Hello. Good day, and welcome to Diebold Nixdorf Second Quarter 2025 Earnings Call. My name is John, and I'll be coordinating today's call. [Operator Instructions] I would now like to turn the call over to our host, Maynard Um, Vice President of Investor Relations. Maynard, please go ahead.

Hello, everyone, and welcome to our second quarter 2025 earnings call. To accompany our prepared remarks, we posted our slide presentation to the Investor Relations section of our website. Before we start, I'll remind all participants that you will hear forward-looking statements during this call. These statements reflect the expectations and beliefs of our management team at the time of the call, but they are subject to risks that could cause actual results to differ materially from these statements. You can find additional information on these factors 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 Participants should be mindful that subsequent events may render this information to be out of date.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 discuss certain non-GAAP financial measures on today's call. As noted on Slide 3, a reconciliation between GAAP and non-GAAP measures can be found in the supplemental schedules of the presentation. With that, I'll turn the call over to Octavio.

Thank you, Maynard, and good morning, everyone. Thank you for joining us. Before I get to my prepared remarks, I'd like to extend my sincere gratitude to Chris Sikora for his invaluable contributions during his time as Head of Investor Relations. Chris has played a critical role throughout the years wearing multiple hats at DN, and his dedication and expertise have been instrumental to the company. Chris moves on to head our business finance operations for retail, where his skills and experience will continue to be invaluable with the large retail opportunities and growth we see ahead of us. I'd also like to welcome Maynard Um as the new Head of Investor Relations. Maynard brings over 25 years of Wall Street and investor relations experience across multiple industries. His deep knowledge and expertise will help build on the strong foundation already in place. We're excited to have him on board and look forward to strengthening the relationship with the investment community and communicating the company's value proposition. Starting on Slide 4. Q2 was another standout quarter, where we delivered strong performance in our key objectives amidst a volatile global environment, generated the third consecutive quarter of positive free cash flow and finished the first half with great momentum, giving us confidence in our ability to deliver strong operational performance in the back half of the year. Product orders grew 10% year-over-year, reaching the highest level in 3 years. Our backlog now stands at approximately $980 million. This momentum, combined with our robust first half, gives us conviction to reaffirm our full year outlook, with the business trending towards the higher end of our range for revenue, adjusted EBITDA and free cash flow. Our solutions continue to see strong demand in the market, and we remain focused on exceeding the expectations…

Thank you, Octavio. Starting on Slide 8. Overall, we're very pleased with our second quarter and first half results. Our execution gives us strong confidence in our full year outlook, which we currently see trending toward the higher end of our guidance ranges. Product backlog at the end of the second quarter increased to approximately $980 million, up from approximately $900 million at the end of the first quarter on strong new order entry, which was up 10% year-over-year, led by Banking. As we shared previously, we expected revenue to be weighted towards the second half, given customer project activity, and this is playing out just as we expected. In Q2, FX was a tailwind to revenue of $19 million. However, for the first half, FX was a net headwind of approximately $4 million. First half revenue came in at 46% of total year's revenue, in line with our previous guidance of approximately 45%. Gross margin continued to improve, up 50 basis points year-over-year and 120 basis points sequentially. Product gross margin saw a significant improvement, both year-over-year of 250 basis points and sequentially of 230 basis points, primarily driven by better geographic mix, pricing discipline and the ongoing impact from our lean initiatives. Product gross margins remain on track for up to 50 basis points of improvement year-over-year. On the services side, gross margin improved 40 basis points sequentially and was down 80 basis points on a year-over-year basis. We remain focused on driving sequential improvement throughout the year as we continue to enhance the best service organization in the industry. We also remain on track to exit Q4, with a run rate in service margins up 100 basis points versus prior years. In the second quarter, operating expense was up sequentially, primarily due to FX and stock compensation.…

Thank you, Tom. To wrap things up on Slide 14, we delivered yet another strong quarter with a relentless focus on our customers and improving operations, demonstrating the progress we're making against our multiyear growth plan. We've built a strong backlog that gives us visibility to the back half of the year. In Banking, we're gaining momentum with a growing customer pipeline for teller cash recyclers and tailored solutions in fast-growing markets, while the refresh cycle continues to progress. In Retail, we expect to see continued sequential improvement for the remainder of the year. Our pipeline continues to grow, particularly in the North America market. We continue to make great strides in building more efficient operations through a disciplined lean culture, and there's still much more to come. And of course, we will continue to focus on maintaining a fortress balance sheet with a target of nearly doubling year-over-year free cash flow generation and returning capital to shareholders. In closing, I'd like to thank our loyal customers, partners, employees and shareholders for their trust and support. We've laid a strong foundation for long-term success, and I am optimistic about the opportunities ahead. And with that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Matt Summerville with D.A. Davidson.

