Hello, and welcome to the Agfa-Gevaert Q3 2021 results call. For the duration of the call, your lines will be on listen only. However, there will be an opportunity to ask questions, and this is done by pressing star one on your telephone keypad. If at any point you need assistance, please press star zero, and you'll be connected to the operator. I would now like to hand over to our host, Pascal Juéry, CEO, to begin the call. Thank you.
Thank you very much. Hello, everybody, and welcome to the Agfa-Gevaert quarter results call. I'm sitting today in Mortsel with Dirk De Man, our CFO, and the executive team of Agfa-Gevaert. To start, I think Q3 results, two numbers, +7% top line versus last year, +35% EBITDA versus last year. However, sequentially, it's a lower quarter than Q2, as announced during the communication on Q2, and we've seen indeed margin pressure from cost inflation and also lost opportunities from supply chain issues.
Overall, a decent top-line recovery for all businesses but HealthCare IT, and I will come back specifically to this point, were a bit hindered by the cost inflation that has been building up in the P&L. The cost inflation is not new, but it's been hitting the P&L due to the length of the supply chain we operate in, rather in Q3 and will continue in Q4. At the same time, we have seen supply chain issues who have hindered somehow the business, resulting in lost opportunities. You will see quite a contrasted performance between the different businesses. We continue to very strictly manage our cost, which helps also mitigate partly the impact of the margin erosion from the cost inflation.
More specifically, I would also exemplify the continuous focus on this area by the recent announcement that we've made regarding our IT reorganization, where we have announced our intent to partner with Atos. The name of the game being not only to review the IT architecture of the group and make it future ready, but also to be more productive and improve our efficiency, including in terms of cost. Now, that's a good illustration that we are continuing to improve the operating model of the group, and the IT announcement is a breakthrough announcement that exemplifies all the work we are doing in this area. Cost inflation. Price actions are in place.
We have been reasonably able to maintain our level of margins during Q3, and that's precisely due to a number of price actions we have taken in various parts of the business. I'll come back to that. The only difficulty that I could mention is, in fact, that price actions take a bit longer to implement in some areas of our business where we have existing contract commitments. We do not foresee any difficulty going forward in passing on the cost inflation. It's just a time lag impact.
Working capital in this context is remaining at the same level in terms of percentage of sales at 27%, which is for me a correct achievement, given the fact that indeed inventory valuation is getting higher and supply chain issues mean we have more than normal goods in transit or goods waiting to be shipped all over the place. Overall, not a bad result. Now, if I show you the number, as I said, 7% top line growth in Q3. You see gross profit 26.8%. That's slightly below the nine months average and below last year. This is the visible impact of the cost inflation we are seeing. SG&A are well under control.
I would say that to make a long story short, that we were able to maintain the level of savings we achieved in 2020. In 2020, part of it was temporary measure, but we were able to replace it with more structural measure, and costs are well under control, and that's an area of focus continuously for us. R&D is in line with last year. What you see is just the quarter-on-quarter variation. EBITDA +35%, EBITDA indeed at EUR 6 million. If I go down the P&L, we still have continuous restructuring initiatives, as you know, in various areas, and this quarter is no exception. We end up the quarter with a net negative profit of EUR 5 million.
If I go a little bit more into details before jumping into the divisional results. DP&C and Offset, significant improvement of the top line, volume and price impact. Radiology Solutions. The film prices have been increased with some geographical exceptions. The DR top line is lower than in Q3. That's the other area in the group where we have a top line that is quite significantly below last year. First, last year in Q3, there was a bit of a boom, especially in mobile equipment to face the COVID crisis. So we are not seeing that anymore this year. I would say the market overall for DR is a lot more subdued, and we believe indeed the overall market for this digital radiography has been negative this year.
