We're going to get started. Thanks. Hey everybody, Amit Mehrotra here. I lead the multi industry franchise at UBS. Super happy to have Diebold Nixdorf here. Last year I did this fireside chat. I was telling him earlier stock was in the early $40s, young $40s. Now it's in the young $60s. So you know, we're set a pattern here hopefully. And every year.
I don't mean to correct you right off the bat, but it's $65.
Okay, $65. Sorry. So maybe by the end of this fireside chat it'll be $67. Octavio Marquez, the CEO, Tom Timko, the CFO. Thank you guys for joining us again. Really appreciate it. Octavio, maybe you can introduce the company to the audience and the people on the fireside chat.
Sure. So thank you, Amit, and once again very happy to be here. And as you said, we've had a fairly good run but we still believe it's just the beginning of our story. So hopefully we'll tell a bit more about the story in the upcoming minutes. So for those of you that are not very familiar with our company, we basically serve two industry segments, banking and retail. In banking we are very focused on automation through ATMs, recyclers, services and software. So we have a very large installed base of ATMs, globally 800,000 ATMs. We do business with all the top banks, credit unions, community banks in the world. And we have a truly global franchise on the retail side of the house. Our product set is around point of sale terminals, self checkout devices and a lot of the service and maintenance around that.
And we've recently introduced a lot of AI solutions for self-checkout, trying to remove friction at the checkout. We have produce recognition. So fresh produce recognition, age verification and more importantly in some markets now shrink reduction, making sure that we help retailers reduce theft not only at the self-checkout but also in the aisles and very soon as well in the warehouses. So we're very, you know, we have a very diversified business where you know, 40% of our revenues come from hardware and roughly 60% this year. A little bit more than 60% of our revenues come from services. So our services are recurring in nature, always long term contract to maintain equipment and software to really automate and transform the way people bank and shop.
If I think about the company, we have a very strong management team, one that I've built over the past three years after we restructured the company and a very involved and very good governance board of directors. So we're very happy with where the company is. But as I said, I mean, we believe that we're just at the beginning of our transformation .
We're going to get into the different businesses and segments in a bit. But Tom, obviously there's a history here. So maybe just level set us on where you came from, the hard work you all did on the capital structure where you are now, and just level set us on that.
So, joining a year ago, we're out of bankruptcy for probably about six months, nine months at that point in time. Our focus really was on our capital allocation framework. I would say first off, our basis in our capital allocation framework is to return the vast majority, if not close to 100% of our free cash flow to our shareholders. Right. So we just completed our first $100 million stock buyback program. And in the third quarter we just announced a new $200 million stock buyback program. So if you think about that. And then we also have M&A component, but we have very strict criteria for what an M&A acquisition would look like in our case, which is very low multiple. And when I use the term multiple, I think about as a percent of revenue and immediately accretive. Right? So you know, there are opportunities like that and we've got a pretty good list mostly in the services area.
Revenue or a multiple?
Multiple of revenue. Yeah. So you think one time. Got it for services. And we were successful. Last quarter we announced we had purchased HTX. You know, it was between $10-$15 million purchase price. That's the sweet spot. Right? Immediately accretive for us. And it's a company that we were very interested in because they had very high margins in the service arena, sometimes in excess of 20% of ours. Right? So real white glove type of service. So we're kind of keeping them as that white glove type of service and learning from them. And we're going to continue to work that into our service margin.
What's your balance sheet now in terms of where it is now on leverage and then firepower where you want to go?
Yeah. Look, from a leverage perspective, our net debt ratio is 1.6. Comfortably in the range of 1.25-1.75. We have the opportunity actually in 2026 at the end of the year after the non-call passes to refinance our debt again. Right. Now where we think our ratings are and what the credit spreads would say that we could do better than the 7.75%. So maybe 100 basis points-125 basis points, $10 million-$15 million a year additional cash flow. So we'll do it right if the m ath works
And you're generating free cash flow, so you're naturally
Yeah, that was actually one of the. Big achievements we had last year. That was the first time that we had generated free cash flow in every single quarter. Right. And that was a very, very significant focus on working capital discipline. So we were able to, as of the end of the third quarter, if you compare it to the end of last year, we took nine days out of DSO. We've got the best customers in the world. Right. But it really was more on the invoicing and the process side. We took 11 days out of DIO, just having more discipline until getting the orders, getting the prepayments, and then building when the install plans are ready. And DPO is something that we're normalizing coming from the corporate restructuring. But we think that there's opportunity in 2026 to go exploit there as well.
