Good morning. My name is Charlie, and I’ll be your conference operator today. At this time, I would like to welcome everybody to the Diebold Nixdorf Third Quarter 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session. [Operator Instructions] Thank you. Ms. Marchuska, your conference now may begin.

Hello, everyone and welcome to our third quarter 2022 earnings call. I’m Christine Marchuska, Vice President of Investor Relations for Diebold Nixdorf. To accompany our prepared remarks, we have posted our press release and shareholder letter to the Investor Relations section of our corporate website. I would encourage investors to review the shareholder letter as it contains additional information regarding the progress of company. Later this morning, a replay of this webcast will be available on the Investor Relations section of our website. Before we begin, I will remind all participants that during this call, you will hear forward-looking statements, including related to an update on our outlook. These statements reflect the expectations and beliefs of our management team at the time of this call, but they are subject to risks and uncertainties that could cause actual results to differ materially from these statements. Additional information on these factors can be found in the company’s periodic and annual filings with the SEC. Participants should be mindful that subsequent events may render this information to be out of date. We will also be discussing certain non-GAAP financial measures on today’s call. A reconciliation between GAAP and non-GAAP measures can be found in the tables of today’s earnings release. And now, I’ll hand the call over to Octavio.

Thank you, Christine. And thanks to all of you for joining us today. Today, I’d like to cover some main points, including our recent Transaction Support Agreement. But before that, I want to spend some time talking about the consistent market demand for our banking and retail solutions during the quarter and how our backlog is positioning us for success. Next, we’ll discuss our operating model, progress on our savings plan and our three-year financial model. And then before I hand it over to Jeff, to discuss financials and details, we’ll share a brief update on the transaction contemplated by the TSA. As we said throughout the year, our banking and retail solutions continue to generate consistent demand in the market, as evidenced by the backlog trends. Backlog remains near historic highs at approximately $1.4 billion in the third quarter, and we will subsequently work its way down in Q4, given our product delivery expectations. We also see continued strong demand for DN Series as the shift from legacy devices continues, and that DN Series cash recyclers continue to comprise the vast majority of our new banking orders in North America. Momentum in our retail solution also remain strong, and our self-checkout business is continuing to grow as we start to see results from our market expansion efforts in the US and outside of Europe. We are also seeing tangible benefits from our new streamlined operating model. During the past two quarters, our company has taken deliberate and strategic steps to become more lean, agile, customer-focused and better equipped to deliver our solutions to the market. We are continuing to focus on our operational rigor. We have significantly improved our cost management by eliminating redundancies, we are creating more efficient processes globally and are considerably decreasing our indirect spend. To-date,…

Thank you, Octavio. My prepared remarks will include references to certain non-GAAP metrics such as adjusted EBITDA. For a discussion of our third quarter performance relative to prior periods, please see the financial summary included in our third quarter shareholder letter. Today, I will spend my time discussing the third quarter results relative to the full year 2022 operating forecast included in our current report on Form 8-K filed on October 20th relating to the TSA. Total revenue of $805 million and adjusted EBITDA of $76 million were largely in line with our third quarter operating forecast. As previously discussed by Octavio, our units and our unit economic model are revenue recognized units, which were in line with our forecast and were as follows. 1,823 ATMs, 2,632 self-checkout units and 32,060 point of sale units. In terms of services gross margin, we continue to see increased sequential improvement of 100 basis points to 31.3% in the third quarter. You will note that we did see a decline in third quarter product gross margin percentage as compared to the second quarter due to an unfavorable product mix in both banking and retail. In banking for the quarter, cash dispensers represented approximately 47% of ATM units versus approximately 42% in the second quarter. In retail, delays in delivery and self-checkout units resulted in overall lower product gross margin profile. Third quarter operating expenses dropped to approximately $139 million as we continue to harvest costs from our restructuring plan and from lower provisions for incentive compensation programs. We continue to believe that normalized quarterly operating expenses will be in the $155 million to $160 million range going forward. The forecasted revenue units for the fourth quarter, as per our full year 2022 operating forecasts are 22,000 ATMs, 9,750 self-checkout units and 34,500 point…

Thank you. [Operator Instructions] Our first question comes from Matt Summerville of D.A. Davidson. Matt, your line is open. Please go ahead.