HealthCare IT, we do have a very good order book, but Q3 has been hit just by the implementation delays of some projects. As I already explained, we have a significant part of our revenue, it will be less than 50%, is dependent on project implementation. We have specific milestone to recognize sales. Actually a few projects have slipped over from Q3 to Q4, which explains the situation in Q3. Basically, the projects are not lost, they're gonna be back in Q4, and therefore we're expecting a much stronger Q4 in this area. All divisions are facing supply chain issues to different extents, of course, as well as some shortages, especially in electronic component, and that's also impacting more or less, let's say all divisions.
I will come back to that when speaking specifically about each of the business. As I said, gross profit margin under control in spite of the strong inflation. Clearly, we have a price increase strategy. I think Offset is a perfect illustration. We are about to implement our third price increase of the year to make sure we make up for the cost inflation. I'm gonna turn to Dirk to comment on the cash slide and the working capital.
Thank you, Pascal. Free cash flow of Q3, I think there the overall we had a higher adjusted EBITDA versus last year, but we did have quite an increase in working capital, and I will get back to that later. All the other elements are within expectations with an adjusted free cash flow of EUR 7 million. Fundamentally, as you know, we are not doing any extra funding for the pensions anymore, so we concluded that program in Q2. You can see maybe on the next slide the year-to-date numbers. Overall, an adjusted free cash flow of EUR 50 million sufficient to cover the regular pension. As you can see also we have invested year to date EUR 129 million in our pension program.
Maybe a quick point to make for the analysts. In terms of the tax cash out forecast, we expect it to be around EUR 10 million for the year. On the overall cash position, it's still very strong. We're close to EUR 400 million. For your information, obviously, that includes the year to date pension investment of EUR 129 million in the first two quarters, but also around EUR 21 million year to date in terms of share buyback. For the quarter itself, that was around EUR 12 million. Maybe quick to working capital.
As Pascal was mentioning, we were able to maintain a stable percent of sales, which we think is a good performance considering, let's say first of all, the raw material inflation that obviously turns up also in your inventories. In addition, the slowing down of the supply chain, both inbound and outbound to our customers, which also makes the overall inventory levels higher than we would normally have. Overall, if you compare to last year, inventories are only up one day, I would say. That's actually limited. In terms of trade receivables, we're actually flat despite the higher turnover, and so therefore a reduction in days. In terms of DPO, we have quite an increase. Overall, also EUR 65 million improvement in DPO.
Net, we reduced the overall net working capital to EUR 63 million versus Q3 last year. In Q4, as we would normally expect to see, we expect a rundown of inventory. We assume a positive fourth quarter in regards to working capital.
Thank you very much, Dirk. Now, let me walk you through the divisional results. HealthCare IT, as I said, clearly a weak quarter on the revenue side and on the EBITDA side, and I think there is only one reason, as I already explained, which is the delay in some project implementation, mainly, I would say in North America. I was saying, you know, all divisions are a bit also impacted by supply chain issues. So maybe it's less obvious for HIT, but we do have some impact due to the fact that when we implement our project, we need also hardware, which typically either are sourced by our customers or in some cases directly sourced by Agfa-Gevaert.
In both cases, I mean, it proved to be an issue. Getting servers, network equipment, even sometimes PCs becomes a bit difficult and therefore has also a role to play in some of the implementation delays we have seen. However, order book remains at a very healthy level, meaning significantly above last year by the end of September. We are in good shape and nothing is broken at all here. Q4, you're gonna see a much better Q4, a much stronger Q4 than you are seeing Q3. I would say overall HealthCare IT will continue to deliver progress in terms of EBITDA for the full year. Which is not the case after nine years, so that gives you a bit the story.
As I said, sales recognition is very precise. We have to hit milestone and to have validated milestones with some of our customers. It can slip by a few weeks sometimes, and everything will be caught back in Q4. That's for HealthCare. Radiology. The Radiology Solutions when you look at the top line, actually it's only slightly below last year. In fact, practically all of the deviation is coming from the DR market, the digital radiography market, where, as I explained, we are seeing a kind of a backlash post-COVID, and a very subdued market. The film CR are by and large in line with last year in this area. Impact on EBITDA, a bit, but remaining very profitable.
