Hello, and welcome to the Q4 2023 Diebold Nixdorf Earnings Call. My name is Alex. I'll be coordinating the call today. [Operator Instructions] l'll now hand it over to your host, Christopher Sikora to begin. Please go ahead.

Hello, everyone, and welcome to our fourth quarter and full year 2023 earnings call. To accompany our prepared remarks, we have posted our slide presentation to the Investor Relations section of our corporate website. Before we begin, I will remind all participants that during this call, you will hear forward-looking statements. These statements reflect the expectations and beliefs of our management team at the time of this call, but they are subject to risks 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 Participants should be mindful that subsequent events may render this information to be out of date.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. 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, Chris, and thank you all for joining us. To get things started today, I wanted to give our Chair, Pat Byrne, another opportunity to share some opening remarks. Pat and the broader Board have been in place for about four months now. We have spent that time working closely together to establish our governance framework and align around longer-term objectives for the company. So today, I thought it would again be appropriate for Pat to kick us off with some of his early takeaways working with Diebold Nixdorf. Afterwards, Jim and I will walk you through our quarterly results. Pat, over to you.

Thanks, Octavio. I'll just make a few comments to provide an update on the Board progress and give you a sense of our excitement for the future of Diebold. We've been working together as a new Board of Directors for several months now and are making very good progress as we completed fiscal year 2023 and set priorities and objectives for fiscal 2024. We're also building strong governance and board oversight and the Board and management team are working well together, focused on running the company towards consistent and improving operating results while also building a flywheel that leads to accelerating profitable growth, margin expansion and free cash flow conversion. Octavio and his team are entering 2024 with real momentum and with clear priorities of both operations and multi-year transformation agenda. As I mentioned last quarter, we believe that the Diebold market position in both banking and retail built on strong customer relationships and innovative technology puts us in a strong position to win in the marketplace going forward. We're confident in our 2024 guidance and the long-term outlook for the company. We intend to share our views of the market, the Diebold opportunities and our long-term plans and targets in a 2024 Investor Day. We're currently planning on doing this Investor Day in the middle of the year, and we'll keep you updated on our plans. We're excited about the future of Diebold and working closely with Octavio and his team to drive long-term shareholder value. Now I'll turn it over to Octavio and to Jim.

Thank you, Pat. We appreciate you being with us and sharing your thoughts today. We are looking forward to continue working with you and the Board on the journey ahead. So, now starting on Slide 4. We have highlighted four areas that summarize our positive results in the fourth quarter. First, we continue winning in the market with our leading self-service and automation technology. Our customers are continually striving to improve customer experience and lower operational costs. We are seeing consistent installed base refresh activity as customers are increasingly replacing legacy solutions with our new technology. Demand remains high for our ATM cash recycling and retail self-checkout solutions, which are also establishing recurring service revenue and additional software business with a high attach rate. We remain focused on driving innovation that our customers need. The team introduced our AI-powered Vynamic Smart Vision Shrink Reduction Solution as we build on our Retail self-checkout technology deployed in the market. This solution addresses shrink-related challenges in retail using AI and computer vision technology to reduce loss during checkout. On the banking side, our teller cash recycler has started shipping in North America. DN's in-branch cash recycling solution supports end-to-end automation across the entire cash ecosystem at the branch from ATMs to the teller line. We continue to view branch automation as a meaningful growth opportunity. With over 70,000 bank branches in the U.S. alone, and the consistent drive by banks to reduce operating expenses, we know this offering meets the needs of our customers. Once again, we had another quarter of strong performance as our team remained focused on customers and continued to improve our operational execution. The team can be proud that in each quarter of 2023, we grew revenue and profitability on a year-over-year basis. Our improved operational execution helped us…

Thank you, Octavio. Starting on Slide 7, the fourth quarter was another period of continued improvement that was in line with our expectations. Revenue and profitability were up significantly both sequentially and compared to the prior year. The higher revenue with gross margin expansion is flowing through to the bottom line, resulting in strong year-over-year growth in operating profit and adjusted EBITDA. Revenue of $1.04 billion increased 7.6% and gross margin expanded 340 basis points year-over-year. Strong product performance was the primary driver behind the gross margin expansion as we continue to drive benefit from our improved supply chain and pricing discipline. Q4 2023 operating expense was up compared to the prior year period. However, note that the prior year period included a nonrecurring adjustment that reduced variable compensation. If not for that adjustment, operating expenses would have been flat year-over-year. Looking at free cash flow, please note in the prior year period, product deferred revenue was elevated relative to historical levels and has now been normalized. Q4 2023 free cash flow of $150 million was up $66 million year-over-year, driven by favorable EBITDA performance, better working capital efficiency and meaningfully lower interest. Turning to Slide 8, banking revenue of $750 million was up approximately 9% versus the prior year period, driven by product revenue growth of 19%. Approximately half of the growth came from higher volume with the other half driven primarily by pricing and mix with a small currency benefit. We continue to have consistent demand for our DN Series offering, and improved supply chain and logistics conditions have enabled us to deliver on this demand. Service revenue was up approximately 1% versus the prior year, driven by higher product installation revenue. As a reminder, ATM deliveries across the industry mostly represent replacement units in the market. So…

