Earnings Call: Q1 2021

May 11, 2021

Slides

Hello, and welcome to the Agfa Q1 Results 2021. My name is Josh, and I will be your coordinator for today's event. Please note that this conference is being recorded. And for the duration of the call, your lines will be on listen only. However, You will have the opportunity to ask questions at the end of the call. I will now hand you over to your host, Pascal Jouary, CEO, to begin today's conference. Thank you. Thank you very much. Good morning, everyone, and welcome to the Q1's results call. I'm sitting here in Morsel, our headquarters with my colleagues from the executive committee. And Dirk Domaine, our CFO, will share the presentation with me. So obviously, a very contrasted Q1 for the group, And I would say a rather seasonally low Q1. On the positive Solid evolution, solid margin performance by Healthcare IT and Digital Print and Chemical divisions On track for growth, these activities are either already in growth mode or close to it like DPC. We are seeing a volume recovery in most of our business areas, including offset sequentially is improving. However, the in this quarter, we had a very weak, in fact, radiology solutions business. Our volumes We're weak. It's I'm telling you right now that this is a weak quarter that will not And already in Q2, we are seeing a significant step up in our business, Whether it is film or RBR business, but I must say the Q1 was Quite low for a number of reasons I'm going to come back to. We are continuing our very strict cost reduction You will see your SG and A are continuously going down. At the same time and that's also Probably one of the major message I would like to give is that we are facing cost inflation headwinds Across our businesses with the exception of Healthcare IT, most of it we are facing them in offset. We estimate the overall raw material, packaging, freight and overall cost inflation to be €50,000,000 for the group. We already have launched significant price increase programs, especially in Offset, but not only in order to mitigate this cost Headwind, but obviously, we'll need more along the years in order to be able to maintain our margins. We have continued with a very disciplined working capital management. Actually our working capital at the end of the Q1 is lower than the end of the year, Which means also even weaker quarter in terms of margin, we were able to be positive free cash flow Before the extra pension spending that we are continuing as you know. So now let me Walk you through a bit more to the numbers. So you've seen and remember that we are still comparing ourselves So pre COVID activity last year, Q1 2020 was almost, I would say, non affected by COVID. So our sales excluding currency impact are minus 6%. As I told you, DPC and Healthcare IT, rather positive, offset recovering but still below And Ideology significantly below last year. SG and A under control minus 8% compared to last year. R and D, we kept constant. EBITDA, obviously, very much impacted by the weak quarter in Radiology, about percent of sales and EBITDA is in fact more or less 0 or less. If we go below EBIT, you will see restructuring and recurring not a big impact during this quarter And therefore, relatively limited loss profit from our continuing operations in this quarter. Overall, top line 6% below 2020, which I remind you is a pre COVID quarter. Healthcare IT positive growth, we were not as you know, we are more Today, chasing profitability improvement, but we are very pleased to see that we could get some momentum also in our business and that's a positive Fine for us and you will see overall we are pleased with the evolution of the business. DPC In line with what was the pre COVID quarter, in spite of the lockdowns that are still impacted activities like sign and display for For InJet Business, but our chemical businesses are already well above last year and growing. Offset Solutions improving sequentially, but Radiology Solutions was the main issue for us in terms of Volume decreased, sales decreased of about 16%, more for film, They are almost online with last year, I would say. So overall, gross profit margin declines From the impact of Radiology, Radiology is the most profitable part of our business. And of course, we are suffering from the mix. And as well, we are starting to see in the Q1 the cost inflation that is impacting across the board. At the same time, we are also suffering from a negative currency impact from the group. The weakness of the dollar is much weaker than last year. And for the renminbi, it's a mixed picture because we buy renminbi also Our operations in China and selling euros or dollars, but China is also a significant end market. It's a more balanced, I would say, situation. Healthcare IT and DPC continue to improve profitability. You will see that for Esco IT, we're on track with which we told you. I mean, we're encouraged by the development, But I'm going to share with you in more details. DPC as well. By the cost inflation, but in spite of this, we continue to improve profitability. Main, The issue of the quarter is Radiology Solutions impacted by China, but not only China is only a third of our sales And we've seen weakness in volumes across geographies, we want to be clear. A very slow start of the year impacted by COVID-nineteen in some Countries still today, but also more pronounced the seasonality overall All of our Radiology Solutions business. Offset, well, all the cost improvements are delivered, but today are A bit eliminated