Cool. Just go to blocking and tackling, I guess, on that stuff. So, Octavio, when we think about the banking and the retail, the banking business, obviously the bigger of the two, but you know, it's kind of a mature business, I would think, r ight? I mean, tell us like what are some of the initiatives to reinvigorate growth in that business? What's the addressable market? And just maybe for the people on the webcast that are kind of intrigued by this company that's seeing momentum, but still a relatively small market cap. So there's still obviously equity value opportunity here. Just level set us on like what actually you do in the banking business and the growth initiatives you're pursuing.
If you think of the banking business, you know, our traditional business has always been ATMs and the, you know, kind of follow on technologies, ATM cash recyclers, everything around the ATM, the software to run ATM networks and the services to do that, that is a fairly stable market. There are roughly 2 million ATMs in the world, you know, bank grade ATMs and the number won't really change significantly. It's been stable at 2 million ATMs probably for the past five years, and all predictions suggest that it will remain stable at that number. The good news for us is that there's a very steady refresh cycle. So every year we're refreshing roughly 60,000-70,000 ATMs, so with an installed base of 800,000 and we've refreshed roughly 200,000-300,000 every year.
So we still have seven years of refreshing old equipment before we have to start all over again. But again, that's a very stable business. And again, the important part is that each of those ATMs carries a service annuity that lasts anywhere from five to seven years. And these are long term contracts that are necessary for banks to provide service to their customers.
And before you go on, I know what everybody's thinking. Apple Pay cashless economy. That's not true because I asked that question last year and I was surprised because the cash in circulation is growing globally.
What I would tell you is clearly new payment methods do not detract from current payment methods, but add on to them. So if you look at the volume and cash in circulation in markets like the U.S., cash in circulation is actually up. One of the reasons why we're being very successful with our recycling technology, which basically allows deposits into the ATM and that same cash to be dispensed is because of the huge amount of cash that banks are taking in. So again, cash in circulation continues to grow, denominations continue to grow, and that's the U.S. market. When I look at internationally and remember, we operate in over 60 countries directly and 100 countries in total. You know, cash remains one of the preferred payment methods in many of the world economies. So we believe that there's still a long run rate to do that.
To that end, you know, there are really two strategies that we're following to actually grow our addressable market because we're moving away from just the ATM, the ATM software, and the ATM services. When you think of a bank's total operating cost, one of the biggest components is operating the branch network. So when you think of operating the branch network, some of the bigger costs are clearly people, but then it's the cost of managing cash inside of the branch. When you think that you have a teller that needs to have cash, a vault inside the bank that needs to have cash, and an ATM that usually sits through the wall or in the lobby that needs to have cash. We've developed first products that automate full cash cycle inside of the branch. So teller cash recycler so the teller doesn't ever have to touch cash.
Allowing the teller to, you know, create new branch formats as well, where tellers become more sellers, where all transactions are automated. And again, we've created the hardware to do that and the software to manage all of that. That produces tremendous efficiencies for banks. As I said, one of the biggest costs in running the branch, other than people, is managing cash. Think that whenever you see one of those big trucks from the cash movement companies, the cash in transit companies touching a branch, it costs several hundred dollars for a bank to just get cash into the branch or get cash out of the branch.
With our technology, you can create what we call a closed end cash ecosystem where you can manage the amount of cash that sits in the branch and really control the cost of the movement of cash. So we're excited about that because that increases our addressable market not just to ATMs, but to really talk about serving the whole branch infrastructure.
So if we just kind of quantified all those opportunities, what do you think kind of the through cycle or compounded growth is for the banking side of the business based on those opportunities?
