Conference Transcript - DBD 2026-06-11

Matt Somerville, Analyst — DA Davidson & Co.

Good morning, everyone. Thanks for joining us today. I'm Matt Somerville, the analyst at DA Davidson, covering Diebold Nixdorf with us today for a fireside chat. To my left, we have Tom Timko, the company's CFO, and to his left, Octavio Marquez, the company's CEO. This will last about 40 minutes, but first I was asked to just reference the forward-looking statement clause in the company's 10K. With that, let's go ahead and kick it off maybe talking a little bit about lean and continuous improvement. Octavio, since you've taken over CEO, you've really embraced lean, continuous, and Tom, you've further accelerated that mentality through cost reduction, other optimization. Can you both speak to how this has become such an important part of how Devolt operates today and maybe how you see these respective initiatives evolving moving forward?

Octavio Marquez, CEO

Okay, well thank you, Matt, and thanks for having us and thanks everyone for being here. So yeah, three years ago we made a very clear decision that we were going to run the company in a totally different way, that we were going to be very focused on lean and continuous improvement. The reason why we saw that is that there's multiple opportunities in the company on how we can win in the market. So we were very focused initially, as most companies do, deploying lean across our manufacturing operations. And the results that we have achieved applying lean in our manufacturing operations have been, in our view, extraordinary. When I took over as CEO, our ATM product margins were 13%. Last quarter, they were 31%. So you can see that we attribute a lot of that to the impact of lean in our operations. So that was the first part of our operation where we truly deployed our lean methodology and our lean way of thinking. When you think of our company, you know, $3.8 billion, $2 billion of that is services. And our margin in services is now below our margin in products. And we're just starting our lean journey in services. So if you look back at what we were able to achieve through lean in products, improving productivity in our manufacturing, and start applying those same principles to services, that's why we're so excited about the future, because there's ample runway to continue improving margins for the company. So we've ingrained lean in our operations. So when you think of our manufacturing, our service, our software development, the team has really embraced lean. We have a new COO, Frank Bauer, who joined us also three years ago to help me implement Lean. So all our operations, I would say, are now in this continuous improvement journey. I'll pass it over to Tom to talk about the other part of Lean, which is not just on the operations, manufacturing, and services, but how we're embracing Lean and also our other functions.

Tom Timko, CFO

Yeah, I'll speak on behalf of all the colleagues who run sort of functions at the company, and I'll give you an example. So in finance, our closed process took the better part of the entire first month after the quarter would end. We spent a lot of time focused on what are we doing and how are we doing it and where are we doing it. And because of that, we now report earnings, full earnings, by the last week of the first month after the quarter. That's a two-week improvement from what we used to do. So we did that by doing what we, in Lean, you refer to as Kaizans and going to Gemba and getting with the folks who are, you know, whether it's making journal entries or you're closing the country and figuring out what sort of bottlenecks there were and how to work through that. So what it allows you to do, you get it done quicker with the same level of quality, and then you get that information, the right information to the right people at the right time to begin to enable them to make the right decisions much more timely. And the quarter's behind you, and now you're looking forward to the next quarter. But it's not just in finance, too, right? It's in legal. The way we review contracts now has been extremely accelerated, actually have implemented some AI there to be able to do that. HR, the same type of thing. And you'll notice, Matt, you probably remember in every single earnings deck that we do, we dedicate one slide to all the lean initiatives. We only call out some of the bigger ones. But you'll see there's always like three or four columns on that of, you know, here's what we did, and it's all the pictures of people who participate. It's cultural is what I'm trying to say, right? And it's not just manufacturing. I'm a GE guy prior to joining here at Diebold. And, you know, even before Larry, but definitely under Larry Culp, you know, lean became a way of life. And it's what really accelerated the earnings in that company. And there's a lot of similarities between, you know, GE and Diebold. When the time I joined, I know the size difference is considerable. But you had a company that had underappreciated cash flows, and they were able to unlock it there. And if you look at us with cash flows now, last year on our EBITDA of, you know, 335, we had cash flow conversion of 49%. This year, we expect to convert cash flow plus 50%, and we think we have a very legitimate pathway that we can see in 27 to getting upwards of 60% free cash flow conversion.

