2023-03-14 00:20:58 ET
Summary
- Diebold Nixdorf is the famed payments processing equipment manufacturer, specializing in ATMs and self-serve terminals.
- Our post in October highlighted an untenable debt situation.
- Since then, Fed hawkishness continues. That married with consistent yield curve inversions paints a bleak picture for the ATM manufacturer.
Since our previous post
Only a 30% January rally produced by Diebold Nixdorf ( DBD ) in January managed to make a dent in the sell call here at ZMK in early October . Yet little has been done by the famed ATM maker to address its spiraling debt loads at a time when Federal Reserve bankers are telegraphing renewed hawkishness in the fight to beat inflation. Our sell rating remains.
Long-term debt swelled to $2.58B up since our previous post, equating to almost $200M annually in net interest expense. While Q4 data showed positive cash flow from operations (+94M), this positive data point pales in the face of annual data that saw negative cash flow from operations to the tune of $-387M.
Only continued debt issuance has managed to patch over gaping holes in the firm’s ability to generate cash to service its gargantuan debt pile. Accordingly short interest in DBD stock has swelled to 10.48%.
In FY 2022, Diebold Nixdorf issued $503M in long-term debt. Inflation fears and the ensuing tirade of Fed rate rises has done little to alleviate the situation. Surprisingly, credit spreads for high yield junk bonds remain incredibly tame, particularly following the increasing volatility witnessed following the collapse of Silicon Valley Bank ( SVB ).
Diebold Nixdorf’s skyrocketing debt pile grew during an environment characterized by low interest rates.
It’s undoubtedly the end of an era of cheap money that has allowed the corporate walking dead to continue business as usual. Given the context, option adjusted spreads on high yield bonds are particularly sheepish facilitating perhaps business as usual.
During exogenous shocks such as the SARS-Cov2 pandemic, spreads on high yield debt increased to about 700 bps. The Great Financial Crisis saw yields balloon to over 2000 bps and the tech bust 20 years ago witnessed spreads as high as 1,000 bps.
Putting that all into perspective, we are currently sitting at less than 500. We continue to monitor this actively as any meaningful move to the upside could see a swift unravelling of economic activity.
Relatively tame high yield option adjusted spreads are perhaps what has saved Diebold Nixdorf from a swift demise.
The yield curve at different maturities continues to telegraph a pending recession only likely to add to Diebold Nixdorf’s pain. Since the start of the year, rates have now risen all the way to the 10-year adding extra pressures on businesses heavily reliant on credit.
The Federal Open Markets Committee, set to make a rate announcement at the end of March, looks likely to adopt the higher for longer stance currently trumpeted by the Fed Chair.
A new summary of economic projections will also be released at the end of the month providing macro-insights into some of the headwinds Diebold Nixdorf is likely to face. All in, there appears very little positive macro data likely to help Diebold Nixdorf recover from its present situation.
Yield curve inversions on the 10-3-month Treasury constant maturity have consistently preceded recessions.
The 2-year-to-10-year yield curve has now been inverted for over 240 days with the 3-month-to-the-10-year inverting for almost 130. Such sizable inversions have been comparably reliable predictors of a future economic downturn. Here at ZMK, we believe the US will be in recession by the end of 2023, increasing equity risk premiums and adversely impacting equity prices holistically.
Last Quarter’s Data
Despite the increasingly grim economic panorama, Diebold Nixdorf’s management painted a relatively upbeat picture when reporting Q4 results. Octavio Marquez, who has been CEO for almost a year, celebrated the closure of the Transaction Support Agreement [TSA] providing some flexibility and relief to the company’s growing debt load.
Transitioning customers to the new DN Series recycling ATMs and a roll-out of the firm’s EASY ONE solution remain priorities for the company to get back on track. Operating plans are ambitious with the company committed to delivering 60,000 ATMs, 35,000 SCOs (self-checkout terminals) and 134 EPOs in 2023.
Deleveraging is a strategic priority and Diebold Nixdorf counts on aspiring operation plans coupled with refreshing the corporate culture as a means of hitting this target. Increasing cashless transactions via mobile phone pose a long-term existential threat to Diebold Nixdorf’s ATM business line but also an opportunity for the development of different transaction terminals.
Banking revenue generated the lion’s share of sales, registering $689M over the fourth quarter. The retail segment, dominated by the self-checkout business line posted $276M.
The company is presently rejuvenating its board of directors , combining the chairman and CEO post, to streamline decision-making processes, reduce cost, and provide organizational flexibility.
Key Financials
Q4’s uptick in revenues ($968M) would have presented good news had it not been for seasonal factors that tend to boost sales numbers consistently over the years during the same period. Sales, goods & administration costs ballooned to ($183M – up from $147M in Q3) That is higher on a like-for-like basis if you review Q4 data from one year earlier. (FY2021 - $162M.)
The company’s build to order model implies a significant inventory holding to offer acceptable product lead times. On current assets of $1.7B (Q4, 2022) almost $1.2B are comprised of receivables ($612M) and inventory ($588M) meaning changes in assumptions would already put under pressure a current ratio of just 1.1x and a quick ratio of 0.6x (!).
The good news is inventory turnover did increase during Q4, from 3.7x one quarter earlier to 4.8x at the end of the year. Positively, cash conversion cycles reduced in Q4 too – from 63.8 days to 46.9 days.
Overall, Q4 saw Diebold Nixdorf post a -149M loss on $968M in sales. Standouts remain the $46M in interest expense on the debt, improvements in reducing inventory, but also noticeable end of year seasonable effects perhaps obscuring the full picture.
Summing it up
Despite a mammoth January run that saw Diebold Nixdorf gain +30% and outperform the main indices, our position at ZMK remains unchanged. The underpinning structural factors linked to debt remain, as does a bleak economic environment in the United States.
While the company should be congratulated for some plausibly impressive Q4 results, that should not detract from the fact that all the foundational reasons we were initially short on the equity remain.
For further details see:
Revisiting Diebold Nixdorf: Debt Increasing As Yield Curves Signal Recession