So we believe that, you know, our natural entitlement should always be 1%-2% of pricing every year. Again, just, you know, global inflation hope at some point gets to that. We believe that, you know, there's another 2%-3% that these growth initiatives, one of the, you know, these branch automation solutions can bring. And I talked a lot about the, you know, the emerging economies where cash is still very important. We've developed very specific ATM models for these growing markets. Think of markets like India, Thailand, the Middle East, you know, some Latin America countries where cash volumes are very big and really they need a product designed specifically for those markets. So we think between those two things, we can have a banking business that grows in the mid single digits year in, year out.
Got it. Mid-single digits. On the retail side, I see it every day. I mean, just my grocery store, living in Atlanta, I used to check out with people, now I check out self checkout. Just talk about that dynamic where you play in that market, how the business is progressing. Obviously it seems like a smaller base but probably growing a little bit faster.
So when you think of our businesses, banking, you know, our total company is $2.8 billion. Retail is $1 billion of those $3.8 billion. The interesting part about that is of that billion dollars, we do $900 million in Europe. And clearly Europe is not the biggest retail market in the world. But we've been successful because we started in Europe. And what happened in Europe is Europe got into the self checkout market fairly late. If you think in the U.S. we've been used to self checkout for probably the past 20+ years. Europe started five years ago. And when Europe started deploying self checkout, they were looking for more flexible solutions, more modular solutions, more open solutions.
So we were fortunate enough that as we were developing the products at that time we were able to meet those requirements in a more efficient way than some of our competitors. When you think of the self-checkout market, think of something that started 20 years ago where you install the device and you needed software to run that device. At that time those things were very tightly coupled, which makes sense when you think of technology 20+, 25+ years ago, hardware and software tended to be very tightly coupled. But in the modern world you don't want to depend on one software having the same hardware from the same software provider. We created an architecture where our software can connect to our hardware can connect to any software and our software can run any self-checkout device. So what are we doing now?
We're expanding into the U.S. Last year we hired our first truly focused U.S. sales team. Before we were just serving our large European customers. Think of companies like Aldi that has opened over 2,000 stores here in the U.S. or global companies like IKEA H&M Sephora where we're their technology provider globally. But again all these are European based retailers. This year we've been very focused on winning U.S. customers and we're doing that to the value proposition of our open hardware and software. But more importantly, the three AI solutions that I discussed that are proving to be very efficient tools to gain attention from large grocers, large retailers and the success that we've had deploying those solutions in Europe is really helping us open new doors here in the U.S..
And are you taking share from long-established players or, and I assume these, that business you can make inroads by big chunky contracts with people that have big footprints. How difficult is that given that markets existed for a while?
So clearly in the U.S. all our gains will come from taking share from others because our presence in the U.S. is very small. Contrary to Europe where we're the number one company for both self checkout and point of sale and point of sale software. In the U.S. we're not in the top five, let's just say like that. So clearly we're making inroads. We're in multiple proof of concepts and pilots with large grocers, large fashion retailers and we believe that we will be announcing some wins in the short term.
And again, we're very excited about that because that is incremental growth for us, and we're not planning on capturing the same as we do in Europe in the short term, 40% of the market. We're thinking, hey, if we can just keep adding a couple tens of millions of dollars every year, it keeps adding to our growth rate in the retail market, which is also expected to grow probably a little bit higher at a higher rate than our banking business.
I know it's a small part of the business, but obviously could be a faster growing part of the business. Is there technology differentiation there that you guys have the ability to kind of?
I would say that the technology differentiation comes on the hardware side for the self-checkouts, that we built a very modular architecture that is very different from the monolithic things. When you tell me that you go shopping for your groceries and you see these machines, you clearly look at them and they're not, you know, they look old, they don't look very flexible. So we built a modern architecture on the hardware where you can easily replace components, change screen sizes, do a lot of things that are very important for retailers.
The other part are software. We made the decision to move away from a monolithic architecture and software into a cloud-native architecture based on microservices. And we did that three years ago. So now we have software that's ready to be deployed. And most of our competitors are just early in those stages. Some of our closest competitors are announcing that they will have that ready in Q1 of next year when we think that we already have it up and running in multiple.
And then how much of that $2.8 billion is hardware versus kind of software?