by the cost inflation and the currency impact for the business. We took action already on price. There is a certain delay in terms of contract management in being able to reflect Higher cost in our contracts. Some of our contracts, about 50% are indexed, But you see the impact with the quarter delay of the cost increase. So it's going to come. And for the rest, we've been very active increasing prices, as you know already. We'll probably have to do more in the next So weeks or months as we are continuing to see an increasing trend for raw materials in the business. Positive free cash flow, maybe Dirk, I will turn to you and you will come on this slide. Yes. Thank you, Pascal. Good morning, everyone. So indeed Good cash flow quarter. As you can see, we had about €38,000,000 of adjusted free cash flow driven Also thanks to strong performance in the working capital despite what we normally have a seasonal buildup Of inventories in Q1, we turned out to still have a positive contribution in terms of the cash flow. CapEx is a bit below average, but normal for a Q1 and of course provisions and income taxes come on top. So the €38,000,000 part of that, obviously, we need to pay for the pensions. So the regular cash outflow Core pensions is around €14,000,000 There is some cash restructuring, which is primarily related to the project 2020 that are being executed still in Q1, leading to a free cash flow of €16,000,000 Four extra contributions to the pensions, and I will come back to that later. So indeed, in the Q1, we did the contribution to the Swedish pension plan, Which as a result will be totally eliminated from the balance sheet. So net, we come to a 0 free cash flow. And if we move To the next slide, you can see that also the net cash position remains more or less unchanged versus previous quarter at a very In terms of the pensions, as you know, the plan we announced last year is Overall, use €350,000,000 for the pension plans, reducing both liabilities, but also derisking. As you recall in 2020, euros 218,000,000 of that was injected. In Q1, we did This elimination of the Swedish pension plan, so it's one of the nonmaterial countries, but we were actually able to totally eliminate The pension plan with that contribution. And then that's not anymore Q1, but in Q2 in April, We also contributed €103,000,000 to the UK pension plan in support of a buy in program, which was successfully placed In April. So the total buy in will I will de risk a total amount of 260,000,000 Euros, and it will not be eliminated from the balance sheet, the liabilities, but will have an offsetting asset That will be totally following the liability, basically a full de risk of the UK pension plan and Which is also a good step in the long term in case you want to go for a full buyout at one point in time. We expect to have the whole pension plan completed in Q2. We are still finalizing with the Sure is all the final calculations. So we expect that we can give you an update with the Q2 results of the total program and the implications it has. For now, I would already like to give the guidance in terms of the cash flow below EBITDA. We expect it to be around €52,000,000 cash out in 2021. And just for reference, in 2020, that was €60,000,000 So we are already Going on that path of a reduction of reduced pension cash outflows. And I'll hand back to Pascal to discuss the work. Thank you, Dirk. That's a good evolution and especially going forward On the cash outflow for the full attention. Disciplined working capital, we have decreased our working capital compared to the end of the year. Percentage of sales is the same. As you know, we have always seasonally strong 4th quarter and a much weaker 1st quarter. Expect the same profile as last year in terms of managing the working capital, probably an increase during the first half And then we will get it back to where it needs to be by year end. We are doing that in order to optimize the way we organize our production schedule in a year that is still that was still not A normal year in terms of, I would say, COVID-nineteen measures, but that's clearly under control. Healthcare IT, the number, as I told you, excluding currency, most of our sales are in dollar in North America. We've seen a growth. We're improving the gross profit of the business as well as The adjusted EBITDA was 12% of sales, significant growth versus last year. So very pleased overall by the evolution of the business. We had very smooth we continue to implement our Enterprise Imaging And we have very smooth go lives in many geographies, especially in Europe, but also in the Middle East and Europe. I want to mention the Leeds Hospital, which was a very, very good project for us for the NHS. What I want also to stress is not only do we deliver good numbers, but we have also actually an order intake dynamic, So which we like, it's the Q3 in a row where we see our order intake picking up with the right mix So, projects, which is also very important because as you know, we engage in specific projects. So, we like our order intake evolution and the Order book, the order book is still at a very, very healthy level and we're happy also with the development. We are also very happy to have been recognized externally. It's the first time in a few years actually by CLAS, which is the market research institute In North America on this subject and they classify Agfa as the most ready for enterprise imaging, Which is an external recognition coming from the fact that now we have a stable technology which