to [indiscernible].

Okay, great. Let's shift to some financial topics. So for 2025 guidance, I think you've said you're tracking to the high end of guidance, so that's low single-digit percent revenue growth. EBITDA close to $490 million, which is up $30 million to $40 million a year, 6% to 8%. And free cash flow of close to $210 million. So that's a big improvement over 2024. So what has driven you to the high end of your growth outlook, the margin improvement and the strong free cash flow conversion?

Let me start [indiscernible] the biggest [indiscernible]. The ability to [indiscernible] to buy every day in the earlier this year we said over the next 3 years, we would expect to be able to generate a cumulative free cash flow of $800 million. To put that in perspective, our market cap is $2.4 billion as of opening this morning so that's 1/3 market cap that we're able to generate and free cash flow. Like that, look at perhaps where our stock price is trading today, and you will believe -- we believe that our stock is underappreciated and under [indiscernible]. So that kind of brings us to move capital allocation frameworks, and that's it [indiscernible].So in February of last year, we announced a $100 million share buyback as well. We wrapped that up in October. It came out during our earnings release and announced that we're going to double that and buy back upwards of $200 million something that we would hope to be able to complete in a similar time frame, we build influence. So when you think about the ability to generate cash over time, this year, we're going to likely nearly double, if not double free cash flow and to be able to continue to grow. So think about even in somewhere between $550 million and $600 million , which is what we said. So the [ 16% ] conversion rate and to free cash flow and/or a CapEx requirement less than 1.5x, right? So very late CapEx environment. We're not very acquisitive. We do have a pipeline, but they're all sort of strategic, very service-based, right, consolidation within regions. So our mantra acquisition, and we've successfully completed one last quarter, it's going to be small. So I think under $30-ish million, the multiple of revenue, that's something I talk about it and it serves onetime that's going to be immediately accretive, right? So those are great, we put it into form and we're able to grow it. We've been [indiscernible] one last quarter for about $15 million on the East Coast, not only does it serve [indiscernible] other machines on the social environment for growth for us. But we feel that's one of the tenants of the things looking too big. And at the end of the day, we're very [indiscernible] team to giving back our free cash flow, if not the best, we that won't the vast majority of it to shareholders [indiscernible] So revenue growth, that mid-single digits is where we expect to land in 2027. And it's not a we get there, it's a combination of banking or brand and retail solutions, right, that Octavio talked about, that fit for purpose. That's a very big opportunity for us. And if you think about a retail business and were roughly it's a $1 billion business, $900 million of it is in Europe [indiscernible] and the rest [indiscernible]. The rest of the world is greenfield to us. Now as Octavio alluded to, we do have very entrenched delivers. But we went out and hired a sales team, particularly in North America, and was focused on 40 accounts, 40 accounts where we know those [indiscernible] to end of life or there's going to be a software upgrade. Both of those opportunities bring on what I would refer as a RFP opportunity for us. And we feel maybe modularity and flexibility that, that offers with or without our software, right? We always like it with the software, particularly with this AI component and what I can mean to, we think we have a very cooling proposition for the stores. So in order [indiscernible] that. So Octavio's point, right? We have build proof of concepts. We have many test pilots that are ongoing as well. This is a new technology, a some point, right? So it is seeing the story about [indiscernible] we actually didn't speak on [indiscernible]. When we want to go take out sort of the demos, right, and told them we would install like the real final product, absolutely refused. They said we don't want to last 1 day, the last 1 week. Does it right? So we noted that. [indiscernible] so obviously, we were able to work with them. We just bring that up as a proof point, right? When the retailers make that investment, it's a big investment and the refurnish there. I mean if you think about bigger retailers [indiscernible] 1% to 2% of revenue. So if you were able to a 70% as we've demonstrated that time and time again, that's a really good [indiscernible] very compelling position. So we think all those factors help us get to mid-single-digit growth, increasing titlement [ 12% ] a year [indiscernible] and [indiscernible] strategic conditions.

Okay. And then on EBITDA margin. So I think the 2027 target is 15%. Your 12% area currently. So is that -- is that mix with higher software attach or is it just good old cost cutting?

Well, it's examination of both, right? So service business, which is approximately point, let's say, $3 billion on $4 billion continued time we're in '27. The origins that we have today, and this is what we said in our third quarter earnings call, we're going to be fluid this year [indiscernible]. We see a pathway to be able to grow service margins, they receive a year we went to say [ 50 ] basis points a year we're seeing a future in the next couple of years, certainly over the man time. And what we were able to do this year because our product margins were so high last quarter is that we pulled in some time investment. So think about a consolidation of our airport depots were going out software technology that not only helps from our field technicians, of which they're 1,000 global as a really big asset for us that can service both banking and retail and just really look at that footprint as well and began to shrink it. So we feel that we have line slate to be able to grow [ 518 ] basis points each year. [indiscernible] you sell transformation of under Octavio's leadership, done 13% margin about 3 years ago, the last quarter then we still expect to be able to go and grow [indiscernible] 25 to 50 basis points a year [indiscernible] not share because this they'd have to airplanes great geographical. And let's those opportunities exist because of services and [indiscernible], 100% of those [indiscernible]. We run a few spins a year and they need to not only safety improvements better quality and better profitability, and that is a lot more flexibility than those companies and in the manufacturing line.

Okay. And because this is a credit conference, can you talk about your leverage target and in particular, credit rating profile if you have a target there.

[indiscernible] we're in [indiscernible] with both S&P and Moody's. Recently integrated by S&P at our needles to get closer to [indiscernible]. I'm not actually worked to [indiscernible] where we were, we've actually made a [indiscernible] gap by about 50%. So more work to do, but we feel very encouraged and we continue to do what we said we're going to do. If we need to slow market. By the way, this year. And if you look across our industry, this is a real challenge. We have positive free cash flow in every single quarter. It doesn't seem like a very big deal, but it is because the unit is going to do it. And we run it to first quarter, think about able [indiscernible] free cash flow was generated in the month of December because that's when we would [indiscernible]. We grow anything into the business. We just really began to focus much more disciplined on DSO, right? So think about DSO is about $10 million or so a day. This quarter, if you [indiscernible] to last year, 9 days in [ DSM ] improvement we have at least another 9 days, right, if opportunity. [indiscernible] about that again, $5 million to $7 million of free cash flow for every single day, 11 days improvement, right? So we're very focused on having the install schedule manufacturing to that in-store schedule with the factory and the meaning finance in there, we have both flexibility. So the things push and we get a retail order in, we have fixible lines, not their belts. We're not older school manufacturing, we're just able to capitalize on new opportunities more efficiently.

Okay. Great. So with about a minute left, I'd like to offer you an ability to just wrap up if is there anything we didn't touch on or [indiscernible].

[indiscernible]. Today, we're in [ 1.6 ] we have [indiscernible] [ 50 ] million [indiscernible] approximately that we will be refinancing sometime in the fourth quarter of [reception]. We believe we can do much better than we easily [indiscernible]. So we're very excited about the future. We wrap it up, I would just say we have a very simple business model. We build great technology, great [indiscernible] products that have made a very sticky [indiscernible] and [indiscernible] many, many -- so it's some business model [indiscernible]. The benefit of that simple business model is that it can generate for [indiscernible] of cash when it's [indiscernible]. So once again, that's why we're excited about our company, and we believe that we're in the [indiscernible]. So thank you very much.

Great Octavio and Tom, thank you so much.

Thank you so much for having us.

Thank you.