Matt Somerville, Analyst — DA Davidson & Co.

Very good. What has all this meant for the company's operating expense, and how should we be thinking about OPEX going forward and some of the initiatives you've undertaken to streamline?

Tom Timko, CFO

Yeah, OPEX, that's been a big program. And if you guys do the homework and our main competitors, you can see that our SG&A in general is higher to the tune of $50 to some $100 million of additional spend. So we've implemented an OPEX program across everything. We've got 214 actions assigned to individuals, some of its headcount, and a lot of its work takeout. But we expect to be able to reduce OPEX by one to two percentage points this year and then next year as well. So, you know, that's about 50-ish or so million dollars, right, which I think makes us much more competitive. And then over that same period of time, we're growing sales, right? So, you know, we're able to either maintain or reduce OPEX in an environment where revenue is increasing.

Matt Somerville, Analyst — DA Davidson & Co.

In light of kind of where you've seen and where you've been able to take gross margins, I think one topical thing that probably brings up or is worth discussion here, what are you seeing in terms of DRAM pricing and what's kind of the game plan as you think about that in the back half of 26 and into 27 and maybe talk about which of your businesses that impacts most?

Tom Timko, CFO

Yeah, so I'll start and then you can jump in. Okay. So in the first quarter, what we said is DRAM had an impact at around $3 to $5 million, right? And the way that the contracts for us are priced, we do get pricing, but there's a delay, right? So for some of the orders that we took in the first quarter, those went out at what I would say was contractually determined when we took those orders. And a lot of that happened through the continuing quarter as well. but that repricing kicks in and you'll start to see more favorability in the second half of the year to offset that. But if you keep that similar range for Q1 of three to five, that's the headwind that we're facing. I mean, everybody's facing it, right? And it's only a matter of time before we

Octavio Marquez, CEO

think we can price for that. Yes. So Matt, probably to be clear on that one, of our two businesses, the banking business, ATMs, teller cash recyclers, and retail, point of sale and self-checkout where the DRAM is an impact the area that gets most impacted is the point-of-sale devices where the DRAM is a very high percentage of the total bill of materials and that's where Tom talked about that's a headwind of three to five million dollars that we've now repriced so we should start seeing our margins that ended for that particular product in the roughly 16% in Q1 get back to the high teens low 20s as we go into Q3 when you think of our banking business, it really wasn't affected that much. Because when you think of an ATM, the component, that's the memory. It's a very small portion of the bill of material. So that one, we were able to mitigate completely. But we expect margins to continue to improve sequentially as we

Matt Somerville, Analyst — DA Davidson & Co.

go through the year. Perfect. Maybe let's get into the businesses a little bit. Let's maybe start with demand. Put a finer point on what you're seeing in the demand environment, maybe on the banking side. How would you frame recycling demand, industry shipment trends, and kind of your

Octavio Marquez, CEO

outlook or your outlook ahead yeah so you know our banking business is uh you know very solid business i think we're very proud of the franchise that we've built so when i look at the different geographies you know clearly the u.s market is one that is growing fast for us because the u.s is adopting this recycling technology so this is the next shift in atm technology where instead of a machine that gives cash in cash out it's a machine there the cash that comes in is the same cash that goes out. So not to get too technical, but that shift allows banks to reduce costs significantly. The cost of provisioning cash into the ATMs and taking cash out of the ATMs gets reduced significantly, upwards of 20%. And that is by avoiding cash in transit companies. Think of the big guys with big trucks going there to take money in and out, roughly 20%. Then when you think of cities like New York, where every truck roll is probably a hundred plus dollars, it adds up very quickly over time as you're doing that multiple times every month. So demand in the U.S. is very strong for that. All the big banks are now kind of fully engaged in deploying recycling technology. And now we start seeing the regional banks, community banks, credit unions start using recycling as well. So the U.S., we're very excited about the u.s europe continues to be very strong for us you know we continue winning in the market we'll probably continue growing in europe as well we're very happy with europe and i would say that then we have the kind of more emerging markets where cash is still a very important part of their economies latin america where we have a leading position continues to grow there we're still waiting for a few very large tenders out of brazil you know the brazilian market has very few banks two of them are big government institutions but when they buy they buy huge volumes so we're waiting for one of those tenders that has been delayed up now a couple times this year but we're optimistic that once it comes out we will win the significant part of it and then i think that i'm very excited about what we're doing in asia pacific lat you know we launched what we call our fit for purpose devices for that market so think that of a smaller lighter footprint more energy efficient device that we're selling in the India market, now in some other markets there, that is really going to help us accelerate our growth in Asia Pacific, particularly in India, a market that we weren't present in for the past five years. And now that we're there, you know, India is the fastest growing ATM market in the world. And now we have a product that allows us to compete and win in that market at the right margin level, because that is very important to us. So demand for banking is very, you know, I would say it's very strong across the globe. And again, we might see small variations quarter over quarter around projects being delayed or some things. For example, right now with the Middle East, we're a little concerned that Q1, we were able to deliver to all our customers there. Q2, we're now working on how do we get around some of the things that are going on there. But we feel very good that banking will continue to grow throughout the year.