Yeah, so if you look at our $3.8 billion of revenue, roughly $2.2 billion is services. And in those services, 70% of that is recurring service contracts. And these are long-term contracts. Think of the contracts to maintain the ATMs, to maintain the self-checkout devices. These become kind of mission-critical contracts for our customers where strict SLAs, you know, very, very stringent response times. And we're very well structured to that. We have our own field tech infrastructure is 14,000 people across the globe to serve our customers. So when you think of our company, roughly 20,000 people, 14,000 of them are out in the field serving our customers every day, repairing equipment or making sure to keep things operational.
And if you have a team member that repairs self-checkout, can they also switch back and forth in banking or is it separated?
So luckily the benefit of us being an integrated company in two industries is that we can share a lot of the back office, a lot of the thinking about the dispatching of technicians. It's a common dispatching system. So if you're a retailer or a bank, you call the same number, your electronic connection goes to the same call center, dispatch center. Our technicians are trained in both technologies. So depending on the density of our country, maybe some people will be dedicated to banking, some to retail or in smaller countries, they do everything. So it just depends. Depends on the density. But our people are trained to really leverage their skill set across both technology stacks.
And just on the growth side. So you said mid single digit on banking, on the retail. What's that algorithm?
So the algorithm at retail would be a little bit higher than that mid-single-digit again, where, you know, the opportunity is much, much greater. But, you know, one thing that, you know, since we've met a couple years ago, you've heard from me and Tom, is we're always very, very deliberate in what we say. We want to make sure that whatever we say we do, so we're thinking that it will grow a little bit higher even though the opportunity is bigger. But believe me, we're very focused on capturing that bigger opportunity.
I guess, Tom, when you think about that growth, that's helpful. But then there's another kind of lever of how do you convert that to profitability, growth, margin expansion, et cetera, et cetera. I know you guys do a lot of continuous, lean and thoughtful about that. Can you just talk about that?
Yeah, I would say culturally, we are a lean company. We've embraced. It starts with our manufacturing. You know, three years ago, our manufacturing, our hardware margins were 13%. Now they're more than double that. And we still think we have the ability that we'll be able to grow those margins over time through Kaizens, which, you know, we participate in multiple ones during a year, the company's probably hosting hundreds. Right. And it's just improved the better in whatever situation that you're in. So we do expect to be able to continue to grow product margins, 25 to 50 basis points each year, service margins. You know, we made a lot of investments in Kaizens and in process this year, think about, we used to have multiple warehouse distribution facilities for spare parts.
We're now taking much more of a spoke-and-hub approach to that and consolidating that. We are beginning to invest in just getting the right facilities footprint down, not only in services, but across the board, and then really densifying some of the areas where we need more technicians because of those SLAs. Then lastly, you've heard us talk about this OFS software, our field software for the technicians. So it really does everything to improving the routes that they're on, to making sure that if Octavio has the right skill he's being deployed or if I have the right skill to go fix it, I'm being deployed and the right parts on the truck. So it eliminates second visits, it eliminates overtime. We've rolled it out in the U.S. and Canada and it's continuing globally. So we do think we have the capacity through that plus some of the other initiatives and the downsizing of our facilities to really drive margin growth. You know, 50 basis points, even upwards of 100.
How do you measure productivity of the field workers? I mean, is it density stops per day? Like how do you, how do you benchmark that?
Yeah, so we have, you know, we measure number of service calls that every person can do, which is a function of, you know, complexity of the call, but also the training that we give people. The other very important metric for us is repeat rate. So we try to make sure that we fix it right the first time and you know, making sure that we have the right spare parts. So all those things are what Tom was commenting around. You know, as we invest more in services, we're you know, trying to make our technicians more productive. Our machines produce a lot of information. Every one of our self checkouts or ATMs has a lot of sensors in each of the components. We're capturing that data all the time. So whenever there's a failure, we can be proactive around it.
If it fails, our technician will get there. We'll have the history of the machine and we'll repair things that haven't failed. But that we think that might fail because they're presenting some strange behavior. Optimizing routes is also very important to us. That's a great productivity. When you think of us rolling just in the U.S. over 2,000 trucks of people moving around, optimizing our route produces significant savings. And again, making sure that the right spare parts are in the right location clearly is a great cost avoidance and a great customer satisfaction, you know, driver that the machine gets fixed with the right part at the right time.
