Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2024 Diebold Nixdorf Earnings Call. [Operator Instructions] I would now like to hand this conference call over to our host, Christopher Sikora. Please go ahead.

Hello, everyone, and welcome to our first quarter 2024 earnings call. To accompany our prepared remarks, we have posted our slide presentation to the Investor Relations section of our website. Before we start, I will 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 this 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 Participants should be mindful that subsequent events may render this information to be out of date.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 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 today. Before we start the call, I just wanted to say thank you to Jim for his leadership as CFO as we undertook major actions to fortify our balance sheet and improve our financial conditions. Jim has played a vital role in strengthening our company, and we're extremely grateful for all his efforts. I look forward to working with Jim in his new role. We are also looking forward to welcoming Tom Timko, as our new CFO, who officially starts on May 17. Tom's years of experience at GE and GM, along with the deep background across key financial disciplines, will help us build up the foundation we have in place and further strengthen our financial and operational business. Now to begin on Slide 4. We are off to a solid start in 2024 with good progress across our operational and financial priority for the year. The strength of our first quarter positions us well to achieve our full year expectations as we build upon this quarter. First, we continue winning in the market with our leading self-service and automation technology. Product backlog remained at $1.1 billion at the end of the first quarter, which is consistent with our backlog levels at the end of 2023. We are encouraged by the demand environment, which remains stable and is supporting our, the product backlog, while we have also accelerated product revenue growth over the last several quarters. Additionally, we are gaining traction in the market with our managed services offering. During the quarter, we closed a 5-year managed service agreement with a top 5 bank in Western Europe. We continue to believe that banks and retailers adopting an outsourced service model represents the next wave of service growth. Our value proposition…

Thank you, Octavio. Starting on Slide 7 with an overview of our non-GAAP results. The first quarter represents a solid start to the year as we work on linearizing our quarters. Revenue of $897 million increased 5.1% and gross margin expanded 290 basis points year-over-year primarily due to strong product performance. Included in our product results is a $10 million benefit from a Brazil tax recovery. Normalizing for this item, our gross margin expanded 210 basis points year-over-year. Gross profit improvement was primarily driven by benefits from our supply chain logistics initiatives combined with price discipline. We are also seeing incremental benefits from the recent investments in our service infrastructure. Operating expense was down 1.9% compared to the prior year period as we improve our operational efficiency. Adjusted EBITDA of $103 million is up 62% compared to the prior year, and adjusted EBITDA margin expanded 400 basis points to 11.5%. Looking at free cash flow, first quarter was a use of $36 million, which was favorable by $65 million year-over-year, driven by higher EBITDA and better working capital efficiency. On an unlevered basis, free cash flow was slightly positive in the first quarter, which is a meaningful achievement given our historical seasonality. Turning to Slide 8. Banking revenue of $649 million was up approximately 9% versus the prior year period, driven by product revenue growth of almost 24%. Favorable product and geographic mix primarily drove the year-over-year improvement in product revenue. Service revenue was up approximately 1% versus the prior. Banking gross profit increased by $40 million year-over-year to $181 million. Gross margin was 27.8% in the quarter, which is up 410 basis points year-over-year. Significant product gross margin expansion was due to greater input cost control and the continuation of price increase realization. It also includes the benefit of…

