Short Diebold Nixdorf
Yesterday Bloomberg ran a piece mocking the millennials-are-killing-everything trope and highlighting the commercial power of “post-millennials” — the demographic born after 1996. The piece discusses how post-millennials will compound the damage imposed by millennials upon the likes of malls, print magazine and football. But the most interesting bit was about cash. Specifically, how teenagers shun it.
American teens are four times less likely to use cash than the general public and only use cash for 6 percent of their transactions, according to data from teen debit-card company Current. Younger generations are also more likely to say they’d like cashless and cardless options at restaurants. And the majority of people under 30 prefer to use cards over cash, even for transactions under $5.
Unsurprisingly, money-transferring apps—such as Venmo, Google Pay and Apple Wallet—are seeing continued growth.
Retailers are also moving toward cashless payments. And Sweden, Denmark, Norway and Singapore have made various efforts to move toward a digital economy—pledging to eliminate check usage and slash cash withdrawals from ATMs.
“There’s many reasons why businesses want to see a shift away from cash,” Sopp said. “Now they finally have a demographic cohort that is ready for it to happen. They won’t resist it, they will push for it.”
So, this begs the question: if an entire generation shuns cash, what does that mean for businesses that are, at least in part, dependent upon cash-based transactions?
This week, the market appears to be asking that question specifically of Diebold Nixdorf Inc. ($DBD), an Ohio-based international financial services company focused on the manufacturing, sale, installation and servicing of transaction systems such as ATMs and point-of-sale terminals. It purports to service 1 out of 3 ATMs around the globe. Regarding its ATM business, the company recently noted:
While there are a few differences of opinion regarding the long-term role of the ATM channel, there is broad agreement that ATMs will continue to be an important customer touchpoint for the foreseeable future. Many customers view the ATM channel as a highly strategic asset. Others are seeking to leverage it to better understand changing customer behavior. And there is a third group who views this channel as a necessary cost of doing business.
But, combined with other factors, the market doesn’t seem so convinced. Why is that? A less-than-stellar earnings call.
Last week, the company surprised to the downside with total revenue down 6% YOY, lower gross margins, below-expectations (non-GAAP) profit, and narrowed guidance.
It also underscored a significant operational restructuring pursuant to which it is (i) “aligning the workforce with market demand” to the tune of $100mm in cost savings (read: firing people), (ii) optimizing inventory and simplifying its supply chain by streamlining the ATM portfolio (read: exiting 2018 with ~30% fewer ATM models), and (iii) shedding non-core businesses so that“[p]roceeds will be used to enhance [its] capital structure” (read: paying down debt). The company reported $313mm of cash on hand plus access to approximately $380 from its credit facility; it also has net debt of approximately $1.8 billion ($1.4b as bank debt, $400mm in unsecured bonds) and a leverage ratio of 4.5x; it has no maturities before 2020.
While we are currently in compliance with our financial maintenance covenants, our revised outlook indicates that there is a potential that in future periods the company may not meet its net debt to trailing 12-month EBITDA covenant as defined by our credit facility agreement. We have engaged our principal lenders and are in constructive dialogue regarding an amendment to address this concern.
In its 10-K filed on Monday, August 6, it took this statement a bit farther, adding:
As of June 30, 2018, the Company was in compliance with the financial and other covenants in its debt agreements. However, the Company’s current operating performance has been below expectations that existed at the time that the financial covenant levels were established, and if financial performance does not improve, we anticipate noncompliance with the net debt to EBITDA financial covenant at the end of the third quarter of 2018.
The company also has to buy $160-$280mm worth of shares from Wincor Nixdorf AG, a German rival that Diebold bought in a 2016 takeover. The company intends to use cash on hand and its revolver to buy the shares. The company may also have to issue new equity (read: dilute equity) or new debt (read: if permitted, higher leverage) to cover some of the nut.
The market be like:
And quickly pounced. As did the media. And the credit rating agencies.
The unsecured bonds plummeted:
If only Diebold Nixdorf Inc. could draw on the ATMs it manufactures to stave off what some analysts see as a potential liquidity crisis.
Moody’s downgraded the company’s corporate rating two notches to B3 from B1 as well as its first lien credit facilities and unsecured notes. It noted:
The rating downgrades were principally driven by Diebold's weaker than expected recent operating performance, meaningfully diminished liquidity, and Moody's expectations of continued operating challenges in the coming year. Concurrently, the outlook was revised from stable to negative.
Diebold's B3 CFR is constrained by the company's elevated gross debt leverage of nearly 6x as of June 30, 2018 (nearly 7x including redeemable non-controlling interests of $469 million), ongoing execution challenges relating to the company's restructuring program, and Moody's expectation of a challenging operating environment in the company's core automated teller machine ("ATM") market in the coming year. The rating is further constrained by Diebold's meaningfully diminished liquidity which continues to be negatively impacted by ongoing cash flow deficits, limited borrowing capacity (due to covenant constraints), and mounting redemptions of redeemable non-controlling interest liabilities related to the Diebold Nixdorf AG ("DNAG") ordinary shares.
Is this an old-fashioned secular decline mixed with inopportune merger-related obligations with a debt-laden cherry on top? Bloomberg states:
Diebold, like its competitor NCR Corp., has struggled this year as consumers increasingly make payments online and through mobile apps like Venmo, diminishing the need for cash and the machines that dispense it.
If something isn’t Amazon’s fault, it seems pretty safe these days to chalk up distress to debt and millennials.
*lays down my debit card*
My generation has done its job, leaving behind fabric softener, Radio Shack, and Blockbuster in its wake
Do us proud https://t.co/3urbpAYLIm
We have compiled a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. You can find it here. We recently added to books that we intend to read: 1) “Subscribed” by Tien Tzuo and Gabe Weistert (WSJ review here); and 2) “High Growth Handbook” by Elad Gil (Tomasz Tunguz review here).
PETITION is looking for a unicorn who wants to help build something from scratch. We are a revenue generating startup with a lot of vision for what comes next. If you have a background in finance, law, or consulting and want to be a utility player helping us build out our content, sales/marketing infrastructure, partnerships, ops, and whatever else we conjure up in our big domes, ping us. All inquiries will be handled on a strictly confidentialbasis. Preference will be given to MEMBERS. How else can you be educated about what we’re doing and how we’re doing it if you’re only seeing part of the picture?!
If your firm has job opportunities, please email us at email@example.com.