is well appreciated by our customer base And we have proved that we can handle very significant implementation and deployment at customer level With full satisfaction, I would say. So we are very happy with that. Again, our strategy remains So for your strategy, we engage at specific customer accounts in specific geographies, And we engage in specific projects for us. So we keep this daily discipline, and this is the reason why you see The steady improvement of this business and the steady improvement will continue throughout the next quarters. And I'm Saying basically that we are on track in our journey to reach the high teens EBITDA Within the next 3 years. So happy about the development of the business. Now Radiology Solutions, which is quite contrast without a play on words, because indeed it was a very difficult quarter, minus 16 Minus 14% including currency, tremendous impact on the gross profit coming from the slack of volumes And Miks, and therefore, very subdued EBITDA level in what is clearly Today, a very profitable business for the group. So the reason for that, overall, as I say, Typically, Q1 is a slow quarter for Radiology, but this year it was much lower than usual. Doctor also which was a positive growth engine for 2020 had a more subdued quarter in Q1 rather flat compared To last year, so it didn't make up, I would say, for the decline of film. Medical film, yes, volumes are impacted, as I In all geographies, China, the situation is a bit different as there is a change in the procurement Process that also involves a bit of, I would say, destocking due to the uncertainty and So our volumes were lower than expected also in China. However, we are already, I would say almost mid May. And we've seen already in March and even more so in April, a very significant pickup of the activity Q2 in film and as well as Doctor. I don't want to leave you the impression that this is the new State of the business in radiology, absolutely not. It is rebounding very strongly, but it's fair to say that Q1 It was very subdued. DPC, DPC rather positive quarter, some different dynamics in the different activities of this business. But overall back in track to last year and better in terms of profitability. And this is a trend that we expect will continue over the next quarter. The reason being, InJet, which It was a bit below in terms of recovery because a significant part of our business is linked, I would say, to commercial activities and events. So it was strongly impacted during COVID time. I'm happy to say that the equipment order book has been steadily increasing for the past So, months and today it's almost back to pre COVID level, not quite so. And the good news is It happened even in a situation where we cannot entertain our customers in our demo rooms First, so that's a good sign. And on top of that, the mix is favorable because it's to the high end equipment of our range, which is for us a very positive sign. Positive signs also, we have our first successes in industrial markets like decor printing and leather printing. And overall in volumes have been now, I would say overall back to pre COVID levels, which is a very positive sign As we were still in lockdown in a lot of countries. Electronic Print overall growth, Hydrogen membrane sales pipeline reflects, of course, a very strong growth, Not yet material for the group. I expect the membrane business to start being, I would say, material for the group next year. But today, we have a very exciting sales pipeline at a number of customers. As you know, the hydrogen world is doubling with And Agfa is present in all projects related to alkaline electrolysis Green Hydrogen Production. Specialty Film and Foil, below last year, the reason being key markets are industrial markets That are still not fully recovered like Aeronautics and Oil and Gas, but we expect to recover partly during the year. So overall better profit. The division is also impacted by cost inflation and we will also put price action or Offset, the good news for Offset is actually volumes have continued to recover. We are not expecting to ever get back to pre COVID level in this business, but I must say The volumes of the first one were encouraging. However, the issue we are facing is a significant impact of Cost increase and currency headwinds in this market, which kind of at the end of the day eliminated most of the cost The actions that were put in place. So again, as already explained, here we have strong price in place that will develop through the year, that we're continuing also Our cost journey and we continue to review our go to market with several initiatives That will be implemented in the next month that we will share with you in due time. But So for me, I mean, the clear way out of restoring profitability today is our ability to increase price in this market. And with the first price increase that was announced a few weeks ago, I think this is a common issue for the whole industry. We've seen also other price increases initiatives in these markets And we will continue to lead the recovery of Offset. Overall, outlook After this really subject Q1, we expect the business volume recovery to continue Throughout the year, I'm starting, of course, with Q2. We are continuing cost reduction programs, And you will we are doing that on a continuous basis, and we will share with you any specific initiatives We might launch during the year. We are, of course, As I told you, the first priority is price management in order to face the cost inflation. And