We are seeing also a very stable situation in the market. There is a very stable situation notably in China. Radiology, if you remember, we had a very weak Q1 , but Q2 and Q3 have been a lot better and we expect this trend to continue. DR, as I said, decreased top line and therefore also impact on the bottom line. We expect also for DR a kind of a rebound in the fourth quarter . Well, that's for radiology. Digital Print and Chemicals. Well, very strong rebound from last year. If you remember, DP&C and Offset were the most, of course, impacted by the COVID crisis.
We are seeing a good evolution. It doesn't mean that all businesses are back to pre-COVID level, and I'll come back to that in a minute. Overall it's very well oriented. Where we're suffering a bit is on margins. Actually, more by the way on the film business an industrial film business we have in DP&C, where we are suffering a bit more in margin. This is also an area where we have supply chain issues that prevent us from shipping some of the goods to our customers.
Overall, an EBITDA almost in line with last year, but that could have been a lot better if we were able to ship to our customers, which proves to be a bit difficult. I think what I want also to stress is all our future-oriented activities in DP&C are well-oriented. Actually, inkjet does very well. Our ORGACON conductive materials, our ZIRFON membranes, everything is well-oriented, and we are still very bullish on these activities. Inkjet, I mean, inks are well above pre-COVID-19 level, so that's a very good thing. Equipment, this is where we are having the issue. We are indeed impacted by supply chain. We have an order book actually that is increasing quarter- after- quarter that we cannot deliver fully.
For instance, we expect the order book at the end of the year to be two-thirds above last year's level. The reason is very simple, difficult to ship, difficult to source some of the components, and that makes up for this delay, where the market demand is dynamic and the launch of our latest initiatives have been very successful actually in the market. High cost inflation also on the film, we are working that out, but it's gonna take a bit more time to work it out. Overall, a quarter for DP&C that is slightly below last year but doesn't change our view at all on the potential of the division. Offset Solutions.
Well, Offset Solutions, here again, a very strong top-line growth due to the fact that, indeed, not only we are recovering some volume, but also we are increasing prices, so that has also an impact on, of course, on the top line. We are not yet in terms of volume at pre-COVID level. We are still about 9% below pre-COVID level in terms of volumes. Here, I would say, we are busy increasing prices to make up. This is the division that is the most impacted by cost inflation, and we are very busy increasing pricing. We are successful in our initiatives so far, and I think it will be the case anyway.
However, it's just a question of timing, where we are expecting a significant impact, but starting in Q1 2022, for the contracts that are in place. I would say that therefore, Q4 is still gonna be a difficult quarter for Offset, due to this kind of delay in the cost hitting the P&L. Again, we operate in a long supply chain market, and therefore Q4 will be impacted by this cost inflation even more than Q3. I repeat, I'm confident of our ability to recover all of it, but there is just a time delay in this recovery.
In spite of that, you can see that the segment is doing a lot better than last year, and that already, apart from the price actions, we are also managing our costs in a very efficient way, I would say, in this business. Overall outlook, as I said, upturn performance for [inaudible] in Q4, that's gonna be a much better quarter than Q3. In the other divisions, more subdued performance expected, as I already explained, the inflation impact in the P&L is gonna be stronger in Q4 than in Q3, so I expect this to impact, indeed, most notably Offset, but not only, you know, other businesses. Radiology, we have probably lower sales than in Q4 last year.
The reason being, you know, typically that was a business in which Q4 was the strongest quarter of the year, but this pattern has somehow changed in the current market conditions. I would say that our dealers are not keen to keep inventory at the end of the year. That's gonna be a different pattern with sales that are not gonna see a bump as we were used to see in the past years. Therefore, that leads us to say that the group EBITDA is likely to be below the Q4 level of last year. We will continue to work on cost management program. We will continue to indeed try to decrease the needed working capital to operate the company.