Thank you, Jim. On Slide 11, we are reiterating our previously communicated 2024 performance outlook. Given the strength of our first quarter results and improved operating momentum, we are well positioned to deliver on our full year expectations. We expect to profitably grow revenue and adjusted EBITDA is expected to be in the range of $410 million to $435 million. Looking at the adjusted EBITDA quarterly cadence for the year, we now expect the first half of the year to be approximately 45% to 50% of full year adjusted EBITDA. This update reflects the stronger initial improvement from our efforts to linearize the year more. We are targeting free cash flow conversion of greater than 25% of adjusted EBITDA in 2024. Additionally, looking beyond 2024, we are working to deliver free cash flow conversion of greater than 50% of adjusted EBITDA. We expect to achieve greater conversion by driving higher profitability through revenue growth and margin expansion, continued working capital efficiency, consistent capital expenditure outlay, lower restructuring with a strong focus on returns and lowering our debt costs. To wrap things up, on Slide 12, we have lot to be excited about at Diebold Nixdorf. Moving into 2024, there is no doubt we are now a stronger company, a more focused company and have established our operating momentum throughout the last 3 quarters. We believe there are highly attractive and potentially under-appreciated aspects of Diebold Nixdorf value creation story that make for a compelling investment thesis at current trading levels, built around 4 components. First, we have strong visibility into our business with solid banking and retail end. Our product backlog of approximately $1.1 billion provides good coverage for product revenue for the remainder of the year. Also, approximately 70% of our total higher-margin service revenue is recurring, which provides additional stability and predictability to our top line performance. Second, we are accelerating gross margin expansion with our continuous improvement program and maintaining operating expenses. We know the company has opportunity reach, and as we implement these tools and actions, we will improve our overall profitability. Third, as we outlined on the call today, we have a number of levers available to us to meaningfully improve cash flow generation. The path is clear. The teams are aligned and now we must capture these benefits. And fourth, we are in the early stages of developing a value-creating capital allocation strategies that will benefit all our stakeholders. As free cash flow conversion continues to improve, we will invest in the business and unlock additional value for our stockholders. This is the next stage of our value creation story. I look forward to sharing more details with you as we solidify our future capital allocation priorities with the Board. And with that, operator, please open the call for questions.

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

A couple of questions. Can you maybe delve a little bit deeper into some of those specific actions you've taken to drive better linearity across the business and also touch on why we should view that as sustainable.

Sure, Matt. This is Octavio. So if you recall, I've been talking about linearizing our business for multiple quarters now. So I would say the most important step that we've taken is how do we manufacture and deliver to customers more efficiently? And how do we align better to their installation schedules? This actually helps us both in manufacturing and service as we can more accurately predict the needs of customers, our own capital needs to deliver to them. So I will tell you that this is still work in progress. We are very pleased with the results in Q1. We are now working on how do we keep linearizing the middle half of the year. As you know, Q4 will always be the largest quarter. That's just the trends in the business. But Q1 was bigger than Q1 of prior year, as a percentage. The middle quarters, we're expecting to see that continuous improvement in linear icing. And then that de-risked significantly our Q4 as we deliver -- as we will have a smaller Q4, as we deliver more linear quarters. So every quarter, you should expect to see improvement, but that's kind of we're feeling about it. And we do feel that with this continuous improvement and all the actions that we're taking, these actions will be sustainable for the future.

And then as a follow-up, can you touch on sort of the sustainability in product gross margins, setting the $10 million benefit from Brazil aside. And similarly, I want to talk about service in the context of historically speaking, Q1 would sort of serve as the lower kind of jumping off point for service gross margins to build throughout the year into a bigger fourth quarter. Is that still the case in terms of how we should be thinking about how service margins ramp throughout the year?

So let me start with product, Matt. So we are convinced that our margins are sustainable. Clearly, there might be small variations -- orders based on volume and mix. But we think that the actions that we've taken around our supply chain and around pricing discipline will keep our margins at this level. So I do believe that this is a sustainable level. More importantly, one of the changes that we're making in the company is there's no program or one action that we're embarking on to deliver on a particular quarter. We're focused on this continuous improvement journey that we're in. So as we deliver on margins one quarter, the team is already working on what can we do to do better next quarter. So I would say that this is the mentality that we're working on. We know that there will always be headwinds and opportunities, but the teams are focused on continuously improving the results that they're delivering. On the service side, we've made significant investments in improving quality in our service, and I'm very pleased on the results that we have. Speaking to our North America customers, they all recognize the significant changes that we've made and how that is helping them better manage their ATM fleet. So I'm very pleased with that. We made significant progress in Q1 as compared to Q4. And our goal is to continue making progress throughout the year. So you should expect us to continue improving margins every quarter of the year as we move forward in our service operation.

And then just last, I'll sneak in one more. Jim, if you could, can you kind of give us the EBITDA to free cash flow sort of walk through as you guys see it for the year in kind of a similar fashion to what you provided on Slide 10 for Q1? If you can just kind of fill in the blanks a little bit in terms of how we get to the $105 million midpoint from what is a $420-some million midpoint on EBITDA?