believe me, We are taking a lot of actions in this area. I confirm the growth of Healthcare IT and Digital Clinical, I think for us, if anything, what we want to achieve is to be able to accelerate this growth. Offset is improving, but is now under inflation pressure, so price will be the way out of it. On Radiology Solutions, substantial recovery in the next quarter. So it's a bit Pascal, if I may, I just wanted to add in terms of the cost savings programs that we also wanted to adjust our guidance around Non recurring and restructuring? Absolutely. We expect this year to be around €40,000,000 in terms of the P and L churn. No, it's a good point. I think it would have come probably through the Q and A, but last quarter we wanted to we had this question and we indeed wanted to come back So we are continuing indeed to spend restructuring in order to lower the cost base of the group. Before I open for questions, I want to share with you our sustainability policy. We have put in place today sustainability roadmap with I would say an ambition, A 5 year objective and a 1 year objective. I will have the opportunity To share that with you in more details in due time, but already we have defined material goals For our business, actually, the first one is about diversity and inclusion As well as safety, these are two areas for which we have a specific road map. We are also working on sustainable innovation. We want to make sure that every new generation of products We placed in the market represents a significant progress in terms of sustainability and We are starting to assess our innovation portfolio accordingly. We will also initiate And ESG rating with a 3rd party, we have not yet selected the 3rd party, but it's going to come In order to be able to have a third party assessment of our sustainability roadmap And we are continuing on a continuous basis, we are reducing the impact of our operations in terms of footprint. And here the main objective for us is CO2 emission. We are about to start actually Solar panels in our North Sol site, which are already there and will start producing electricity for the site 1st June, we have a number of industrial initiatives at our site to reduce CO2, And we have created a CO2 reduction roadmap. So I wanted to share that with you today. We have not only a policy in place, but a sustainability roadmap With the yearly objectives and probably in a few months, I'll come back to you and share these objectives on how we are doing Regarding this objective, the sustainability is a very top priority for us as well. So that's what I wanted to share with you today. In a nutshell, a complex quarter In terms of business, especially for hydrology volumes, but also I would say the cost inflation that's coming our way, means we'll have to implement a lot of pricing action in an overall context where I must say that The recovery of volumes is confirmed in the same month after month in most of our businesses and whereby We are confident going forward with the evolution of our 2 growth divisions of DPC and SGRIT. I'm going to stop here, and I will take the question of the analyst. Please. Thank you very much. Please ensure your line is unmuted locally. I will then introduce you into the call. Our first question comes from the line of Guy Sips from KBC Securities. Guy, please go ahead. Your line is now unmuted. Yes. Thank you. I have three questions. First is on Radiology Solutions, can you elaborate a little bit on what you call new centralized procurement practices? What is behind that? And how should we see that? And what is the potential positive impact going forward of this? 2nd is on Offset Solutions. We saw can you give us an overview of the dynamics in the market? We now saw for the first time Fujifilm, the latest to increase prices starting May 1. How important is this That's yes, as well Fuji is now implementing The higher aluminum prices that this cannot be longer absorbed. So how do you see these dynamics going forward? And then on these restructuring costs, the EUR 40,000,000, how is that spread over the year? Is that skewed to the end of the year? Is it equally spread over the different quarters? Thank you. Thank you very much, Keith. Radiology Solutions, so China, The change is in fact, there is a change in the procurement practice in China whereby procurement is now being organized by region, by Provinces whereby it was more decentralized before. So that creates a bit of disruption if you want In the way the procurement is organized and that's what we are seeing right now. So it has an impact because basically either you lose or you win a province. So at the end of the day, I'm not expecting necessarily a tremendous impact in terms of volume, but it's not going to be Organize the same way it was before. And it's a little bit unclear for the time being as the system is being implemented. Only a few provinces have been going through this system. We won some. We lost So we are in this kind of in between situation. I don't at the end of the day, the China remains the 1st market for hardcopy films and the 1st market for Agfa. We were in the process of rebuilding our market share after changing our go to market a few years back. We have now to adapt to a new system in order to get back. But there is no Change in the film consumption whatsoever at this stage in China, it's a disruption Due to this change of process, so that's for China. Offset dynamics in the market, Well, I already have the opportunity to say that clearly, we the