In this bond review, Durig takes a look at a company which serves banks and retailers alike around the globe. Diebold Nixdorf (NYSE:DBD) has a full service suite of back office services, including software and hardware solutions for both banking and retail industries.
With the release of its fourth quarter results, it appears as if the company is making progress towards its goals. A few highlights include:
- Q4 Gross Profit of $270.4 million
- Gross margin growth of 16.3% to 23.5% from the prior year period
- GAAP gross profit was $303.1 million, with non-GAAP gross margin increasing from 23.3% to 26.3% YOY
- Boosted Q4 adjusted EBITDA margin to $130.9 million, an increase of 5.3% to 9.21% from the prior-year quarter
- For the year, net cash provided by operating activities was $135.8 million, a improvement from the prior year period of $239.9 million
- Generated full year free cash flow of $92.9 million versus an initial expectation of breakeven
- Reduced leverage ratio by more than a full turn, ending 2019 at 4.4x
As the globe continues its transition towards electronic banking services, online shopping as well as mobile transactions, companies that provide these essential services like Diebold Nixdorf are in a prime position to reap the benefits. Diebold Nixdorf’s 2024 bonds, couponed at 8.50%, are now trading at a discount, which gives them a very attractive yield-to-maturity of about 9.5%, and with the company’s robust fourth quarter results, these bonds are an outstanding addition to Durig’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio, the aggregated performance of which is shown below.
DN Now Transformation
Diebold Nixdorf recently reported its plan to overhaul both the company’s operations and cost structure. The DN Now program was created to simplify DN’s operations for everything from payroll to real estate, and also aims to right size its expenses in vendor and supply chain management. The goal of the DN Now program was to derive $400 million in yearly savings through 2021, and it appears to be working.
Diebold’s CEO, Gerrard Schmid, had this to say about the DN Now program at year-end:
“We completed 2019 with strong momentum as we continued to execute on our DN Now transformation initiatives and delivered on our commitments. Financial results were in-line with, or better than, our expectations. During the full year, we improved adjusted EBITDA by 25% on stable constant currency revenue, and substantially improved free cash flow. I am pleased that we delivered these results against a backdrop of stronger customer satisfaction. Our management team is very encouraged by these accomplishments, and we enter 2020 with a strong foundation to build upon.”
Diebold Nixdorf Reports Fourth Quarter Wins
Diebold Nixdorf realized some solid victories in its fourth quarter (12 months ending December 31st, 2019). The company saw increases in its free cash flow, net cash provided by operating activities, gross margin, in addition to improving its adjusted EBITDA. Other fourth quarter highlights included:
- Signing of a multi-million dollar, international agreement with Citibank for Vynamic Software as well as DN Series ATMs
- Won a multi-year ATM-as-a-Service contract in Belgium with JoFiCo for the update and upkeep of roughly 1,560 ATMs
- Selected by a top U.S. financial institution to provide approximately 20,000 Vynamic software marketing licenses and associated services
- Signed a comprehensive solutions contract, valued at nearly $10 million, with one of the largest banks in the Philippines to upgrade its ATM fleet to Windows 10
As the point-of-sale (POS) solutions market continues to change, D&N responded with the introduction of its all-in-one POS system that combines the latest technology in a sleek, compact design. Big wins of the quarter also included a $15 million deal with a Swiss gaming cooperative for 5,000 POS systems, in addition to securing a 3 year, multi million dollar deal with a European DIY retailer to improve the complete customer checkout experience in hundreds of stores across 12 countries.
About the Issuer
Diebold Nixdorf is a global driver in facilitating and connecting commerce through automation and is digitizing and changing the way society banks and shops. On a daily basis, Diebold Nixdorf’s integrated solutions help to connect digital and physical channels in a convenient, secure, and efficient way for millions of consumers. Partnered with almost all of the world’s 100 largest financial institutions as well as most of the top 25 global retailers, Diebold Nixdorf provides an unrivaled level of service and technology solutions which drive the daily operations and consumer experiences of banks and retailers around the globe with a foothold in over 100 countries and roughly 23,000 employees around the world.
Financial Transaction Services Industry
Payment processing is an integral service that Diebold Nixdorf provides to its banking clients, and it is growing rapidly. A recent report from McKinsey & Company provides insight on the global growth and present state of payment processing in different regions around the world and also includes projections for growth.