I was hoping maybe to start with Retail. Expand a little bit on the fact that you have all this confidence regarding that business inflecting in the second half of the year. Can you speak to where that is being driven from a pause versus still standpoint? Is it North America? Is it Europe? And then can you maybe discuss a little bit how the funnel in North America may be starting to mature and if you'd be willing to maybe put a value on that North American funnel?

Yes. Thanks, Matt, for the question. Look, in the quarter, what we saw was a much higher mix of point-of-sale revenue versus SCO revenue. That mix unfavorably impacts us in terms of margin performance from the perspective of not only services, but hardware as well. Some of that backlog and order entry growth that we're seeing, and Octavio will comment on this in a second, it's led by Banking, but we're seeing really positive signs of recovery in Retail. And we -- remember, in that backlog sits our Deutsche Post win, which we would expect to start converting into product sales towards the end of this year or early next year as well. So we remain confident that over the next quarters, we'll be able to sequentially improve both revenue, operating profit and margin as well.

Yes. Probably just adding to Tom's comment, Matt, remember, we started the year with big expectations for North America. We created a very focused strategy. We understand where the opportunities lie in the market. We have a targeted pipeline. We identified the 40 best accounts for us to target initially this year. We've engaged with most of them. We have pilots in many of them. Again, these are some of the largest grocers, general merchandising companies in the U.S. Again, it's a long complicated sales process where we're trying to unseat formidable incumbents. But I am convinced that as we keep showcasing the capabilities of our products and our solutions that, particularly, I am very impressed with all the pilots that we -- or all the proof of concepts and pilots that we're driving with our AI solution, that gives me a lot of confidence. As far as the size of the pipeline, probably I can't comment on an exact number, Matt. But what I can tell you is if you think of our business, where our European business has always been 80%, 85% of our total revenue, I can tell you that our North America pipeline now supports the idea that we will have a North America business that is growing much faster than the rest of the world for us, again, be it from a small basis, but we're very optimistic about that, and the team is very focused on it.

Maybe as a follow-up. It was mentioned several times in the prepared remarks, but can you talk a little bit about the TCR, the penetration rates as they sit today across the major geographies? And I guess, where you see banks prioritizing branch automation? Is it more at the ATM? Is it more at the teller counter? And I guess, are you seeing verified sort of cross-sell opportunities between those 2 products? And maybe just -- again, I've asked this in the past, using a baseball analogy, what inning are we in with TCR adoption? What inning are we in with the recycling-led replacement cycle?

Thank you, Matt, and thank you for asking that because talking about TCRs is probably my favorite thing to do nowadays when I'm with customers in Banking. So remember, the TCR, the hardware that we're deploying to take recycling into the teller line is part of our broader branch automation strategy. We will be launching officially this strategy -- or kind of communicating more broadly in our Intersect customer event later this month. But what it basically boils down to, when you think of the cash ecosystem at a branch, it encompasses the ATM, the teller line and the vault. So through our services, through our hardware and through our software, we're now able to manage that complete cash ecosystem. So when I think of branch automation services, it encompasses the ATM where we can do -- just sell you the hardware or manage it completely for you. Now we will be able to help you manage the cash at the teller line by selling you the hardware with our recyclers, keeping tabs on where that cash is, whether it's in a teller at the ATM. Our products are interoperable, so we can change cash from one device to the other and provide you a complete view on how you're operating the cash ecosystem at the branch level. This resonates with banks tremendously. As you know, cash operations is one of the biggest cost drivers in many -- in any retail -- branch retail network, and this is really providing a strong ROI for customers. I would say that we're in the -- for us, we had our first significant order with -- for Teller Cash Recyclers this quarter. I'm extremely proud of the team because this is a customer that wasn't our customer for ATMs, wasn't our customer for…

Your next question comes from the line of Antoine Legault with Wedbush Securities.