Thanks. Jeff, if I heard you right, in the fourth quarter, you’re looking to ship 22,000 ATMs, which seems to be a pretty big number. Again, we don’t have a lot of unit history with you guys. It’s newer disclosure, which, of course, we appreciate. But just help frame that up. What has to happen for you guys to ship 22,000 ATMs? And has there been a period in recent history where Diebold has shipped that many units in a given quarter?

There has been, Matt. And here’s – and we haven’t filed the 10-Q yet. But when we see the 10-Q, you’re going to see that we’re carrying a high number of relative to finished goods inventory. That – those are units and there’s approximately 14,000 units that are waiting for delivery to customers at the end of the third quarter. So we’re high in inventory and finished goods inventory. So you begin with the fact that there’s 14,000 units ready to be converted out of inventory into revenue recognition. So to answer your question, how do you hit 22,000? You convert a significant portion of that inventory that’s already built, it’s waiting for delivery and you deliver it to the customers. And then you get back to a more normalized number of an incremental 8,000 that have to be produced and delivered. Now, one of the things about any shipments that are coming out of Germany, the window closes fairly soon. That’s why we’re talking about the potential for risk, is we have to have – when we’re shipping units out of Germany to North America, we have to have them in transit. Yeah, by very soon in order to hit those numbers. So the risk is associated with not being able to produce, but being able to revenue recognize those units. If the – if we miss in the fourth quarter, those revenue units, that means that those units are sitting and waiting for delivery and just didn’t get to the point of revenue recognition. Many of our customers, the revenue recognition for our customers is installation. So that’s always an area that is variable. Can we get them installed before the end of the year?

Okay, thank you. That’s helpful. And then maybe just a little bit more detail, Octavio maybe on what you’re seeing from an incoming order rate standpoint? And if you can dissect that a little bit by region and across both ATMs and retail, maybe just do a little bit of a deeper dive. That would be great. Thank you.

Sure, Matt. So let me start with retail. So during Q3, and if you see the unit comparisons clearly Q3 and our deliveries for our self-checkout was you know below our expectation. However, order intake continues to be strong for self-checkout. So it’s once again a product of making sure we normalize supplier relationships as inflow from material is adequate. And to be honest, probably there as we were modeling the information that we disclosed that we were modeling, we were hoping for a faster normalization of our supplier relationships than what we’ve had. But on the demand side, we still see ample opportunity in self-checkout. And I feel fairly confident that, as I’ve said before, regardless of macroeconomic environment, our self-checkout solution help retail improve customer journeys and minimize costs. So there will always be, I think, a good chance of us continuing to grow those self-checkout units. And as you know Europe has been very strong for us, but we’re now starting to have significant deployments in the US, which will also help us you know demonstrate how our solutions are capable in every – and probably the most challenging self-checkout market in the world, which is US groceries, and we’re making significant progress there. On the HCM side, I would tell you that demand across the Americas continues to be very strong. So the trend to install recyclers in the US is, I would say, is now common across all major financial institutions, all large financial institutions with the – and as you know, once the large banks start installing a technology that very quickly trickles down to the rest of the market. So we see the US entering this you know long-awaited cycle where recycling technology would become mainstream. Latin America, as you know, continues to…

Octavio, if I can just squeeze in a follow-up there. To your point on reentering India, can you talk in a little bit more detail about the strategy? Is that – is the idea there that you’re going to make in India, for India or make in India for the broader Asia Pacific market. And if it’s more of the latter, what does that mean for your manufacturing base that this joint venture in China? Thank you.

Yeah. So for the first step, Matt, and I’ll be very brief and we can probably take this offline later, if you want. But initially, we’re just going to build in India for India as you know is one of the biggest ATM markets in the world, and you do require a different cost structure and a different cost product. We believe that with some of the core components of DN Series, we can address some of those cost actions, but also manufacturing in India will be beneficial. So initially, we’re planning this to be a test of the Indian market and then who knows. And maybe we decide that this is something that we expand elsewhere. But for the short-term, it’s just – it’s building in India exclusively for the Indian market.

Got it. Thank you, guys.

Sure, Matt.