industry as a whole As a challenge in the offset, last year you remember we were negative EBITDA in this business. So clearly, it's not a specific Agfa issue. It's an industry wide issue. There is no Of course, there is no, I would say, competitive difference in the cost to make Digital play is between Fuji or an AXA or Kodak for that matter. So clearly, we want to lead the market. We were the first to announce what is necessary for the industry given the increase of aluminum, but not only aluminum, All raw material, chemical raw materials are increasing. The strength is increasing. The packaging is increasing. I mean, cost inflation is not just only aluminum, by the way. So does it mean a new dynamic? I think the industry has no choice, I have no choice at all. And facing with what we are facing for offset and I told you it's about 50% of the overall cost inflation For the group are €25,000,000 and we see aluminum prices still going up today. Therefore, We need to increase price, and we will probably continue to do so over the next weeks months. Change of dynamics, yes, I think this is the first time ever that at least as far as people can remember That AXA is doing a general price increase in the market. And I must say, I've seen the announcement of Kodak and Fuji, it seems that the all industries faced is facing the same challenges, which is absolutely it's a normal for me. So change of dynamics, yes, because it's the first time in many years that prices will increase in The EUR 40,000,000, I'm not sure it's easy to give a quarterly guidance. To respond to that, it's going to be spread over the year. I would not give any other guidance at this point in time. Now we wanted to give you an idea of the overall amount. Now it's more complex to give a spread, so €40,000,000 for quarter? We have 3 left. Okay. Thank you. Our next question comes from the line of Maxime Stranard from IMG Bank. Maxine, please go ahead. Your line is now unmuted. Thank you and good morning. So three questions from my side as well. First of all, in radiology, would be is it possible to quantify the impact of China of COVID-nineteen in Latin America and India and the rest to have a broad view of what Is the main building blocks in the decrease in EBIT? Secondly, in terms of outlook, So you previously mentioned that you expected the pension deficit to be below €700,000,000 by 2024. Is it something you still confirm? And then secondly, for 2021, is it possible to have a more quantified view on what do you expect? And finally to rebound on Guy's question on restructuring initiatives. Is it possible to have a better view on what you Exactly intent to implement and which division it will impact? Thank you for your answers. Thank you very much, Maxime. On Radiology, it's a bit difficult to be that granular. But let me tell you that when I look at the volume impact of the film for the Q1, China is a third of that. So actually, I told you it was across the board on the volume weakness and that is behind us. It has already come back. And there are specific reasons for this. For instance, in Southeast Asia, the yearly contracts takes a bit of time to be negotiated, meaning we don't sell during the 1st months of The 1st 2 months of the year and we start selling in March after the contracts are in place. So don't We've got that kind of impact as well. So China is not the full story. It's about a third of the film Witness. The outlook of the pension, Dirk, 2024 below €700,000,000? Yes. I think the guidance still But as I mentioned, we're going to give an update in Q2, which summarizes all the effects because obviously between The previous time we mentioned that we still had a revaluation at year end, which always has an impact on what the net position is. But we will give an update in Q2. But let's say, all things being equal, the target still stands. But obviously there was a revaluation in the middle, so we need to assess those impacts. And for the restructuring, Maxime, I wish I could Share that with you, but you understand that restructuring is always linked to social process Somehow, so if we do restructuring, it means we are going to impact somehow our people. And therefore, I'm sorry, but I cannot share with you our plans, Precise plans for what we are going to do in the next quarter. So you're going to have to take our word for it. We have shown in the past that we are not shy of doing this. We have announced projects, by the way, already at the end of last year. We will announce probably more projects in the next month, but I cannot share with you the nature of this project for this reason. And regarding the quantified outlook for the year, I'm not giving a guide a number of guidance for the year For the simple reason that I think we are still in a kind of a flux in terms of raw materials and pricing. We have a lot of actions and a lot of moving parts right now. And I want to have a little bit more visibility on the rest of the year Sir, I would say for Ideology and the rest, I mean, DPC and Healthcare IT will continue their course. Offset is we will see probably a first impact of the price increase, but also an increase impact of the cost Perfect. Noted. Thank you for your answers. Our next question comes from the line of Chris Kippers from Degroof Petercam. Chris, please go ahead. Your line is now unmuted. Yes, good morning and thank you for taking my remaining questions. Firstly, coming back on the price increases which you're pushing through. Just for my understanding, what is the current delay