Just, Octavio, you mentioned about the Indian market, and it's clearly a very large addressable market. And you mentioned that the ATMs you sell there are more compact and energy efficient. Overall, are you able to achieve a similar margin profile in these machines? And just can you speak more broadly to the opportunity ahead in India?

Yes. So Antoine, India is probably one of the largest ATM deployer market today or one of the largest ones. We built our strategy around local manufacturing in India with a more compact, more energy-efficient product, smaller footprint because that's what the market needed. So this new redesigned product that meets all of our DN Series quality standards does allow us to compete and command similar margins to those that we have in the rest of Asia Pacific. Remember, the importance of this market is that it is a very fast-growing hardware market and more -- and one where we weren't particularly strong since we had exited manufacturing there a couple of years ago. By reentering, this allows us to once again start growing our installed base there. And the important part is as we grow this installed base, we have a very strong service annuity for the future. And I would say that the service annuity in the APAC market is probably one of the strongest margin profiles that we have, as many as these customers like to give the service of their ATMs to their OEM providers.

Understood. That's helpful. And just one more follow-up. I just want to confirm, you're looking for retail and product gross margin to lift in the second half as the scope picks up. And to expand a bit on that, I'd assume growth efforts in Retail, either Smart Vision or the incremental software features or the push into North America, should be margin accretive for your retail business. Is this the right way to think about things?

Yes. What I would encourage you to think, Antoine, is we will get better in margins in Q3 in Retail. We will get better in margins in Q3 -- in Q4 in Retail, and we will also see revenue growth in Q3 and Q4. So as Tom said, we're very optimistic about the growth in Retail, and this is driven by what we're seeing, a steady European market with slight recovery and some large projects that we need to deliver there and our continuous efforts into growing in North America.

Understood. And maybe last quick one on the tariffs. I know you mentioned $5 million to $10 million or $7.5 million at the midpoint, which is down significantly from your initial assessment, which I think calls for about $20 million of annualized costs related to tariffs. Is this mostly a result of the now lower tariffs on those jurisdictions? Or is it also the impact of your mitigating initiatives taking hold now that we're about 4 months into this?

Yes. So I'll let Tom talk about a little bit kind of the tariff rates and all those calculations because, to be honest, as they change every day, I have a hard time figuring them out. But let me tell you what the part that I'm very focused on. One of the things that we said is that we would mitigate some of those impacts with our own operational efficiency. One of the impacts that we had -- or that we were forecasting last quarter was importing the engine of our recyclers, the RM4 modules from Germany. We would manufacture them in Germany and then distribute them to our multiple manufacturing facilities, whether it was Ohio, Manaus, Brazil or India. Since then, we've localized manufacturing of the RM4 engine to Northeast Ohio, thus avoiding the impact of the tariffs that were imposed in the EU. So again, we are continuing to look at all these different alternatives, the idea of expanding our manufacturing footprint here in Northeast Ohio for retail products. We started with the self-ordering kiosks for quick-serve restaurants, expanding to self-checkout. All these things help us really mitigate the impact of tariffs. So Tom, do you want to talk a little bit about the rates?

Yes. Look, you know what our assumptions are China, 55%, everyone else at or around 15% for the remainder of the year. We were very transparent in the first quarter, came out and said our gross impact could be up to 20%, but we have line of sight to mitigate 10%. So think about that 10% in the first quarter now going down to a range of 5% to 10%. And we think that we have multiple ways to win here and continue to mitigate that even further, which is why we're confident despite tariffs, we're still going to be able to execute towards the high end of our range.

Your next question comes from the line of Justin Ages with CJS Securities.

Positive to see the pilot program and the one customer on the uptake in Retail for the Vynamic software. Can you just give us a sense of the conversion of pilot programs or the lead time that, that takes?

Yes, Justin. And again, it varies, to be honest, depending on the size of retail, the complexity of what they're trying to deploy. We're encouraged that this is a midsized grocer that had a couple of hundred stores, but they've started with the first 18 that are now live. So we're happy to see that. That was a process that roughly took us 6 months from the inception of the first proof of concept to piloting in one of the stores to now starting to roll out in the first 18 stores. So I would say that for midsized companies, we're anywhere from -- 6 months should be a good time frame. We see that in some of the larger grocers, some of the larger retailers, that process is a little bit more extensive, particularly as retailers with multiple -- with hundreds or thousands of stores really create a more comprehensive testing process and evaluation process. So I would say that, that probably takes 6 to 9 months. But I think that, that is the average time frame, anywhere from low end 6 months to high end 9 months. And remember, we started some of these proof of concepts and pilots early Q1, so we're starting to see the early green shoots of those efforts.