Thank you. Our next question comes from Paul Chung of JPMorgan. Paul, your line is open. Please go ahead.

Hi. Thanks for taking my question. So if you could expand you know kind of on the product mix impact you’re seeing. You mentioned you know some lower margin units here in North America and LatAm in the quarter. You know how do we think about the kind of product mix to kind of end the year and into next year? Is the backlog kind of made up of higher ASP mix as a result? And if you can also talk about the backlog or orders firm and non-cancelable and our margins kind of locked in the backlog?

Yeah. So Kartik, thanks, that’s – sorry, Paul. I was looking at the question queue. Sorry, Paul, about that. So, Paul I think that how you should think about our unit mix is over several quarters, the unit mix should stabilize itself and be appropriate in the appropriate ratios. In any given quarter, we might deliver more of one type of unit than the other, particularly in Q3 you know we have significant shipments of cash dispensers, both you know to differ just across the globe of cash dispensers versus recyclers that we turned into revenue. And again, this is a product of cash dispensers coming primarily from our Asian manufacturing and hitting the different markets during Q3 and our high-value recyclers coming basically from Germany that have a different cycle time you know being a little bit slower in converting into revenue. Again, over time, the mix should return to the you know what we think is the trend that we’re seeing where you know low-40s is cash dispensers high, low-50s you know mid-50s is cash recyclers. That is I think our goal you know the normalized mix. In any one quarter, it might go up or down one of those variables, but you should think about it in the long-term, you know it’s fairly stable. As far as the orders you know, remember, we don’t manufacture anything without a firm customer PO. The biggest challenge that we’ve had right now is working with our customers, that’s why I wanted to thank all our customers at the end of my prepared remarks. Because, to be honest, they’ve been very patient with us, working as we normalize our supply chain and get units to them and accommodating towards their installation schedules, their delivery schedules. I think that everybody is very happy once they have our DN Series ATMs or our self-checkout devices. And again, you know I’m thankful that our customers have continued to work with us adjusting their schedules to meet our delivery schedule. So could have – we haven’t seen any order cancellations. We work – we continue working very closely with our customers adjusting our schedules, and we continue you know and we will continue doing that. But to-date, we have seen no cancellations in our backlog.

Yeah. Paul, I think it’s important just for me to reiterate that falls. So I just want to say that just the thing to remember is that, there’s risk in the supply chain, not in the demand. So if we do not hit our unit projections for the fourth quarter. It’s not because of demand. It’s because we could not produce and get them to revenue recognition and time to recognize them in 2022. They’re still there. They’ll end up in inventory and then in revenue in 2023, probably very early in 2023.

Got you. And then just a follow-up, just talking about where the firm can find some incremental areas for cost cuts here. I mean you know your cost-cutting initiatives have been quite aggressive over the past five years on a post-Wincor acquisition. So where are you kind of seeing lingering redundancies? And just any comments there? And then you know as we start to think about kind of the longer-term operating model you’ve laid out you know what’s the right level of absolute OpEx and also kind of normalized gross margins in the longer-term model.

Yeah. Let me start, and then Octavio can fill in. So on the OpEx side, I mean we always want to be looking for opportunities. And where we’re heading from an operational perspective, especially in transactional areas as being digital-first, get a digital solution versus outsourced manual processing. And that’s going to significantly help us. And that relates back to what we’re doing for indirect spend. We have some – we put incremental rigor in relative to indirect spend, you know third-party spend, bid processes and looking at eliminating waste. So we have – we have continued opportunity in indirect spend. And then from a people person – you know people perspective, it’s about being efficient with the use of systems and process. So that all being said, where we think we will be when we reach our goal, our goal is a little more aggressive than our model in OpEx. We are targeting a $600 million OpEx number, annualized $150 million a quarter. We haven’t identified that, so it’s not in that operating – strategic operating model, but that’s our ultimate goal. And then once you get into those digital processes, right, you don’t experience wage inflation. So that’s important to us as we go forward. So to answer your question directly, we’re looking for $600 million of OpEx a year or a $150 million a quarter.

Thanks. That’s really helpful. And then lastly you know free cash – go ahead.

Go ahead, Paul. Sorry. Go ahead.