We will continue to increase prices as needed in order to recover our margin. Now, if we take a step back a bit, today, I would say with the exception of Radiology, I believe that all businesses will be in a position to deliver higher results than in 2020 in spite of the cost inflations. On the Radiology is significantly below, but the gap is not increasing, I would say, significantly. That's what I wanted to share with you in terms of economic results. I want also to touch on sustainability. I want to stress that we are stepping up our efforts in sustainability in three dimensions.
The first dimension is really people-oriented, I would say, well-being and health and development of people. We have a lot of activities regarding our safety programs. We have the ambition to reduce significantly the number of incidents, accidents at our company. We have a number of behavior-based actions at the moment. We have also increasing our focus on diversity and inclusion. As you noticed a few months back, we have welcomed a CHRO to our organization, Gunther Koch, and he's gonna lead this effort in the next month, ten years. Second point, we want to make sure that every product that we put in the market is assessed in terms of sustainability, and we want to innovate in a sustainable basis.
We are putting in place actually the right assessments in order to make sure we do so. At the same time, we are also being assessed currently by a third party provider, EcoVadis, to understand where we are in terms of sustainability practices. We use it as a benchmark tool in order to, I would say, define the areas where we're gonna need to make continue our efforts going forward. Third, we are working on the footprint. We have a number of initiatives in order to reduce our CO2 emissions. Agfa-Gevaert is not a very large CO2 emitter as such.
However, we have a role to play as well, and we want to play our part in meeting the objectives of the Paris Agreement. This week is the week of the COP26, and certainly at our level, we absolutely want and need to contribute. Overall, I would say a Q3 that shows different trends. Recovery in the top line, a challenge in the cost inflation, and I would say a different kind of a delay in the [inaudible] implementation of projects.
Overall, I confirm the overall direction of the group with the growth potential of HealthCare IT and DP&C, the ability for Radiology to provide a significant, I would say, cash generation for the group and Offset, our efforts to restore profitability in a complex environment, but where we could still, in this complex environment, considerably improve the results of the business. I'm gonna stop there and take any question you have. The analyst, I'm sure, will ask the questions.
Thank you. Just as a reminder, it's star one if you would like to ask a question. Our first question comes from the line of Kris Kippers from Degroof Petercam. Please go ahead.
Good afternoon, gentlemen. Can you hear me?
Yes, Kris. Very well. Thank you.
Two questions from my side. Firstly, looking at the price increases you've done now in this quarter, I know you've got contracts, of course, which are not always provides the flexibility to open them up. But to what extent do you need to step them up and what is the reaction of competition today? I mean, are they also being quite stringent on that? Is it full-fledged or is it a quite fierce market over there? Thank you. That's across the board.
Well, across the board situation is a bit different, but let's take Offset because Offset is the largest.
Yeah.
The area in terms of price increase. We have made already two price increases, and so far I can say these price increases have been accepted by our customers. We are now preparing for the third one, which will be even probably more significant than the other ones. I believe that there is overall an acceptance rate. I'm not saying that customers welcome, you know, that we increase prices, especially as the increase is starting to be very significant. You're talking double-digit increase here. Overall, this is well understood by the market. The main driver for Offset being aluminum pricing, this is more or less a pass-through for our customers because aluminum is not consumed in the process.
I can also say that Agfa-Gevaert has been clearly leading the price increase on its own. We have seen tangible signs that our competition is following, I would say, these price increases. We don't expect to be an outlier on increasing prices. I mean, the cost inflation we are seeing is pretty much global. It's mainly a global phenomenon from aluminum, chemicals, packaging and freight, and everybody is impacted the same way. As you know, the starting point of the industry meant that we didn't have a lot of, I would say, reserve in order to absorb this cost impact.
Overall, your other areas also, like in ink, when we increase price, I mean, it's painless and it goes very smoothly, I would say. In some other areas of films, it proves to be more difficult depending on where you are geographically. I would say China is the area where probably we have the most difficulty today to increase prices. Overall, I think we are on our way to recover the cost inflation, and we increase prices everywhere we can do. We can do it. Now, the time lag, most of the contracts are yearly contracts when we have contracts.