Yes. Thanks, Matt. I would say that, that largely is in line with we talked about when we came out with guidance for the year, save for -- and I think you can see what drove the first quarter favorability against the prior year are just all the benefits that we're starting to see from more efficient working capital management. So I'd say all the other points and bridging items that we gave at that point in time remain intact, particularly around things like taxes and restructuring efforts and those things, where we're starting to see maybe a little bit more benefit is through the operations and more diligent and efficient working capital management. We saw with inventory here in the first quarter, and we expect to continue to see that through the balance of the year, that efficiency. And you can see from receivable metrics that there's a little bit of opportunity there for us to go get. So yes, that's really the key variable there is working capital benefits coming through.

The next question comes from the line of Matt Bryson of Wedbush Securities.

Congrats on the strong results and the progress in moving towards that more linear shipment profile that you've been targeting. I know course can fluctuate a bit, but I thought it was particularly impressive that you managed to hold backlog steady despite the better sales number. Octavio, I think you characterized the environment is stable, but again, this is better than I would have thought given the better sales number. Was there anything unusual going on in terms of like large contracts that you added? Or have you seen any improvement in customer activity that would explain kind of why you're seeing better sales, but also, again, not working through backlog anymore?

So thanks, Matt. Again, I think that when I walked you through the different regions, you can see that there's still strength in the North America market as recycling continues to take hold. Latin America has always been a strong market for us. And in Europe, I think I'm -- even though our retail revenue fell a little bit short this quarter from the prior year, it was a conscious decision that we made on exiting certain unprofitable third-party sales that we didn't really contribute much to us. But I would -- as I said, I characterize demand as stable. We continue winning. And I think that this is a trend that the teams are very focused on. We've built a strong base with recyclers. We have good technology that customers want to adopt. And on the retail side, we're now very focused on -- over the past 2 years, we've grown significantly in Europe. We've made our first inroads into the U.S. market, and this is the year where we're really focused on how do we accelerate our expansion into the U.S. So I would tell you that those are the kind of the key drivers, but particularly, it's a strong focus of our teams to keep winning in the market and serving our customers.

The gross margin improvement in the quarter was nice to see. And I know you talked about the ability to continue to improve that metric. At the same time, you're keeping your EBITDA and free cash flow guidance unchanged. Were the improvements that you're seeing or think that you can manage already envisioned when you provided your initial guide? Or can we assume that if you execute in terms of getting gross margin higher that we'll see upside, assuming all else is unchanged?

Yes, Matt. So clearly, we had built some of these things into our planning. I would say, particularly, we're seeing faster return on some of the actions that we took, particularly on the product side. We do see component pricing working favorably, pricing taking hold in our -- across our enterprise with all our sales teams. So some of those benefits that we were hoping would be more Q2, Q3, we're realizing before. We need to maintain those improvements throughout the year, and we're confident that we can do that. Before we change anything, we want to make sure that we provide consistent operational execution over the coming quarters. We still need to linearize more the quarters. As I said at the beginning, we are off to a good start. Now we're working on a strong Q2, a strong Q3, and taking risk off the table as we keep linearizing things. But that is the spirit. And as we do that, yes, clearly, we will have opportunities to keep improving throughout the year.

We now have a follow-up question from Matt Summerville of DA Davison.

Just 2 quick ones maybe. Octavio, can you maybe describe the recycling adoption level you're seeing in North America? Is it still primarily relegated to the largest kind of Tier 1 financial institutions? Are you starting to see that migrate down market into the small bank, regional bank market? In addition, if you could maybe use a baseball analogy, inning wise, to describe where we're at with recycling adoption in North America and how that will likely play out this year and heading into '25.

Yes, Matt. So -- so again, as you know, the large banks have started on that journey. But I would say that we're still in the early innings with those large banks. We've had significant wins in Q1 with large banks that are just starting down that journey. Remember, recycling provides better customer service, but clearly a lot of operational efficiency. So as these larger banks start adopting this -- and remember, they need to change part of their software and different things -- that provide other opportunities for us. As these banks mature in that journey, I think it's still multiple years. They are large fleets to refresh. But clearly, smaller financial institutions take note of that. And remember, particularly in the U.S. market, many of these smaller financial institutions are connected to large national switches which are all investing heavily and building recycling capabilities. So I would say that we're very early in the stages of adopting recycling. We're also seeing recycling not just at the ATM. Think of our recently launched seller cash recycler, which is starting to gain traction as part of the whole cash ecosystem that you have in a branch, which is a very important point. Recycling provides benefits not just at the ATM, but at the whole branch level. So I would say that we still have significant runway to go, but it's a process. We need the switches to adjust to recycling. The big banks are doing it on their own. So we see this as an early stages of our process. We're probably still in the early innings of doing this.