Matt Somerville, Analyst — DA Davidson & Co.

Maybe just talk about, since you brought it up, what is your Middle East exposure across the two businesses?

Octavio Marquez, CEO

So it's more for the banking business, and we work a lot through our distributors there. But it's one of the fastest growing regions economically in the world. So it was a good market for us. You know, last year we did roughly $50 million. So, you know, this year we'll see where we end. But we feel good that even with some disruptions, we will be able to still see our banking business grow as we expect it to grow through the year. Remember that one of the key things that we've built into the company are multiple ways to win. So we're not dependent on one market, one product line. We now have the ability to, if one part of the business is suffering, other parts of the business can make up the slack. And hopefully we get to where all parts of the business are performing very highly.

Matt Somerville, Analyst — DA Davidson & Co.

Contrary to what some might think is happening with bank branches here in the U.S., we've seen large banks like B of A, Chase, PNC announce plans to open hundreds of new branches over the next several years. Can you talk about how you think about the revenue opportunity this poses for North America banking and maybe speak to why these banks are opening up all these new branches when, you know, people tend to think about banking being more of a digital transaction

Octavio Marquez, CEO

these days? Yeah, so I've worked with banks, Matt, now for probably 30 years. And 30 years ago, people told me that there would be no more branches 30 years ago. So it's an interesting trend that's been a little bit slower to materialize. But when you think of what's the easiest way and the highest quality deposits that a bank can get, they're always the deposits or the accounts that are opened in branches. We have multiple statistics on how an account that's opened inside a branch is a lot more productive over its life cycle than an account opened digitally. So big banks have realized this. And again, don't think that you'll see the branches of the past with 20 tellers and, you know, big marble columns. You know, you'll start seeing more branches in neighborhoods in, you know, different smaller formats that have a lot more automation. Why? Because, you know, you will have ATMs in those branches, but you will also have teller cash recyclers so think of an ATM chopped in half with the same recycling mechanism so the teller does not really have to count cash and it becomes a different type of environment more of a selling environment advisory environment for for bank customers so you'll see that that fight for better quality deposits in the build out of branches and that creates a great opportunity for us in the North America market not just with the ATM recyclers but also as you think of the whole branch ecosystem which is what we're very focused on how do we make all the cash handling inside of a branch more efficient that means the ATM the teller cash recycler the software that we put on top of that and the more exciting part for us is that as we put more of these devices in the ground they all have common components so think that one of you know the best part of our business is our service business you know 2.2 billion dollars of recurring revenue well mainly basically recurring revenue if we put more devices in the ground that use the same parts that we can use our same technicians to maintain it just becomes incremental incremental margin dollars for us at a with very minimal you know cost associated to it so we're very excited about the branch build in the u.s and once again it falls in this philosophy of there's multiple ways that we will continue winning in the markets yeah i just want to add