Some of them are multi-year contracts, which is why we're expecting the rate of implementation of the price increase, and especially in offsets, to be much higher in the first quarter of 2022, of course. Here again, we successfully discussed with the customers having longer contracts, and I think we are coming to terms in order to find the right outcome for them and for us. That's on. Did it cover your question, Chris?
Yes. Thank you. It's quite clear. Secondly, a question more on the working capital. We again see a very nice improvement in the third quarter . It does seem indeed that Q4 should see another support by the inventory rundown. It does imply that the improvements you're installing are quite sticky, so there's no real squeeze that you're doing to improve the cash position currently or something. Just really restructuring.
No, not at all.
Sorry, recurring. Yeah.
No, no, there is no squeeze. What we want to do is to really progress in our ability to manage the business with less working capital. When we are improving, I would say the overdue level, you would understand that it's not window dressing, it's real actions. When we are decreasing the number of days of the DSO behind that, you have specific changes of payment terms and conditions. In terms of inventory, we have a long supply chain. We still have some improvement to make. Indeed, what we are doing is trying to operate the business at a much reduced rate of working capital.
Okay. Clear. I look forward to the others. Thank you.
Thank you very much. Our next question comes from the line of Maxime Stranart from ING Bank. Please go ahead.
Hi. Good morning, afternoon actually. I hope you can hear me well. Two questions on my side as well. First of all, looking at the non-recurring expenses, if I recall correctly, you guided for an amount of roughly EUR 25 million to EUR 30 million for the full year. We already are at -EUR 5 million. Is it something that remain unchanged?
Secondly, a bit of a focus on the medical films and the trends you see there. You mentioned that you see some change in pattern in, well, order, especially for the fourth quarter . Is it linked to the change in China, I would assume? So, if you could shed some light on what's happening over there, as I understand it's a rather important market for medical films. Thank you.
Yes, indeed, Maxime. Let me turn to Dirk to answer your question on non-recurring.
Yeah, on non-recurring restructuring combined, we are actually reiterating our guidance. Actually, we're probably gonna be somewhere in the middle of that range that we gave you before. The key reason, obviously, as you noted, the year-to-date number is still lower. The key reason is in the fourth quarter , and that's pending the finalization of our contracts with Atos. We will be taking some restructuring items related to the transfer of the people to the Atos company, as well as some restructuring in other regions, and we will be forced to recognize those in the fourth quarter .
Thank you, Dirk. Very clear. For China medical film, I would say, you know, as the new process, value-based procurement process in China has hit us very much in Q1, but actually Q2 and Q3 have seen a recovery. Including today, we are seeing, we're starting to see a better market share in China. We are going back. The lack of bump in Q4, actually, I think it's more it doesn't have anything to do with China, but it's more generally speaking, I think the practice is being changed. We are living a volatile world, I believe, in terms of demand, on cost, and so on. Today we have less.
The practice was to try and finish the year very strongly, I would say, and some of our distributors were kind of doing some pre-buys. That's not the case anymore. We are not seeing this trend anymore. There is nothing broken in the demand itself. The situation in China from Q2 onward to us is very stable.
Very clear. Thank you for that. If I may, maybe just follow up on medical films and what you do expect for the next year, assuming still some price inflation over the first half of 2022.
Well, when... Maybe let me clarify. When I say, you know, when we make the comment, we expect the cost inflation and supply chain issues to continue in 2022, in the first semester of 2022. We are not saying that we expect the price to continue to increase. We are saying that the situation at a very high level of raw materials, energy, shipping, and so on, will continue, but not necessarily further increase. I want to clarify this comment as well. I think it's important. Now, regarding what you're asking me for medical film, I think it's too soon. We are right now, I'm not breaking any secret, but discussing our budget for 2022 with the team. I think it's a bit premature.
The only thing that I can confirm is so far, we are not seeing any change in patterns. Okay? That's what I can share with you at this stage.
Very clear. Thank you for that.
Thank you very much. Our next question comes from the line of Guy Sips from KBC Securities. Please go ahead.
