Hello, welcome to the Agfa full-year results 2020 call. My name is Rinkel, and I will be your coordinator for today's event. Please note 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. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you will be connected to an operator. I will now hand you over to your host, Pascal Juéry, CEO, to begin today's conference. Thank you.
Thank you very much, operator. Hello, everyone. It's good to have you on the phone today to review the Agfa results. Well, of course, I don't need to explain that 2020 was a year disrupted by the pandemic. First message to you is, in this pandemic, we try to do three things. First, addressing the short-term challenges. Managing our cost base and our capital, and mainly our working capital. Second, we continue to transform the company, and we made significant changes in the portfolio, the balance sheet, and in the way we operate the group. Third, we have kept investing in our growth engines. We have a clear growth path for a number of our activities. While we are addressing the challenges in specific areas of our business, we keep investing in our growth engines.
Let me now walk you through a bit more in the key highlights of the year. First, needless to say, the key event was the closing of the sale of the HealthCare IT activities. Pandemic was already in full swing. We could deliver on it. This enabled us to start working on fixing our balance sheet, namely funding our pension and de-risking actions and repayment of our financial debt. More details to come in the course of the presentation today. The highlight is the success in Imaging IT. We doubled the adjusted EBITDA in a year. As we know, we have a mid-term growth strategic roadmap. We are happy to say that, if anything, we are a bit ahead of our plan in this area, and we successfully increased our margin. We have, I believe, an excellent outcome on this business for Agfa.
Third, we still had good performance in some specific areas in the company portfolio, including direct radiography. We delivered double-digit growth. Inkjet consumables, this is really inks mainly. That worked out quite well. We're ending up the year on a very positive note on this area. Our specialty chemical business, who is already at the end of the year, 2020, is well ahead of last year. This being said, we were also impacted strongly in other parts of our portfolio. Strong impact on Offset, on the printing equipment for inkjet, where basically the market dried up during a few months in 2020. The film-related activities, either medical or industrial markets, have been difficult in terms of volume due to the COVID impact.
We've seen a recovery for most of these activities in the second half of the year, but we are not yet at the pre-COVID level, to be clear. I think one of the success of the year is we've been successful in adapting our cost base relatively quickly to what we've seen in the environment. If I take SG&A and R&D, we were able to decrease our cost base by EUR 70 million. For SG&A itself, we were able to maintain the percentage of SG&A at the same level of last year in spite of the steep decrease in the activity. Out of the EUR 70 million, the majority, about 55% of it, is temporary measures or related to the activity level. 45% comes from structural actions that we have taken in order to simplify the way we manage the group.
We will continue to work on that in the years to come. We are on a path of transformation in the way we operate the group in its shared services, and we expect to continue delivering year-over-year benefits on this front. Working capital. Well, we operate in markets where we have long supply chains for a variety of reasons. One of the reasons being some of our markets are quite far from where we produce. Also we have an OEM activity in some of the business portfolio that means we have long supply chain. It took us a bit of time to adjust the working capital according to the reality of the business, but we did it. EUR 100 million reduction in working capital during the year. We end up as a percentage of sale that is lower than last year.
Very significant progress in this area. We made structural progress in the way we manage receivables and inventory. In this context, which is quite contrasted, of course, we have decided to launch a EUR 50 million share buyback program. Please take it as a sign of confidence in our midterm perspective. That's very clear. We believe that following the achievement of the HealthCare IT divestment, we needed to think about our shareholders. On top of this EUR 50 million share buyback, I'm sure you've seen also that we are canceling 4.1 million shares that we are currently holding as treasury shares for an amount of about EUR 15 million. Last but not least, we have renewed our revolving credit facility to maintain, of course, the liquidity of the group.
Although we have plenty of cash today on the balance sheet, we believe it's always a good thing to have access to this instrument. These are really the highlights of the year. In Q4 now, if I'm more specific, the developments in Q4, what do we see? The headline is a strong improvement in Digital Print & Chemicals, and the return to positive adjusted EBITDA for Offset Solutions. We had two quarters that were extremely difficult for Offset, and in Q4 we could get back to positive EBITDA. Self-help measures, for sure, and as well as a bit better volume environment. I would say the more negative news come from the medical field. We used, normally, to have a very strong Q4 in terms of volumes, and especially in our main market in China, stocking for Chinese New Year.
There is a new procurement process in place that deterred our dealers to make too much inventory and, therefore, we suffered a bit from this during Q4. Last but not least, you've seen that the working capital reduction came very much in Q4. We took specific production adjustment action. As I said, this is also long supply chain, so this is why it came a few months after the dip in the market. That's a structural reduction that we are making. I'm going to skip the sale and go to the P&L. You've seen for the year, 13.5% decline in our sales to EUR 1.7 billion. Already in Q4, as you can see, the impact is less, but not of course, to pre-COVID level. Gross profit, we maintain pretty much our gross profit percentage.