Okay. Just so yeah just on free cash flow outlook longer-term. I mean, where are you kind of finding efficiencies in working cap? I know you have a large backlog and conversion of that inventory is very key, but you have this big jump in unlevered free cash flow in ‘23. How do you get there? And what are some I know there’s also some moving pieces on cap structure, but any estimates for levered free cash flow as well? Thanks.

Yeah. So I’ll start with unlevered. So when we get to ‘23, our goal is by mid-2023 to be done with restructuring transformation. We still have modeled about 78 – $80 million. You can see it in our disclosed information in our free cash flow in the cleansing documents, approximately $80 million of restructuring transformation are still modeled for 2023. That would be through midyear ‘23, the latest third quarter, then we want to be out of the restructuring transformation world and out of the GAAP to non-GAAP reconciliation world. Where that leaves us is, you know we’ll pick up $80 million there when we get to $24 million. And then we want to be more normalized relative to working capital. We have, by necessity stressed accounts payable days, we’re going to get back to normalize in conjunction with finalizing the TSA, and that’s what’s hitting ‘22. So as we go into ‘23, we expect to be more normalized relative to working capital. You can see it in our disclosures. We will have a little bit of an increase in inventory in ‘23, but we believe that going into ‘24 will be normalized in working capital. We’ll be out of the restructuring transformation business and that gets us to an unlevered free cash flow as a percentage of EBITDA model at greater than 70%. From an interest payment perspective, obviously, rates are going up, and we are – we’ll take on some level of incremental debt, including what the TSA. We’re modeling somewhere in the [$210 million] [ph] interest payments as we move into ‘24.

Thanks. Very helpful.

Thank you. Our next question comes from Kartik Mehta of Northcoast Research.

Good morning, everybody. This is Jack Boyle with Northcoast Research, calling on behalf of Kartik. I had some questions answered already for us, but I just had a question regarding back to that backlog, I believe you stated that by the end of the year, you planned on working through about $100 million of that. Could you give us a little bit more color about – around maybe kind of the future cadence of that? Is that kind of the rate you expect to work through that backlog going forward? Or you know how quickly do you expect to be working through that? Or how should we view that?

Yeah. So let me try to – it’s an interesting question that you post, but let me walk you through how I want the business to be run. And why we’re making some of the changes and decisions that we’re making in the short-term in order to solidify the long-term of our company. If you think about what would be the ideal way for us to manufacture and deliver, if we’re planning 60,000 units next year, we should be manufacturing and delivering 15,000 units every quarter. That would be an ideal world, it would help with our cash flow, it would help with our – you know planning of installations, it makes life more predictable. The reality is that, based on our past capital structure, we were always a little constrained at working our inventories down at the end of the year, ramping up at the beginning of the year. So that made for slower starts to the year, and then I think you know somebody – Matt asked us, you know then bigger numbers at the end of the year. My goal is to start to normalize that. You know will it be 15,000 units every quarter from now on? Probably not. It will probably still need some work to be done. But if we start getting into that cadence, it’s very easy to start working the backlog down and working it down predictively. So my goal is, if you listen to what we said. Right now, we have 80% of next year’s – or we will end the year with roughly 80% of our product back you know revenue in-house. That is a very high number. Once we normalize things rather than having almost three quarters of backlog, my goal is that we have a quarter or a little – you know or over a quarter of backlog you know in our books at any given time. That would be the normalized rate. I would say that for the foreseeable future, probably we start going from having three quarters of revenue in backlog to probably having five to six months and keep working our way down as we improve velocity in our supply chain. Remember, the demand is there, what we need to accelerate is the velocity to get it into the hands of our customers. So I hope that was helpful.

Yeah. Sorry, I was muted there. And I appreciate that additional detail. Maybe you can go in a little more detail and maybe perhaps I missed it as to why it was flat. Was that you know just an issue of supply chain continuing to be an issue?

Why was backlog flat? Again, remember backlog you know it’s – yeah. So again, it just meant that we didn’t convert as much revenue as we were hoping for during the quarter, and we have more orders than what you know it’s a combination of orders coming in and revenue being converted. So the math around that, they didn’t allow us to ramp down the backlog. So yeah, it’s a combination of more orders and less ability to accelerate the conversion of backlog into revenue.