Tom Timko, CFO

one thing to that matt you know when you think about the atm recycler and you think about our teller recyclers, you know, there are many safes, if you will, right? And the cassettes are interchangeable between the two. And what that does, and what we've seen for our customers who have deployed it, and these are big, you know, regional banks as well, is that it reduces the amount of cash that you need to have at any given branch. So what does that mean? If there's a branch that, you know, has, I'm going to make up a number, $10 million of cash there that would service those that branch and that's what they kept there we've seen reductions of 25 to in some cases at smaller banks 50 and what what does that mean that cash that 25 to 50 percent of what they hold now goes back to the bank to go earn to be lent out right as opposed to sitting sort of

Matt Somerville, Analyst — DA Davidson & Co.

stagnant to service the branch so when you think about the atm when you think about teller cash recycling, how much have your per branch economics improved as you've expanded

Octavio Marquez, CEO

your product set? Remember, in the Teller Cash Recycler, we launched this product late last year, so we're in the early stages of deploying this. But, you know, we see banks, you know, achieve tremendous, you know, with recycling banks achieve like a 20% reduction in the cost of cash at the ATM. We believe that when you create this closed cash ecosystem between the Teller Cash recycler, the ATM, you can expect a similar decrease, if not more, on the amount of cost associated with the branch. So, it becomes a very easy investment for banks, one with a very quick ROI. Plus, it allows them to really focus the personnel in the branch not on transactions, but really on serving customers and offering new advice and new products.

Matt Somerville, Analyst — DA Davidson & Co.

Thank you. Maybe let's move over to retail for a few minutes. For 26, how's the macro backdrop shaping retail customer deployment discussions across Europe and North America and what are you seeing in terms of project timing or demand signals? Yes, so Matt, our retail business is

Octavio Marquez, CEO

probably one of the things that we're the most excited about. Q1 growth up north of 20% year over year and we see demand continue to be very strong. So again, even in a complicated macro environment, our products are winning in the market. Remember that our retail business, roughly a million a billion dollars about 900 million of that is done in europe where we have the number one market position for both point of sale and self-checkout as i always joke as much as i love europe it's not the biggest retail market in the world the biggest retail market in the world is here in the u.s and we still have a very small position here but we've made the investments to win in the u.s and we're now winning in the u.s so we see that accelerating that's part of how we're being able to grow our revenue so quickly in retail. Just in Q1, even with the small days we have in retail in the U.S., we're able to grow 70 percent. So we're very excited about the opportunity for us in retail. And the technology that we're deploying with our loss prevention, our shrink prevention, avoiding theft at the self-checkout, avoiding theft in the aisles has really resonated with grocers in North America, and that's been a big engine of growth for us, you know, and it's now being deployed in live stores across the U.S.

Matt Somerville, Analyst — DA Davidson & Co.

For those that may not be as familiar as I might be with that product, during our time at NRF in January in New York, we noticed people's ability to apply AI-enabled tools across the store, as you mentioned, in the aisle, at pause, at self-checkout, as a differentiator, as we went around to some of the other booths there, which is great. Can you talk a little bit more specifically so people understand exactly the tool set you're bringing and the types of results that's providing the retailer. Sure. So remember