However, on a much lower volume, which we partly mitigate through our SG&A action and R&D reduction. R&D, let me tell you that the most of the decrease comes from Offset. We have kept our investment in R&D in other activities. Of course, a significant hit on EBITDA, because we couldn't mitigate the full impact of the reduction of the volume. If we turn to the next slide, coming from a EUR 36 million EBIT for the year, we do have quite a lot of restructuring this year. Mainly two items. The shutdown of Leeds and Pont-à-Marcq , who is now done. That, of course, is reflected in the 2020 accounts, as well as the announced restructuring of our German manufacturing footprint in radiography. That has yet to be implemented, but that has been provided for.
Therefore, that brings us to a negative net result on continuing activity and, of course, a strongly positive profit when taking into account the Dedalus divestment. I'm going to turn now to Dirk De Man, our CFO, who will walk you through a few slides related to cash, pension and working capital. Dirk?
Yes. Thank you, Pascal. Indeed, positive cash flow for the year. Indeed, a very tough year on the business and the business results, but still a lot of mitigating actions able to limit the damage, let's say, to the bottom line. Outstanding performance on working capital. Overall, EUR 84 million of cash was generated. We improved on all fronts, so the receivables management, the payables management, and in Q4, especially, the inventory improvements. We'll go back to more details a little later. CapEx was well under control. We limited the investments to the necessary and the growth-related investments, that was a lower number than in previous years. Overall, leading to an adjusted free cash flow of EUR 123, which was sufficient to fund both the regular pension contributions and the restructuring and non-recurring items. Overall, +EUR 15 for the year.
On top of that, we invested part of the proceeds in de-risking our pensions. In the amount of EUR 218, and I will get back to that point a bit later as well. Now, this is the free cash flow. Obviously, this excludes all the proceeds from the HealthCare IT divestiture. The total net cash flow is about +EUR 690 . On the net financial debt, it's actually a net financial cash slide. Since Q2 2020, we're in net cash position. Basically, that is evolving over the quarters, mainly affected by the investments in the pension de-risking. If you exclude that part, we actually generated about EUR 37 million of extra cash in Q3 and Q4, in the COVID period. If we move to the next page, on the pensions, we're well on track to deliver what we discussed.
In the previous conversations we had, our objective was to achieve about EUR 250 million in 2020. We ended up doing a bit less. I just wanted to explain quickly the reason. It's because in one of our less material pension plans in Sweden, we actually saw the opportunity to completely eliminate that, so completely de-risk it from our balance sheet. In terms of process, it's taking us a bit more time, so that will be executed in the first half of 2021. It is basically a deferral and a bit of a diversion from basically the Belgian plan, where we'll do a bit less. Here, we can actually totally eliminate about EUR 16 million of pension liabilities in Sweden. For the rest, I think the slide is pretty identical to what we have shown you in the past quarters.
It's just a reminder that we are doing what we're planning to do, and that the balance of the budget that we have foreseen for this will be actually executed in 2021. If we move to the working capital, I think Pascal highlighted already the key achievement there. Let me just highlight indeed Q4 on inventory management. We made at last a lot of progress. It was very tough to adjust our supply chains to the drastically reduced demand in the COVID period. It took us a bit of time, but we achieved those results in Q4, and we're very pleased with that. If you look at the days on hand in terms of inventory, we actually are very close back to the pre-COVID period. I think we did a pretty good job. On receivables, obviously, receivables go down when sales are going down.
The key achievement here, you can see in the days of sales outstanding, where we actually reduced it from 58 to 52 in a year where obviously credit management was not easy. We focused a lot on the reduction of overdues, had very close contact with our customers, and that was the result, obviously, of a lot of follow-ups by our organizations. Even in days payable, we did a good job. We managed to improve it 2 days - 59 days of payables outstanding. That is remarkable in a year where, obviously, we had to reduce our supply chain massively to achieve those inventory reductions. Again, I think I can say we did a good job at delivering that kind of an improvement in terms of days. Net, we reduced the working capital with 1% of sales versus the end of last year.
Thanks a lot, Dirk. Very good results. I'm very pleased with the results for working capital indeed. Let's go quickly to the business division to give you color. Here on HealthCare IT, I think we really need to concentrate on the full year. A quarter for this business is not representative, as we have a sizable part of our revenues which are project-based. It's fair to say that Q4 is generally a weak quarter anyway, seasonally, and we had a bit of a weaker quarter here. The achievement stands really for the year. We have made tremendous progress in the profitability of our business, and that's really structural progress in the way we implement our projects, we implement our services, we gain efficiency. We had very robust sales, especially in North America, which is our main market. North America business development extremely positive.