that you face in this part? Is it a couple of months, 2 months? Or do you are you playing a bit short on the ball With the current hike we're witnessing, second question would be coming back on the nonrecurring charges. Could you share with us what the impact on the cost savings is actually for the year and afterwards? And regarding also on the cost SG and A, we saw an 8% reduction. Which part of that is structural and which part is temporal? Thank you. Very good question. Thank you, Chris. Well, the price increase, the short answer is we have different situation. As I told you, we have indexed aluminum contract in which We have a quarter delay in implementation through the contract. So that's the way it is. When we don't have a contract, we can increase Prices almost, I would say immediately. When I say immediately, it's a few weeks delay. And but it pretty much depends on the contractual situation. But overall, yes, I mean when you implement a price increase, it takes a few weeks or a few months in the worst case to take hold depending on your contractual Situation? Luc De Leggate for Offset, you can comment if you want further. Yes. Pascal, I think you said everything. So For instance, in Europe, which is a very important region, you may say half of it is what we call net of Alu. That means the aluminum increase is foreseen in the contract. So it goes, so to say, automatically. But in some cases, there is a delay foreseen in the contract, because not having the fluctuations immediately. For the rest, we have to look at each and every contract and we are pushing hard to increase this crisis because let's not forget that in offset, the printer Ken recover this increase because once he has used the plates, he will sell them to scrap dealer and also these prices are going up. For the aluminum, I mean, typically if not a typical situation is a For a pricing contract, so you've got a month of notice, So I would say. So that's for your first question. Non recurring impact, Dirk, you want to take this one? Yes. So in the nonrecurring restructuring, so there's two pieces of that. There's obviously a large part that is the nonrecurring part Related to the separation activities regarding offset, so that's a structural cost Mainly ICF related that obviously does not lead directly to cost savings. There is also program costs because we are working on different kinds of programs to find opportunities to reduce costs. And I would say that's about in total that's about half the amount we're talking about. So the other half would be More restructuring related and therefore become ultimately effective in the P and L. Regarding SG and A, Regarding SG and A and to your question, I would say most of what you see is structural with one caveat. We don't travel, Of course, very much still today. There is less trade shows and that kind of expenses. But on the I mean most of what you see is not anymore it was the part was temporary last year. It's less and less Because of course we have less and less this measure of temporary unemployment and so on and so on. We still have some in some areas, But not as much. So actually, the percentage of structural measures in the overall SG and A savings is becoming higher and higher. Okay. Thank you. And just as a small follow-up to be sure, if I look at working capital, which was stable in the quarter, 27% of sales, if I'm not mistaken, Is that something which might go up in view of the inventory? Or is that a small part only and won't evolve much? The typical Phasing of working capital given our manufacturing footprint would be that We will probably increase our working capital until the summer before winding it down in the second part of the year. In terms of inventory, of course, as raw materials are increasing, then you will have also an impact on inventory as well. But you have an impact on inventory, sales price, I mean, overall impact. So this is why I think the percentage of sales is the right metric For working capital. But overall, except the same phasing, maybe less pronounced than last year, but the same phasing in terms of working capital, A bit higher at the end of Q2 and Q3 and lower at the end of the year. Excellent. Thank you. Our next question comes from the line of Guy Sipps. Please go ahead. Your line is now unmuted. Yes. On the pension liabilities, can you give us an update on the sensitivity on The discount rates, what is the impact of 25 basis points increase or decrease of the Discount rates on your liabilities? Thank you. Yes. I think you can still use the guidance that we have in the annual report. I don't think it So that's €75,000,000 for every 25 basis points. That will not be impacted By the measures taken in the Q2? Yes. Well, obviously, we'll recalculate the sensitivities once we have everything implemented. Right now, we're still in the middle of So at year end, we already had parts reflected. And the key thing will be On the gross liability, the sensitivity may remain the same because in the UK, it's a derisking, it's not an elimination. But in terms of the net liability, the sensitivity will be completely eliminated. Hence, it will reduce In the future, but we have not been able to recalculate the sensitivities based on the new structure. Okay. Thank you. Thank you. And I think that We can conclude the call at this stage. Thank you very much for attending, and have a good day. Thank you. Thank you very much for joining today's call. You may now disconnect your handsets. Hosts, please stay on the line. Thank you.