Octavio Marquez, CEO

if you're a retailer there's two competing pressures. You want to create the best checkout experience for your consumers and you want to reduce as much cost as you can and prevent losses. So on the area of improving the customer experience we have several use cases but I'll talk about the two most important ones. The first one is age verification for restricted products. So think that when you're checking out at a self-checkout and you buy a bottle of wine the transaction stops and somebody has to come up to you look at our your ID and then the transaction happens through our technology we can with certain certainty identify the age of people and then allow the transaction to happen again this has some depending on the jurisdiction it has some some limitations but that is to improve the flow of transactions the other part that's very interesting when you buy fresh produce think of you're buying bananas you're gonna check out at the self-checkout you put the bananas on the self-checkout device and it asks you to select what type of item you've placed through computer vision we can identify that it's bananas that it's tomatoes and the transaction just flows very smoothly so that really helps the trans you know one reduce the cost of personnel because there's less interventions in the self-checkout process making the experience better for consumers but the part that's really resonated with a lot of our you know US grocers has been shrink reduction or loss prevention so our ai can detect at least 27 different use cases on how people can steal at the self-checkout and then through that you know stop the transaction and ask for an intervention so think about it 27 different use cases on how to prevent shrink at the self-checkout when you think that a grocer loses you know about one percent of revenues not of profit, of revenues to shrink, and our solution can reduce up to 70% of that. It is a solution that provides a very quick ROI. The other part is that it's a very reliable solution. We have very few false positives. It's less than half of .5%, less than half of 1%. So again, not impacting the customer experience and significantly reducing the losses that stores are experiencing. what are you doing in the aisle so in the aisle you know we we've connect you we connect to the CCTV system that every every retail has and we capture the videos and we can detect if somebody is conducting some anomalous behavior in the aisle think of you're in a high value item part of the store where you might have you know wine or some and you you know as you always do put the wine bottle inside of your jacket as you're walking out to later on you know we can flag that and then that that consumer will be monitored as it moves through the store and when it gets to the checkout if the consumer takes the bottle out of his jacket and scans it well then then that's just the way he shop but if he conducts his transaction and does not scan that bottle we can stop the transaction there an intervention from the personnel of the store can be there and the good part is since we have the video images that we can first nudge the customer you know so that you know to try and get them to to scan that device by presenting the video and reminding him you might have forgotten to scan an item that you have if that nudge doesn't help him then we can stop the transaction and a store personnel can come and help them you

Tom Timko, CFO

know complete that transaction think about having a screen on some of the self checkouts it shows up there first right it shows that action to remind you And then if you choose to ignore it, then you can get an employee involved to help resolve the situation.

Matt Somerville, Analyst — DA Davidson & Co.

That's helpful.

Tom Timko, CFO

Super embarrassing, by the way.

Matt Somerville, Analyst — DA Davidson & Co.

Can you talk just a little bit more broadly about the scope market from a demand standpoint? Of course, geographic overlay is helpful. You know, we went through a period, I would argue, that there was a little bit of pull forward in deployment as a result of COVID, maybe a bit of a demand reset. Are we coming out of that demand reset? Have we seen firm inflection? Maybe if you could talk a little bit about that.

Octavio Marquez, CEO

Yeah, I think through, you know, and to your point, I think through COVID and a little bit after that, there was a lot of demand for self-checkout as people were more conscious about how they wanted to check, you know, a little bit of panic around that. So the market dipped a little bit right after COVID. Today, we're seeing the market get back to the same levels where it was before. And what's interesting is we're seeing new use cases for self-checkout. When you think about, I assume everybody here got on an airplane, every airport now is self-checkout. So wherever you buy in an airport is self-checkout. If you now go to fashion, which is another interesting use case, now a lot of fashion retailers are now deploying self-checkout as well. So if you go shop in New York, for example, at a Uniqlo, you'll be able to check out by just dropping your things in a bin at the self-checkout and through RFID identifying the items. So I think that you will continue to see self-checkout be deployed in many, many new use cases as we move forward.

Matt Somerville, Analyst — DA Davidson & Co.

When you look at your self-checkout, I think people generally assume it's a lane-based format. What other form factors are you maybe evaluating for deployment in self-checkout or for self-checkout?

Octavio Marquez, CEO

So Matt, I always like to talk when we talk about self-checkout or check-out in general, I like to put it in one big bucket, right? There's multiple ways that people can check out. You can check out through giving things to a person that rings them up for you. You can do it yourself. You can use camera technology to walk in and walk out of a store and get charged for that. So I think that that market will continue to evolve. There will be new form factors that we deploy in self-checkout. Today, the self-checkout machine at groceries has to be very big because the baskets are very big. But at airports, it has to be very small because you're buying a pack of gum or a soft drink. So you'll continue to see those form factors evolve as we build new use cases for different industries. Even in grocery, one of the things that we discuss a lot with some of our large customers is you don't need to deploy the big self-checkouts, all lanes the same. You can have lanes that have what we call the three steps that you park your car here, you scan, and you bag. So there's probably one-step self-checkouts that you could also deploy in a store for people that are buying, you know, five, six items and to make the experience faster. So you'll continue to see us evolve the form factors that we use in self-checkout and add other new technologies as well.