We were impacted by COVID. The access to the hospital was not certainly easy and in some cases, we had to do projects totally remotely, which we could do, by the way. We believe the outlook for the business is extremely positive. I remind you, we are implementing a new technology platform now for a few years, and now we are getting, I would say, to cruising speed. We are doing that quite efficiently, I would say. As you know, in this year, it was not about increasing revenue. It was the reverse. It was about focusing in a disciplined way in specific types of projects, specific customer typologies, specific geographies. I must say that we have executed according to the plan. Therefore, we are not chasing any project.
We are chasing the right projects for Agfa here. What I can also tell you on a positive note is we've seen an acceleration of the order intake during the year. We ended up the year, in terms of order intake, much higher than at the beginning of the year, and the order book is at a very healthy level. Again, I repeat, we are absolutely on track to reach the profitability target of 18% EBITDA for this business. Radiology Solutions. Radiology Solutions, a bit of a contrasted story here. After a beginning of the year where the medical field market was quite resilient, we've seen a strong impact of COVID volume-wise. The reason being that hospitals were only busy with COVID, and therefore, a lot less activity happened at the hospitals, and we are suffering from this.
I would say it started more in Q3 and in Q4 in this business. Reversely, in DR we are making progress, we are gaining share, and we generate a double-digit growth. This being said, the film business is still today much more significant than our DR business, and this is why you see here, of course, a year where we are declining sales and EBITDA in Radiology. This is the story. I told you the development that we have is we have a bit more price and volume pressure coming from our main market, which is China, and we are taking all the mitigating action that we need to take in this area. Going into 2021, I expect a similar trend. DR growth and more challenges in the film area. DPC, here, of course impacted.
I told you the main areas of impact for DPC are really the equipment, the printing equipment in this COVID crisis, as well as we have a film business that is exposed to oil and gas and aerospace, and we've seen also, of course, an impact in this area. Steady improvement during the year. Actually, we ended up the year on a quite positive note on our business. I'll go immediately to the comment. Inks, we are very happy about inks business and development, and we are growing and very confident about the growth. That's just the printing equipment that was an issue in 2020. What we've seen from September is a recovery of the sales pipeline for our equipment, but more in the mid to high segment and not yet on the lower segment of the business. That's still the part that lags behind.
Digital printing is a growth market. It's here to stay. We have a lot of initiatives in this market. On the equipment side, we actually launched yesterday the largest ever printing equipment that we have launched in the market, the more productive, the faster, the more automated. We have high expectations for this launch. We are now really the commercial activity in the segments we have been developing in the last year for industrial floorings and leather, and as well, soon packaging are really taking off. Overall, I'm expecting good growth in this application. Film and foil, impacted by COVID because it's oil and gas and aerospace. We've seen an improvement, but not yet a return to pre-COVID. I would say it's going to be a gradual recovery with this market. The specialty chemical market, very well positioned for growth.
Our exposure is Asia, our exposure is electronics, the electrification of cars. Soon, as I told you already, we are seeing the very good possibility for membranes for green hydrogen production. The sales pipeline, the project pipeline is very healthy. It does not yet today contribute really to the business, but it might come very soon, I would say. Overall, DPC is confident. Offset Solutions. As you know, it was a very difficult year for Offset. First, because it was the activity that was also extremely impacted by the situation. Actually, if you look at the -16%, more or less, decrease, it's also very contrasted. Of course, in Asia, through our JV and our activity, our sales platform with Lucky, we did very well. In fact, on the top line, actually, it recovered very well.
The recovery was a lot more subdued in the rest of the world. Very difficult bottom line in this context. There is over capacity in the market. We are addressing it upfront. We had two quarters in negative EBITDA, but I'm happy to say that now we are back in positive territory due to the self-help measures we have taken. Here we will continue to work on our cost base. The shutdown of Pont-à-Marcq and Leeds, the two European units we shut down last year, that's over. Now we are going to see the full impact in 2021. As you know, we have announced a standalone structure for this activity. This being said, the challenges are not totally over for Offset. That leads me to give you a bit of an outlook. We are seeing continuing impact of COVID-19 for the first month. It's no surprise.