This is kind of almost like a logistics operation as well.
It is a logistics operation.
So, is that all included in the $50 million that, you know, the cost out program that you have, and maybe just update us on what's included in that in the timeline because it's a decent number?
Basically, yeah, $50 million. Well, and I'll tell you, this is one of the things, right, the deeper you dive into those processes and the $50 million we've come out and said we expect to be able to exit 2026 with an improvement of $50 million in our sort of SGA run rate. Right. And we've got over 200 actions with individual owners and milestones for success identified to the $50 million. So we feel very confident about that. And I will tell you that the more time we spend looking at those initiatives, we feel like there's even more opportunity, r ight? And it's a simple benchmarking exercise. If you benchmark us to some of our competitors, we have more than $50 million of a gap that we're trying to close. And we think that the initial $50 million is a good start.
But I wouldn't be surprised if at year end we come out and we announce that we're capable of more savings, but we don't want to get ahead of it. We want to make sure we've got those detailed milestones and plans put together so that when we say it, we can go execute towards it.
And the sales force that you guys are introducing in the U.S. or now have in the U.S., what's their incentive structure? How do you kind of make sure that their incentives are aligned with the financial goals of the business? Because sometimes that can be quite tricky.
Yeah. So we've worked a lot in making sure we hire the right sales team first in the U.S. for our retail business. So we start by hiring a leader that is an industry veteran, you know, 20 + years in retail and, you know, Marquee companies like Zebra and others with really deep relationships in retailers. And we built a very, you know, a very thoughtful sales plan where we have both people harvesting our existing European accounts with one compensation plan that is a little bit more conservative, but people going really after some of the largest retailers in a more aggressive fashion.
And again, since our installed base in the U.S. is so small, we're more focused on gaining share right now in the U.S. but we always want to maintain that discipline around margins. We believe we have a superior product, both hardware, software and services. So we try to compete on value. So, you know, pricing is not our key differentiator. It is the value of our solution a nd that's how we, how we incent our sales force.
Got it. And maybe just, I guess, in November or a month ago, you guys talked about this, gave your guidance and updated the market on the guidance. Maybe just refresh us there and kind of how you're tracking and just where things are right now relative to expectation.
Yes. So what we said is that we see ourselves trending towards the higher end of the guidance that we gave. So if you think about revenue, we said revenue this year would be flat to up 2%, maybe 3%. We're much more towards the higher end of that range. The EBITDA guidance that we gave is $490 million, sorry, $470 million-$490 million. We're very much on track for the higher end of that range as well. And then free cash flow, you know, this company and the ability to generate free cash flow is probably one of the great attributes that it has. So last year, if you think about, you know, coming out of that corporate restructuring, we had a little bit of overhang. We were able to generate about, you know, convert 23.5% of our EBITDA into free cash flow.
To put it in numbers, that's about $109 million this year w e expect to nearly double that, if not double it, and then next year it's not a doubling, but it'll be a conversion of if we end this year at 40%+, next year be at 50%+ and then 2027, we said that we see a pathway to 60%+ conversion. What does that mean and why is it the single biggest attribute ?Cumulatively from 2025, 2026, 2027, we think we have a clear line of sight to be able to generate $800 million of free cash flow.
It feels like just a year ago, like when you guys were starting this journey, and now I talk to you now, just kind of, it feels like the say-do ratio is just really, really high. Like you guys are really focused on kind of maybe not under promising, but definitely over delivering on what you promised and just building that track record, and that track record is not created in quarters. It's measured in years. It feels like you're kind of maybe in the second or third inning of that journey. Is that a fair characterization?
Yeah, absolutely. That's why when I talk about OpEx, it's important. We're not going to throw numbers out there until we have a plan to go execute on them. Right. We're not going to talk about what we think we can deliver on margin growth until we see a clear line of sight to go be able to do that. And that's what we have now, r ight? With the leadership team that Octavio has, where we are in a product life cycle and the refresh we feel, you know, to give you a perspective, our backlog is about $920 million. That gives us clear line of sight to be able to execute. Not only what we said we'd do this year, but then also start next year off on the right foot as well.