Yeah, for every quarter in ‘22, order entry has exceeded revenue recognition for units. So that’s what’s been building the backlog. And that’s why we have modeled in that we – and that’s why we’re carrying 14,000 units in inventory. So what needs to happen in the fourth quarter is to convert those inventory units to revenue and have you know plus 8,000 units coming through and produced and revenue recognized. That’s what the model has. And that would work down a certain amount of that backlog. So that’s why we’re projecting for the backlog to be down, but the demand remains high and has exceeded our ability to produce in revenue recognized units.

All right. Thank you, both. Appreciate.

Sure.

Thank you. Our next question comes from Ana Goshko of Bank of America. Ana, your line is open. Please go ahead.

Hi. Thanks very much. So you know just listening to your comments. And just to set expectations correctly, I think the takeaway from that I’m hearing is kind of the new base case for the fourth quarter and EBITDA is really the $263 million, maybe the $293 million is kind of aspirational now. Is that fair?

So the $293 million is our operating forecast. What we provided in the cleansing documents with the TSA was – it wasn’t guidance. It was our operating forecast. So that’s where we’re operating to. We’re operating to the $293 million. What we provided today was a look at their potential risk in units conversions as the window is closed relative to where we’re shipping product. So we haven’t changed our targets, but we’re saying that there’s the potential for risk and it could be as high as 15%. And that really relates to the unit risk in ATMs is what we’re providing. There’s still time to achieve those targets, but the window is closing. So we’re providing the potential risk to those units in today’s call.

Okay, thank you. And then so there’s a lot of usage of the term supplier relationships with regard to the conversion problems or kind of headwinds you’re facing in the fourth quarter. So can you be more concrete about – is it a couple of supplier relationships? Is it a specific component? Or you know what is really the issue behind that?

The issue is under our old capital structure, and this is something we’ve talked about for probably close to a year now is, we wanted to get to an ABL, we wanted to get to a point where we didn’t have restrictive covenants that put us in a position even when we have liquidity of not being able to access liquidity. So when that happened to us, especially in the situation we’re in now. So think of the situation we’re in now is that, because of increasing inventory, right, it puts pressure on liquidity, which is why we really need to move those 14,000 units up. But increasing inventory puts – historically, would have put significant pressure on our covenant compliance in the last leverage point we have is really related to accounts payable. So what we ended up doing then is, stretching supplier payments. Historically, we pay – we would pay twice a month, mid-month, end of month and our DPOs would be in the 80s, maybe as high as 90s dependent on timing. But under the current restraints of the old credit facility, we would push those up into the 100s even higher, right, in the 120s. We put a lot of that pressure on indirect spend, but – and when we’re really pushing supplier payments, it starts hitting critical vendors. And that’s component suppliers. So when component suppliers were getting hit, right, then they get to a point where they’re limiting shipment or requiring payment before shipment. So we want – we need to get out of that. And that’s what the TSA allows us to do, is to get back to a normalized payment process, where we get back to that 80 to 90 DPO and we don’t have these critical supplier interruptions and component – key component interruptions that were – and it’s not just one. I mean it’s all of our electronic component suppliers. If we do that, that has caused issues within the supply chain.

Okay, got it. So it’s less of a sort of industry supply chain issue and really touch more related to the relationships that you have with your suppliers that you’re trying to improve with –

Well, so Ana, let me put it at as you know, let me expand on – yeah, Ana, let me expand on what Jeff said. So throughout the year, we’ve battled different challenges. So if we go back to the beginning of the year, we were you know we’re still constrained on availability of core components you know just the same as everybody else in the world. As the year has progressed, we’ve improved that availability of components. However, you know as we work with our suppliers, we need to normalize payment terms. We need to normalize those relationships so that is a steady flow of product of raw material in a predictable way. And in order to achieve that, we have to have two conditions. One, that the availability of materials is there, which it is now there. And the other condition is that, we have a steady cadence with them around shipments, payments, shipments, payments. Those are the things that we’re trying to normalize and that’s why it’s so important for us to conclude all our refinancing efforts, because as we conclude that, that allows us to normalize those relationships. So the first part of the equation, which is overall availability in the market is starting to solve itself. Now we need to solve our internal you know unique situation of normalizing those relationships with suppliers. And again, you know we have multiple suppliers, some of them as they’ve seen our disclosures – are now in a steady state. Others, we’re still working with them to get them to a steady thing.