Thanks, Jim. Wrapping things up on Slide 12. Let me walk you through an early view of our continuous improvement in churn. It all starts with our people, who make Diebold Nixdorf a great company. We are taking a fresh perspective with several initiatives planned to reinforce that we're a people-first organization. We will empower our teams to drive continuous improvement through trust, transparency and a shared commitment to excellence. The company strives to attract, develop and retain exceptional people. As a result, a strong team will deliver profitable revenue growth, winning new customers and increasing wallet share through crisp, commercial execution. In addition, we will accelerate growth through focused innovation for our customers by executing on our R&D pipeline to maintain our technology leadership. We will continue expanding margin while exceeding customer expectations. Accelerating the adoption of remote diagnostic and resolution, simplifying our product set to reduce component costs and complexity and implementing an industry-leading operating expense profile will drive improve profitability. Finally, we will execute on the levers that Jim outlined earlier to improve free cash flow conversion. Improving quarterly linearity will continue to be an area of focus. These four components help us build the flywheel for our growth and continuous improvement and will help us better visualize and achieve our longer-term objectives. As we conclude our prepared remarks, I am excited about the future of Diebold Nixdorf as we start our continuous improvement journey. I look forward to sharing more with you throughout the year as we achieve these objectives. Lastly, I wish to thank our customers for their ongoing support. We are committed to providing best-in-class solutions to help them achieve positive business outcomes. And I remain incredibly proud of our Diebold Nixdorf employees around the world. Our team continues to focus on what is the most important, our customers all while improving operational execution. And with that, operator, please open the call for Jim and me to take questions.

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

Thanks. Excuse me, a couple of questions. You talked a little bit about product gross margins in the prepared remarks. I'm curious, a couple of things that absolute level at 25.5%, realizing their seasonality to the business, how sustainable is that relative trend in improvement? Is there still incremental price capture to be had as you're driving down, I would expect, driving down backlog over the course of the year? And then you didn't address services gross margins those headed in the wrong direction? So talk a bit about that. And then I have a follow-up. Thank you.

Thank you, Matt. So let me start with product. So we continue to see very, very strong demand for both our DN Series recyclers, our DN Series self-checkout solutions. So we're – I think that that's the good news. Technology is being adopted by customers, customers like the product set and they continue investing in it. You're right, there's a certain level of seasonality in our business. So you might see slight variations in our gross margin quarter-over-quarter. But I would tell you that our intention is to keep the trend that we've been on, which is continue improving our overall gross margins. Even though we made significant progress in our supply chain and our efficiency, we're just at the beginning of our journey. I'm super excited as we announced a few weeks ago, we've hired a new operating excellence leader for the company, Frank Baur, who will help us in this journey and continue accelerating the improvement in all our operations, and that leads me to service. Our service business, and this is very important to me is a people-driven business. So we need to make sure that we're delivering the highest quality for our customers and that we're creating an environment where all our people can thrive and be successful. So in Q4 and as we manage the portfolio of hardware, software, services creating the solutions that we have, we've invested heavily in our service infrastructure, particularly in North America. So we're battling some of the secular trends around the difficulty of hiring people, the difficulty of retaining people. But in this balance, we want to make sure that as we're battling those things, we're keeping the customer at the center of our actions and making sure we delivered excellent service to them. So our goal is we will continue working on improving our service margins. It's clearly an area of opportunity for the company. We're all aware of it. And we want to do that while we continue to improve our service. So our commitment for the year is to getting back to our historical service margin levels as the year progresses, but doing that in a way that we continue serving our customers with excellence.

Thank you for that. And then I just – what's your view just for the market overall? I know Diebold is not going to disclose units anymore. But if we think about just the global ATM market, the global self-checkout market, what do you expect in terms of unit growth roughly in 2024 relative to 2023? And how do you think about Diebold going forward in terms of your ability to reduce Diebold's reliance on hardware cycles? Thank you.