That's helpful. And then one more. I appreciated the color around guidance on the tax rate. Can you give us an update on where you are in getting to a more rational tax rate? I know that was a bit longer-term focus. Just wanted to get a sense of the progress being made there.

Yes. Thank you, Justin. It's a great question. This quarter, we were able to capitalize on some discrete onetime items in the quarter that dropped the rate to 33%, right? So we were able to adjust our range, lowered it a little bit from 45% to 40% to 45%. Again, we -- some of the tax planning initiatives and strategies are going to take some time to not only implement, but then also manifest themselves on our results. So we are still committed to doing what we said at IR Day. And by 2027, we believe that we can drive the rate down to the low to mid-30s. And we think that, that at that point would be a sustainable type of range for us, right? We do have good -- I guess, it's a good problem, maybe a bad problem of making a lot of our money in high tax jurisdictions like Brazil and Germany and the U.S. So it's a little bit more of a headwind for us, but we're confident in our ability to lower that rate over time and not only rate, but some of the cash tax payments as well.

Your next question comes from the line of Matt Summerville with D.A. Davidson.

A couple of follow-ups. I want to make sure I understand kind of the go-forward cadence in service's gross margins. And I want to understand, you talked about a lot of different investments you're making on that side of the business, which will obviously bear long- term fruit. But I'm curious, are those investments actually weighing on margins at present? And again, if you can remind us how we should think about Q3 and Q4, the margin evolution. And then I have a follow-up.

Yes. So look, our view is the 100 basis points of service gross margin continues to be our North Star, right? And remember, it's not just this quarter, it's not just this year, it's that whole 3-year journey, right? So we have increased margins Q1 and Q2. And as Octavio and I both pointed out, continue to expect that sequential improvement throughout the year. But let me give you a road map for the remainder of 2025. So look, first half service margin came in at about 25.3%. We're projecting full year service margins of at least 26.5%, and we're targeting multiple opportunities to incrementally improve that through the remainder of the year. I think what's important to keep in the back of the mind here is as we exit the year, we do expect our Q4 service margin run rate. So as we exit the fourth quarter to show at least 100 basis points of growth over the Q4 2024 exit rate of '26. So you are correct that there is an elevated cost associated to the repair of those -- the consolidation of the repair centers, the field software for our technician, the software rollout and then also adding field technicians to support our service portfolio as well. But again, we remain confident on the ability to achieve what we've said and overall maintain the higher end of our guidance.

Yes. Matt, and just to add to Tom's point because this is one of the things that I've committed to all our customers. We will be the best service organization. We will continue improving using technology, incorporating AI into the way we serve our customers. So we're very focused on that, and that is something that -- that's what I think of our 3-year journey are the investments that will clearly elevate our capabilities around service and really distinguish Diebold Nixdorf in the market.

As a follow-up, can you maybe expand a little bit on that $50 million sort of OpEx target you're looking at in terms of annual savings? Tom, maybe where you and Octavio are seeing the greatest sort of magnitude of kind of opportunity going forward? And are you executing towards that type of number for 2025 as well? I want to be clear on that.

Yes. We'll have more to share with you. We're working towards those plans and developing those plans. We think we've got opportunities in shared services. We think we've got opportunities in our manufacturing and operations kind of across the board. As we continue to roll out lean, it's been -- it's really been embraced by the company, and we expect, given the number of kaizens that you saw on the slide, we continue to roll that and see it as well. And then in the functions, whether it's our back office and shared services and whatnot, we think that we have opportunities to begin executing to that. So I would ask for a little bit more time to more fully develop those plans and give you an idea, but we would expect a favorable impact to the current year.

And it seems that we have no further questions. I will now turn the call back over to Maynard Um for closing remarks.

Okay. Thanks, everyone, for participating in today's call and your interest in Diebold Nixdorf. If you have any follow-up questions, please feel free to reach out to the Investor Relations team. Thanks again, and have a great day.

This concludes the meeting. You may now disconnect your lines.