Matt Somerville, Analyst — DA Davidson & Co.

Just to go back to North America on the retail side of the business, can you maybe compare and contrast the company strategy today versus maybe how the company was positioned in North America retail three or four years ago? So you talk routinely about targeting kind of the top 40 accounts in North America, maybe give a little bit of a progress update and any proof points in terms of pipeline, demand signals, etc.

Octavio Marquez, CEO

Sure. So we changed our strategy in retail as a company. We are the number one provider of retail technology in Europe. And our strategy had been that we would just follow our European retailers as they expanded globally. Think of companies like IKEA, H&M, C&A. If IKEA opened a store in Nashville, we would ship our products to Nashville to serve that store for them. But we basically were following our European customers across the globe. Two and a half years ago, we saw the opportunity, as I said, the biggest retail market is the U.S., to really focus on the U.S. market. And we selected 40 accounts, you know, that these are well-known brand names for all of us, where we knew one of two things was happening, that they were at that point in the refresh cycle where they needed to buy new technology for their stores, or where we saw that our technology could really disrupt the competitive landscape. Think of our AI solutions. So I'm happy to say that, you know, that strategy has paid big dividends. Our retail pipeline has grown, you know, 500%. We now have significant wins in grocery, fueling, convenience, fashion with U.S. retailers. So we're happy. We're very happy on how that is progressing. And we built a very strong team. We built a team that is where our customers are. So I never thought I'd have offices in some of the cities that we now have offices. And Tom always gets a little bit paranoid when we spend more money in offices as we're trying to reduce cost. But it is very important to have people next to the customer. So we have invested in that, and the good news around that is that we targeted these initial 40 because we thought that our product set would fit very nicely. But as we're winning in those 40 accounts, new opportunities start emerging for us. So we're very excited about how that strategy keeps playing out well for us.

Matt Somerville, Analyst — DA Davidson & Co.

Got it. Maybe just talk a little bit about backlog and book-to-build trends across the business. How are you feeling about regarding inbound order rates, visibility in the back half of 26, and any early thoughts you may have on just big picture demand in 27, given some of these businesses are longer cycle?

Tom Timko, CFO

Yeah, we're starting to see sequential growth in our orders across both businesses. And when we think about our backlog as it exists today, you know, we ended Q1 at about 790 million. And because of that strong OE, right, we're starting to replenish that. But, you know, backlog at one point for Diebold was an important metric. And to a degree, it still is, but less so. Less so because of all the lean manufacturing improvements that we've been able to deploy over the last couple of years, we've cut our lead times in order to deliver product from 200 days, in many cases, down to 120 or 90 or less, right? And that's driven by a decision we made equally about, you know, four or five years ago where we manufactured the majority of our ATMs and SCO equipment in Paderborn, Germany. Today, we have four manufacturing locations and have really deployed a local-to-local strategy, which has really helped us manage expenses in the areas and where we sell. So we've got one with our partner, Nash, in India to sort of help us with that Asia-Pac region. Obviously, Paderborn continues to be very important to us. And then at our headquarters and facility in North Canton, that is a full-on manufacturing facility for us now, capable of doing both SCOs as well as ATM. And we refer to it as a flex factory, where in the past, you know, it used to be more of a conveyor belt type of manufacturing. Now it's flex. We can literally, within hours, change from manufacturing SCOs to going back to ATMs. So much more flexible in our response time. And then our last facility, which helps us in Latin America and South America, is in Manaus, Brazil. And again, it's that same sort of flex ability. So when you're in an environment that we experienced just not too long ago with tariffs, not a big impact for us, right, because we're manufacturing locally. Now, there were some areas when those tariffs came out that we said, hey, you know, we had things in the pipeline to kind of move. So it accelerated that movement into the regions where we're selling them. But we feel like that local-to-local plus lean has really helped us on product. And product margins, right? I mean, Matt, you remember last year we were able to grow product margins 300%. And now we think that we can maintain that and over time incrementally get maybe another 25 basis points here and there. But when you're talking about being able to sell an ATM at a 31-plus percent margin, that's pretty good. We're pretty proud of that, and we're investing to maintain that.