And then as a follow-up, can you just put a finer point on the headwind we should expect in 2024 overall from some of that deliberate revenue exit that you guys undertook in the retail business? And can you maybe just put a little bit of finer point on exactly how that relationship would have worked in the past, just a little bit more around exactly what you exited there?

Yes. So Matt, one thing, I think the important part is we're very focused on our -- we still believe SCO is a great avenue of growth. I have no doubt of that. Retailers keep facing some of the same challenges and want to continue investing in those technologies. And we are developing the complementary solutions that our shrink solution, our age verification solutions to make the solution even more robust. In the past, as we look at our retail environment, we were selling third-party products into many of these large retailers. Think about electronic shelf labels that we would integrate handheld scanners, different products that were part of providing a service to a customer, but we were just basically being a reseller for somebody else. So we've made the decision that it's better to utilize our cash in different ways. I would say that this -- while it be a revenue headwind, you can -- it will be a profitability increase for our retail business. So that's why we're focused on that. I think overall, the growth in SCO and electronic point-of-sale throughout the year will more than offset that decline in those third-party sales. So we do see a stable retail business but with a much better product mix.

We now have a follow-up question from Matt Bryson of Wedbush Securities.

So free cash flow, with the solid operating profit and the the -- there doesn't seem to have been any headwinds from inventories to accounts receivable or working capital at all. So a lot of the reasons seems cash flow was negative was that was in other category. Jim, do you mind just walking us through what exactly was what that other category is that led to free cash flow being negative?

Yes. I would say, Matt, thanks for the question. And again, I think we talked about this at year-end with respect to how we group cash flow items. And so I think the incremental disclosure that we've given in the deck breaks apart how we look at working capital. And so what portions of current liabilities and current assets are outside of what flows through those receivables, payables, inventory, deferred revenue lines. And so the biggest driver of the other category here in the first quarter is timing on indirect tax payments. And so if we think about the fourth quarter, we typically have timing items to the positive in terms of sources, and then that flips around in the first quarter here, where the cash goes out. So that's really the most significant item of that. And then the balance is made up of other movements on accruals and prepaid timing at the beginning of the year. You can see that actually in the new table that we put into the deck towards the back. It's a supplemental schedule, Matt, but it should be helpful in bridging some of the incremental items outside of AR inventory, AP and deferred revenue to give rise to those movements. So the biggest item there is indirect taxes, followed by other timing on accrual payments that get paid out of accounts that are not categorized within accounts payable.

But it sounds like it's predominantly timing items as opposed to anything structural. And so net those are... If you were able to...

That's right.

And then I guess just one last question for me. I know that the circumstances around the debt force you guys to give us unit estimates. It doesn't look like you're disclosing those anymore for ATM, self-checkout, point of sale. Are we not going to see those at all? Or will we see those in the filings? Or if we're not going to see them, can you give us, I don't know, some guidance around sequential or rough numbers? Or any help there at all?

Yes, Matt. So I would tell you that we're moving away from units as we're more focused on price realization that we get and kind of volume mix across the different regions. But what I would tell you is we still see, for ATM units and SCO units, particularly in ATM, we're entering new markets. We're reentering the Indian market. So we do expect to see growth in volumes across our geographies. So I would say that we will move away from that and be more focused on clearly, the revenue mix and margin expansion of our products. That is, I think, a better metric for us to focus on. And again, as we linearize quarters, which is the most important thing to me, we will -- you will see that Q2 will be better than Q1. Q3 will be a little bit better, and then Q4 will be a more manageable and not so dependent for our yearly results. So say that the important thing is we still see growth in units, but we're linearizing that more across the year so that we don't have that big spike in Q4.

As this concludes our Q&A session. I'd like to hand the conference call back over to Christopher Sikora for closing remarks.

Thank you for participating in today's earnings call. Please feel free to reach out to me, Chris Sikora in Investor Relations, if you have any questions or need additional information. Thanks again, and have a good rest of the day.

Ladies and gentlemen, thank you for joining today's call. You may now disconnect your lines.