Yes, thank you. Most of my questions are already answered, but I have two questions. First is on CapEx. Can you give us some more color on what number we can expect there for the full year and on CapEx allocation? The second is more general on the Atos transaction. What is the reasoning behind that? Why this transaction? Why now? Can you give us some more color on that transaction, please?
Of course, Guy, and Dirk will do that.
Yeah. On CapEx, I don't expect any outliers versus the year-to-date spending. I think we're a bit on the low end of our spending versus what we had anticipated, but there will not be any major shift in the fourth quarter . Regarding the Atos contract, in terms of the key background as Pascal was already mentioning, one of the core things is that Agfa-Gevaert will need to upgrade its infrastructure, future-proof it in terms of software and hardware in the coming years. One of the ways to do that with excellence and, say, in terms also of risk management, we thought it was a good plan to introduce a partner to help us with that.
Overall, I think the idea is to also have a broader access to innovation through a partner. At the same time, we are able to transfer the largest part of our organization to this partner, which will also allow us to follow the, let's say the efficiency of a program that an external partner can provide us in terms of costs. Overall, I think it's a combination of cost management, of innovation, and transformation of our IT platforms, which is basically long overdue because I think we've been living with an old structure for the last 15 years. It was about time that we tackled that issue.
Absolutely. If I may add, we want to simplify the IT infrastructure, which will have a significant benefit on the way we run our operations, and is also an enabler for us to do more things in improving further the operating model of the group, and especially getting more efficient in the way we run the group in terms of supporting functions. It's one brick in the overall transformation program of the group, but that's a key brick because it's gonna enable a lot of other actions.
Thank you.
Thank you. We do now have a follow-up question from the line of Maxime Stranart. Please go ahead.
Yes, thank you. Here again, two questions on my side. First of all, you confirmed that the carve-out of Offset Solutions should be well finalized by April this year. Could you shed some light on what are the costs we are expecting, you are expecting on that regard? Secondly, obviously, the third quarter of 2021 impacted by a couple of price increases. Could you provide us with a rough breakdown of what was the price versus the volume impact? That would be all for me. Thank you.
All right. On the carve-out, I want to make sure I understand correctly your question. Are you asking the cost of doing the carve-out?
Yeah, that's correct.
Yeah. Actually, we do not give particular guidance on what the costs are of the carve-out. There's a lot of costs involved, including the setting up of new legal entities, the splitting of ICS systems, et cetera, et cetera. It's included in our guidance around the non-recurring and restructuring.
Okay. The second question, I want to make sure. I'm not sure I got it. Maxime, if you could, yeah, kind of repeat it to make sure I got it right.
Yeah, sure. No problem. Looking at the third quarter of this year, would it be possible for you to provide us with a breakdown of what was the price impact in the top line growth, basically, versus the volume impact, obviously?
Well, I'm afraid I'm not able to do that. I will have to go to a level of granularity that is probably not practical. If your question is do we already see a price impact in Q3? The answer is yes. Yes, we see it, but we need a lot more price impact in the next quarters. That's in place, basically, yeah. In Q3, we see some, but not by far, not yet the full impact.
Very clear. Thank you for that. Have a nice day.
Thank you very much. There are no further questions in the queue, so I'd like to hand back to Pascal, if I may.
No, thanks a lot. Thanks a lot for attending the call. As you see, a pretty complex first quarter indeed. A fourth quarter , again, that will continue where we will continue to focus on price cost management, and where we will see a very good rebound in HealthCare IT to cap off the year. I repeat that our confidence going forward in the growth of DP&C and HealthCare IT is confirmed. We have a stable situation in front of us, as far as we can see in radiology and in Offset. We will continue to restore profitability here. The main action is indeed price management as well as continuing to decrease our cost to operate.
Thanks a lot for your attendance. Thank you for your attention. Have a good day. Thank you.
Thank you very much, everybody, for joining today's conference call. You may now disconnect your lines, and we wish you a pleasant afternoon.