Matt Somerville, Analyst — DA Davidson & Co.

We have about seven to eight minutes left. I want to talk about profitability, but first I want to make sure we cover balance sheet and cash flow. So D-Build's balance sheet remains very under leveraged. You have a $200 million share repurchase in place. Where do you see the company's leverage guardrails kind of going forward? How committed are you to maintaining leverage in that bandwidth? And obviously, the company's buying back stock, but you guys also acquired some stock in the market not too long ago. So maybe speak to that as well.

Tom Timko, CFO

So we are committed to maintaining what we refer to as our fortress balance sheet. Our net debt leverage ratio last quarter was 1.2. Our guideline is we'd like to keep that under 1.5. And for now, our capital allocation strategy is really focused on buying back stock. You know, we announced the $100 million program last year. We did that in about 10 months, 11 months, wrapped that up, and the board supported us with another $200 million program repurchase. We're probably going to wrap that up in a similar amount of time. We've said that before, and we're going to go back and get an additional authorization. Right now, we feel like our stock, even at these prices, continues to be undervalued. And the ROI on buying that stock back now is something that we're going to continue to do remember we are a very light capex environment think about one to maybe 1.5 percent of our revenue is is capex but we feel we feel good about the capital allocation process I think now as we look to refinance our debt right the night we have 950 million in secured notes that the note the no call may call provisions expire and reduce in December of this year. So we will likely be in the market again. And we'll look at, you know, perhaps a more flexible structure with a term B and then some secured notes. A lot of that is TBD, but we will definitely be refinancing at that point. And, you know, depending on the amount of cash that we have on hand, depending on the stock buyback programs, we're likely to continue to make an investment in our Fortress balance sheet and pay down some of that debt as well.

Matt Somerville, Analyst — DA Davidson & Co.

And then maybe talk about some of the recent insider buying as well.

Tom Timko, CFO

Yeah, well, look, this stock had a little bit of a dip recently. Nobody could understand why. So we were in an open window and we jumped at it. So this is my third time that I've gone to the market and bought stock in an open window period. Octavio did the same thing. and our chief revenue officer, so the guy who delivers everything, went out and made his first purchase as well. So the management team, you know, believes in what this company can do, and that's why we're here talking with investors is to try to get that message out there about this company's ability to generate free cash flow and then have multiple ways to distribute it. Right now, we're very focused on buying stock back, but at the same point in time, we're beginning to grow a little bit more in terms of what do we want to do from an M&A perspective. So we've got opportunities that are coming into us, and we'll continue to look at those. You know, for now, we're kind of in a smaller sort of tuck-in acquisition mode, but I could see if it's the right opportunity at the right price that we would be willing to spend a little bit more to make that acquisition.

Matt Somerville, Analyst — DA Davidson & Co.

What do the credit rating agencies need to see to push your debt rating into investment grade? And do you think that ultimately can happen leaning into this refi? And if you were to refi today, what would the spread favorability look like for you? Yeah, good question. So I think

Tom Timko, CFO

they want to see consistent execution. So the one thing that we've been able to demonstrate for the last, I think it's six quarters now, is positive free cash flow. That doesn't seem like a big deal, but for companies in our space, right, and our competitors, the majority of our cash flow comes in in Q4, when the service contracts get renewed, there's a down payment associated with it. It had been a very, very, very long time that Diebold had been profitable or positive free cash flow in any other quarter except Q4. I would say as a result of some of the lean initiatives that we deployed around DSO and managing DIO better, we've been able to generate positive free cash flow for the last six quarters. Obviously, Q4, still a big quarter, but that is our focus to continue to remain cash flow positive in each quarter. Now, there may be some quarters that we've got to make decisions on certain inventory, et cetera, that may push us more towards a break-even, but we're very focused on that. That has been a big piece for them in some of the recent crediting upgrades. I mean, I think since over the last two years, we've gotten two upgrades from both Moody's and S&P. We recently engaged with Fitch. They're a We're a notch above Moody's and S&P at BB minus, and we're hopeful that the continued execution and maintaining our minimum cash balance in a range of 250 to 300 will likely get S&P and Moody's, hopefully, to bump that up as well.