So let me start with self-checkout this time as retail is a very important business for us. So Matt, I think, there is no doubt that consumer preferences keep shifting and the ability to offer options that self-checkout, whether its assisted self-checkout, self-checkout continues to be important. And there's, as I mentioned, new technologies that we keep adding to the self-checkout process to make that a frictionless thing both for our retailers and for the consumers of our retailers, so really changing the way people shop and the experience at the self-checkout. So we can – we see this market to be one of continuous growth. There is no – whether it's labor, whether it's customer experience, self-checkout helps improve that. So we continue to see that market as growing at a very healthy clip. Remember, we've been traditionally a small provider, even though now we've gained significant share or at least that's what we believe will happen when the analyst’s report these things. Remember, or as I mentioned in our remarks, every self-checkout that we deploy is basically a new placement for us, or has been for the past year. So we're growing and gaining that market and we see that market as continuing to expand. On the banking side, and again, that's why I tried – I know you like this question around the markets. That's why I tried to add to the regional color now. It's a varied business. There is clearly mature markets that are growing at a slower rate. There is some markets that are growing at a faster rate. I would say, overall, I would characterize the market as one that is stable and growing a couple percentage points one year probably shrinking a couple percentage points the other year. So what's important about…

Thanks, Octavio.

Thank you. [Operator Instructions] Our next question comes from Matt Bryson of Wedbush Securities. Matt, your line is now open. Please go ahead.

Thanks for letting me ask question. The 40%, 60% split in terms of free cash flow, any chance you can give us kind of a similar split or a way to think about how revenues might progress through 2024.

Yes. Thanks, Matt. What I would say is that the relative split on that on revenue is going to roughly align. I think that as we think about that cadence, right, that they're roughly going to fall in line with each other. So I wouldn't expect for there to be a material deviation in terms of how we think about revenue and then it's kind of its flow through to EBITDA and then to free cash flow. So again, not precise numbers, right, given the fact that we're not giving quarterly guidance, but I would think about those as being fairly well correlated.

Got it. And if revenues don't dip so much or product shipments don't dip so much, can we expect that the benefit on the gross margin line from having higher volumes continues kind of throughout the course of 2024? Or is there something of a dip in the first half as revenues are a little bit higher or a little bit lower and then it picks back up in the back half?

Are you talking about product gross margins, just to make sure that I understand the question?

Part of gross margins on the ATM side in particular.

Yes. I wouldn't expect for their for there to be a dip in the first half as you lay, I think, that as Octavio just said, right, there's certainly seasonality when we think about what the fourth quarter yielded on the product gross margin side. But as we move into – as we move into 2024, when we think about the quarters in 2023, we would expect for there to be improvement on a quarterly basis and for us to be in, call it, the low 20s on a fairly consistent basis. So, no, we did not expect.

Okay. And I guess just staying on that theme. I mean when I think about those product gross margins, I think, at one point, there had been the hope that with the DN now series, there would be a bit of an expansion from here. Is there a longer-term goal that you can talk about there that you've talked about there?

So I'll take that one, Matt. So what you'll see us talking about is this continuous improvement mindset that we're implementing in our company. So, where we are today is not the end goal that we have. Our goal is to continuously improve revenues, margin and free cash flow. So, we're trying to create this flywheel effect in our company where you constantly see us taking small incremental steps but accelerating our progression. So as Pat mentioned in his opening comments, we will have an Investor Day later in this first half of the year, where we will highlight those longer-term goals. But again, the idea is we're at the beginning of the journey, not at the end of the journey. So, from here on, you should expect us to continuously improve.

And I guess the last one for me Octavio is obviously an impressive Q4 and a relatively robust guide for 2024. I think when we enter 2023, backlog covered the entire year for 2024 you're talking about backlog covering about three quarters of the year. So, you guys having very good visibility but at the same time, can you – do you have confidence that as backlog works down that you're able to maintain revenues at current levels, and there's not a dip once you work through backlog. I know that'd be like 2025, 2026. But can you just talk to where backlog is today and how to get that moving forward?

Sure, Matt. So probably the easiest answer is, yes. I am confident that revenues will not dip as we accelerate backlog conversion. We still see a strong demand environment for all our products. So revenue for the – as you said, three quarters of the product revenue is covered by backlog. Again, different regions have different rates of acceleration in orders, but we feel confident in the plan that we put forward. And remember, one of our goals is also to normalize our backlog, which also creates benefits in some of our working capital, inventory planning, collections. So, the goal that I've stated for quite some time now, and we're starting to get closer to that is to have two to two-and-a-half quarters of revenues in backlog at any given time. So, when you think that we ended the year with $1.15 billion, $1.2 billion of we still could probably normalize or reduce backlog as we accelerate revenue a little bit, but then keep it consistent at that level. So, we're confident on how that's going to play out through the year.

Thank you so much for the color.

Thank you. At this time, we currently have no further questions. So I'll hand back to Chris Sikora for any further remarks.

Thank you again for participating in today's call. If you have any questions, please feel free to reach out to me in Investor Relations, and have a good rest of your day. Thanks.

Thank you for joining today's call. You may now disconnect your lines.