Yeah, and one thing I've noticed, like it takes four or five years to build that track record and just one quarter to completely go back to square one. So that's a really important point. Do you think that, you know, in 2026, we're sitting here December 2nd, in 2026, we kind of revert back to the longer term algorithm of mid plus single digit growth and kind of that good conversion partly based on the lean and cost opportunity? Is that, b ecause obviously we're a little bit below that right now? But do you think 2026 offers that opportunity?
I think 2026, we have the opportunity to maybe touch mid single digits. Although you know, we're saying it's low to mid single digits within that range in 2027. We think that with a year or two underneath our belt and the success that we envision that we can have within Branch Automation Solutions, Fit for Purpose or the AI and retail in North America, we think that we can sustain mid single digit growth from 2027 on.
Okay, got it. Maybe as a final point, if there are any questions, we have a mic that's roaming around, but maybe Octavio, talk about two, three years from now. We're sitting here having this conversation as we look back, what are some of your kind of goals and say this is a successful outcome, what I'm trying to do here.
Yes, so what I would say, Amit, and it's a good question thinking about where we will be two, three years from now. So I preface that by saying we have a very simple business. You know, we build great technology products, whether it's our hardware, our software that help us win in the market. So if you talk to our banking customers, to our retail customers, they all love our products, our hardware and software. So our goal is how can we deploy the most of those products in the end markets that we serve? Because once we deploy those end products, the simple model is they carry a seven-year annuity, five- to seven-year annuity. So every device that we put in the market carries service revenue for, you know, five to seven years.
So when I look at the success of our business, it will be in continuing to invest in innovative technologies that help us continue to build those automation points, whether it's ATMs, recyclers, self-checkout point-of-sale, but automating that banking and retail experience and then attaching those services to that. I think that that algorithm creates this, you know, $2.2 billion that we are hoping to grow in service revenue year in, year out at very good margins and providing great stability to really increase our free cash flow conversion. As Tom said, you know, this year we'll end somewhere around the 40%+ free cash flow conversion, roughly $210 million or somewhere around there. But our goal is much higher than that. In three years, we want that number to be north of 60% and with EBITDA growing also significantly. You know, our goal is we will measure success that if by the end of 2027, we've delivered, you know, $800 million of free cash flow, cumulative f ree cash flow.
And does that give you opportunity to maybe make bigger deals? Is that, is there scope for that in your market?
So, I would tell you that right now we believe that the best use of our cash is continue our share repurchase program. That's why we announced earlier in February the first $100 million share repurchase program the company had done in the, I think, in the last 10 years. You know, we completed that in October.
A company that had capital structure problems now buying back the equity, that's a big transformation.
Now we're, you know, we've announced a $200 million share buyback program that we hope to hopefully complete in the similar time frame. So we believe that once we do that, we will start evaluating if the share price is where we believe it should be. I think an important part is Tom and myself don't get paid. You know, our compensation structure, mine and all my management team is very tied to specific milestones. The first milestone for us to get paid is $65.
Hey there, Tom. What's the next milestone?
$85.
Okay.
The last milestone that we have in our plan is $95.
Gotcha.
We're very aligned to that. Again, you know, we're focused on building a company that's sustainable, one that can really serve its customers for many, many years, but also one that is very focused on returning value to our shareholders.
Not to say M& A is not going to play a part in that. But just think small t uck in, right? Like the HTX example that I gave. Yeah, it's, it's such a great example. Right. Immediately accretive, small, you know, I mean, very service niche oriented, r ight? That's kind of our sweet spot for the foreseeable future .
Cool. Any questions? Can we get the mic over to this gentleman, please?
Volume-related revenues on ATM.
What do you mean volume?
Tourists in Europe, you know, when they're spending. Like volume-related, volume-related revenues on your ATM business.
We don't get transaction fees on our ATMs. We sell our ATMs to our banking customers. They own the ATMs. We can manage them for them. You know, we can fully outsource the network for them, but it's on a fixed price basis, not on a volume basis. So that's why our service revenue is very stable, because it's a fixed annuity that we have every year with our customers.
Listen, I'm really glad that it's working out great progress this year and wish you guys the best of luck. Thanks for taking time to chat with us today.
Thank you for having us.
All right.
Appreciate it. Thanks to you again.
Thanks.