Okay, great. And then just finally, so I know that unlevered free cash flow came in below what the target was for the third quarter. You still have the same target for the full year. Are any of these issues that we’re deciding especially with the payables and the supplier relationships. Is that going to put additional pressure on your ability to meet the full year unlevered free cash flow target?

That what’s built into the unlevered free cash flow target is normalizing those payable positions through the liquidity provided by the transactions of the TSA. So our goal is by year end being back to normalized supplier positions relative to payment, and that will put us in the best possible position moving into ‘23 to achieve those goals relative to unit conversions.

Okay, great. Well thank you very much.

Sure, Ana.

Thank you. And our final question of today comes from Peter Sakon from CreditSights.

Hi, good morning. I just wanted to follow-up on the order activity in the most recent, I guess, the first and second quarter, you gave product order entry numbers. Could you share that with us for the third quarter this year and comparable to last year?

For the third quarter, you’re asking for order entry for the third quarter? I’m just trying to understand the question. Because I don’t think we’ve provided order entry. We provided the backlog information. So theoretically, they can back-end order entry.

Got it. So I guess in the first and second quarter, I have let’s call it $56 million in the second quarter. And fourth, I guess it was down 6% in the second quarter. So with the revenue decline –

Yeah, I would say –

[inaudible] is a revenue entry.

So no, we did not provide order entry in this third quarter filing. So it – as I said, we provided the backlog information that effectively provides the order entry information. Well let’s take this offline and Christine can walk you through that.

Fair enough. And the EV charging, I didn’t see any update. Is that no longer a focus for the company?

So Peter, EV charging continues one of those areas where we are focused on leveraging you know our service footprint. We will end the year with the 30,000 units that we set up to have under contract. I think that we’re on track on that. We’re – you know my goal is EV charging same as other industries where you require high availability and strict service levels for our distributed technology footprint remain areas where we want to continue leveraging our services footprint. So I just don’t want to continue making everything about charging. That’s clearly a very attractive opportunity as that market continues to evolve. But we want to make sure that we’re thinking about what we do is you know based on how do we leverage our service footprint better across different industries. If you go to our shareholder letter on Page 5, we did mention some of the wins that we had in EV. So we’re preparing you know services in six Eastern European countries now with alpitronic. We are working on a service contract with a Pan-European petrol station. And we remain on track to meet the 30,000 chargers under contract by end of 2022. So that business is going as we had forecasted. We clearly still have a lot of work to do in that market, and it’s an industry that’s shaping it to – so I would really you know we want to be a part of this EV charging companies start developing their service model for the future. We want to be a part of how they define the service model so that we can actually be a more strategic partner to them. But yeah, you can see that in our shareholder letter in Page 5. And if you want more details, you know Christine can gladly walk you through more details on what we’re doing there. But keep in mind that, you know our service business is a very unique asset that we have. It’s a $2.1 billion business. 70% of the revenues are recurring, and we want to leverage that infrastructure in other areas besides just banking and retail or with other technologies besides ATMs and self-checkout. So we’re looking for those options. EV charging is one, but we’re also looking at other alternatives in the market. So you know Christine, can walk you through some of those ideas if you’re interested in.

And my last question, if I may. What other conditions do you need to meet to close the transaction? And do you have a target date for closing the new financing? Thanks.

Yeah. From the financing perspective, I would draw your attention to the 8-K filings and it provides there. We need to be careful what we say relative to the TSA based upon the SEC regulations. So what we would do there is just point you to the 8-K.

But as we said in our remarks you know –

By the end of December.

By the end of December.

By the end of –

And you’ll see that in the document.

Thank you. At this time, we currently have no further questions. So I’ll turn the call back over to Octavio Marquez, CEO of Diebold Nixdorf to begin.

Thank you, operator. And thanks to everyone who listened and participated in today’s call. We look forward to seeing you at our upcoming investor conference and during our next earnings call. Matt, thank you again.

Ladies and gentlemen, this concludes today’s call. You may now disconnect your lines.