- Revenues in global payments are expected to near $3 trillion by 2023
- The Asia-Pacific Region represents over half of global payments revenues of about $900 billion
- Global digital commerce was over $3 trillion in 2017 and is forecast to double before 2022
- In 2017, mobile transactions represented 48% of digital sales around the world and as mobile technology and usage continues to grow, this is projected to represent 70% by 2022, or approximately $4.6 trillion
With Diebold’s large international presence, the company is in an excellent position to capitalize on the growth in the global payments industry.
For bondholders, an issuer’s liquidity and interest coverage ratio are important considerations. Ample liquidity allows issuers to cover operational expenses and interest payments if the company does not generate enough cash flow for the quarter. As of December 31st, 2019, Diebold Nixdorf had total liquidity of $770 million, which includes nearly $388 million in cash in addition to the company’s available credit.
Interest coverage is an important measure of a company’s ability to continue to service its existing level of debt. For the 12 months ending December 31st, 2019, Diebold Nixdorf had operating income of roughly $203 million (without non-cash depreciation expense of $226.1 million) and interest expense of $202.9 million for an interest coverage ratio of about 1x. It is also worth noting that for the fourth quarter, Diebold had net cash provided by operating activities of $128.4 million and a fourth quarter interest expense of $49.6 million.
Another positive for the company included the divestiture or closing of about a half dozen businesses in 2019, which generated about 2% of revenue for the year.
Going forward, Diebold Nixdorf is forecasting its operating cash flow to range from $170 to $200 million, and expects capital spend be limited to $70 million. The company expects to generate between $100 and $130 million in free cash flow for the year, which would represent an improvement from the $93 in free cash flow it produced in 2019 and an even larger improvement from the $163 million of cash it used in 2018.
A Forward Statement from Diebold Nixdorf CEO, Gerrard Schmid:
“Moving forward, we expect to enhance our growth and differentiation through our DN Series™ ATMs, our Retail self-checkout technology, our market-leading Services business, and targeted investments in our Software and Services businesses. Off the back of strong execution of our DN Now program and solid momentum entering 2020, we are increasing our savings target from $400 million to $440 million through 2021.”
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The risk to bondholders depends on whether Diebold Nixdorf can continue to improve its margins as well and optimize costs. The DN Now program has produced good results for the company in reducing its expenses and improving margins. Another positive for the company was extending its $787 million revolving credit facility in Q3.
Diebold Nixdorf projected revenues will be relatively flat in 2020 when compared to 2019 and expects 2020 results may fall more towards the second half of the year. The company also added that it believes it will reach its DN Now goal of $400 million in annual savings by the end of next year. If DN continues to improve margins and free cash flow, the risk for bondholders should lessen significantly.
Although the company continues to make great strides, the execution of their business initiatives still faces many obstacles including the accelerated evolution of global financial markets. Additionally, because many of Diebold Nixdorf’s clients are directly involved in global financial markets, a global market crash could be detrimental to their business execution.
Generally, there is reduced risk for investors who invest in Durig Capital’s Fixed Income 2 (FX2) Managed Income Portfolio due to its diversification across many bonds and industries, as compared to the purchase of individual bonds. Historically, the FX2 Portfolio has significantly outperformed when compared to portfolios where investors have chosen bonds individually.
In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
Summary and Conclusion
Diebold Nixdorf has been working hard to reduce costs and improve margins. The company has been improving free cash flow and continues to produce strong wins. Global growth in the financial payments industry is expected to grow significantly in the next three to five years, which should bode well for Diebold Nixdorf’s revenues and profits. The company’s 2024 bonds have a yield-to-maturity of about 9.5% and provide investors with an excellent chance to further diversify their portfolios into the fruitful retail and banking industries with the addition of this financial services company. Considering the company’s improving cash flow, margins, and robust fourth quarter results, these bonds appear to be a great addition to Durig’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio.
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Issuer: Diebold Nixdorf Inc
Ratings: Caa2 / CCC+
Price: ~ 96.50
Yield to Maturity: ~ 9.50%
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Disclosure: Durig Capital and certain clients may hold positions in Diebold’s April 2024 bonds.
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Randy Durig, Durig Capital, Inc.
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