Octavio Marquez, CEO

Yeah, and probably, Matt, you know, as we think of the rate that we will be able to refinance, if you think of our notes today, they're at 775. If you look at how they're trading in the market right now, it would imply a rate that's closer to the low 6-something. So we're very excited about doing that because just by doing that refinance, where we think we would land would add probably $15 to $20 million more of free cash flow to the company next year. So we're very focused on that, and that is something that we will definitely be doing once December comes along.

Matt Somerville, Analyst — DA Davidson & Co.

Perfect. And then on free cash flow, how should we think about Diebold's long-term conversion on adjusted EBITDA, if that's the right way to look at it? And what are the three, four, whatever, you know, five sort of items you need to get there?

Tom Timko, CFO

Yeah. You know, last year we did 49% conversion of free cash flow against EBITDA. What we said we'd do this year is 50 plus percent conversion. And we think we've got pretty good line of sight in 27 to get that up to 60 plus percent conversion. You know, for us, I still think we have ample opportunity with DSO. We're not at entitlement yet. And each day of DSO is $10 million of free cash flow for us. So if you think if our DSO is in the mid 60s, we probably have entitlement in the high 40s. So we still have pretty good runway there. And DIO is something that we've been very focused on. And I think as Diebold begins to morph, and I talked about the lead times reducing on inventory, and since we're able to turn it more quickly, we don't need to build it in advance. We've got a shorter period of windows, so that means we're not carrying as much raw materials or finished goods until the point that we're actually going to be ready to go sell them and install them. So we feel that we have opportunities there. And then I would say kind of, you know, the ongoing focus of, you know, OPEX and reductions across the board there in spend kind of all contributes. Right. But, you know, to what Octavia said before on some of the products and margins, you know, even within that space on free cash flow, we have we have multiple ways to win. Right. It's DIO may be up one period because we decided to make an investment in X to secure revenue for the future, but then we can do better on DSO, right? And it's worked out well for us. And overall, too, we've just been able to reduce sort of the amount of professional fees associated with some of the projects and processes and even our OpEx evolution program as well, right? That'll go away after time as we've embedded some of those 214 actions that I talked about into our operating culture.

Matt Somerville, Analyst — DA Davidson & Co.

We just have about one minute left. So real quick, on services gross profitability, you talked a lot about product. How are we thinking about service gross margins? And what are some of the more iterative things you've done in that business to drive profitability higher looking ahead?

Tom Timko, CFO

Yeah, I'll start and I'll let you finish. Our biggest opportunity is service margins, no doubt. Our service margins are probably in the mid-25-ish area. You know, we feel entitlement for us in that space should be much, much closer to 30. So what we've done is we've deployed what we refer to as our field technician software. It's based on an Oracle platform that makes sure that, you know, you've got the right parts on a truck. You have the right person who's going to go to that service call. And the software predicts where that person needs to go. So there could be an example where Octavio is a block away. I'm six blocks away. In the past, they would talk to each other. Octavio would take it because he's closer. He gets there, realizes I don't have the right part, and geez, I've never really done this before. Our software knows the skill of the technicians as they're graded, knows what parts are on the truck, and now it deploys Tom. Tom goes there, fixes it right the first time, and that's where we saw a lot of the inefficiencies in the past was multiple visits to the same site to fix the machine or overtime. And we've been significantly able to scale back both of that. And then we're also densifying the amount of field technicians that we have. So more boots on the ground per machine. And what that's doing, yes, it costs more. That's the investment we're willing to make. But the SLAs are improving. And as our service level agreements improve, so just think when I say that word, it's all about availability. As the availability of those machines continue to improve, that translates directly into wins on the product side. So you get more wins, you get more C-base on the service, and that helps.

Matt Somerville, Analyst — DA Davidson & Co.

Well said, Tom. I think we need to wrap up there. Thank you, guys.

Tom Timko, CFO

Thank you. Thank you, Matt. Thank you for having us. Appreciate it.