I mean, the lockdowns are still in place in a number of countries. We are not expecting a back-to-normal situation in some of our businesses. The second point is we are seeing inflationary pressure. That's raw materials, that's metals, that's also shipping costs that we are working on to mitigate. That's also a new development since a few months. We are not expecting an improvement during the first part of the year, but we expect the improvement to be rather back-ended in the year. We expect all divisions to progress versus 2020, with the notable exception of Radiology. We will not progress in the year. However, for the medium term, I repeat my strong confidence that we are in businesses that are going to be oriented positively for us. If anything, imaging IT growth should definitely come midterm. DPC, I'm also extremely favorable.
For Radiology, more contrasted, for Offset, as you know, it's a different story, where we are more focused on, let's say, restoring profitability than generating growth in this business. That's a bit what I wanted to share with you, and I would like to leave time for questions. In summary, in an extremely complex year, we have kept our focus on the transformation of the group while addressing the short-term challenges and having a very disciplined approach into allocating resources to our growth businesses. With that, I would like to give you the opportunity to ask questions. Analysts and press, you're welcome to ask questions. Yes, we have more details in the pensions, if need be. We have a couple of slides we can show more in the pension. I'm already showing that to our dear friends in the analysts, if you need it.
Operator, can you please open for question?
As a reminder, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. You will be advised when to ask your question. Star one on your telephone keypads now. We have a few questions. Our first question comes from the line of Guy Sips from KBC Securities. Guy, your line is unmuted. Please go ahead.
Yes, good morning and good results. I have four questions, they're all related to timing, meaning we incorporate in our model that it would be somewhat later. Can you give us a little bit more color on the intention to organize the Offset Solutions activities into a standalone legal entity, you see that as a first step? What could be the next steps? Third question is related to ZIRFON membranes. You were saying very soon. Is that already something that we can expect some positive contribution in 2021? In what magnitude can we expect something from ZIRFON? The last question is related to, can you give us some quantitative guidance for the restructuring and non-recurring costs for 2021? Thank you.
Okay, thanks a lot, Guy. All very good questions indeed. Film in China, too soon to say because the situation is not, I would say, stable. Actually, it's a process by which provinces are in charge of the procurement, and therefore there are still a lot of question marks. I would expect to have a clearer view, I would say, by mid-year on this. It's a different way of procuring the film. Not sure right now I'm in a position to tell you exactly how it's going to pan out, but we are managing the situation, of course, very closely. Offset standalone. Well, yes, indeed. The first priority for Offset is to restore profitability, and we continue to have a number of cost initiatives in order to achieve this goal. However, regarding the standalone, what does it mean?
It means that we are ready to look at potential strategic options. That's what it means for us. It's, of course, way too soon to discuss about these potential options, but I sincerely believe that in a declining market, as we see it today, that probably there is a need for industry recombination of some kind of sort, and we believe that we are one of the few players in this market, and we are ready to contemplate it. Again, too soon to say, too soon to comment further on that. ZIRFON. The short answer, yes, I personally expect that we will start having an impact during 2021. Let's say we have in our pipeline specific projects who could actually propel ZIRFON to the size of, I would say, a real business. The short answer is yes, I will expect it to happen during this year.
To your question number four on restructuring, Dirk, you want to take it, please?
Yeah. It's a good question. I think it's not necessarily easy to answer it. If you're asking for a range, I would say it's between EUR 15 million and EUR 30 million, which basically means it's a lot less than what we have this year. One, for sure, because we are not planning any industrial reorganizations. I think we have announced all the plans that we had recently. The key thing next year will be the effort that we'll do in creating this standalone organization for Offset. As you may remember from the former carve-out work that we did on the HealthCare IT business, this is a cost mainly related also to IT systems carve-out and separation. I would estimate that to be in the mid-teens in terms of costs. Then there is ongoing transformation costs that may come on top.
As I was saying, it's probably not going to be below EUR 15 million, but it certainly is not going to exceed EUR 30 million.
Okay. Thank you.
Thank you, Guy. We have our next question coming from the line of Maxime Stranart from ING Bank. Maxime, please go ahead.
Yes. Good morning. Two questions from my side. First of all, you were referring to the trust you have in the targets you have on the midterm. Will you, at some point in time, communicate those targets with the market? Then secondly, on the share buyback program and on the capital allocation efficiency, I would say, while looking at the valuation multiples you are currently trading and given rather ambitious consensus, if you look at a 20% EBITDA CAGR over the next two years, how should we understand that you decide to proceed with that share buyback now? Is it due to a lack of possibilities to invest in other projects or, well, other companies? Thank you for your two answers.
No, sure. Okay. First on the midterm guidance. I prefer to wait a bit until we are really out of this situation of COVID before expressing midterm guidance. I'm thinking about indeed organizing an event sometime during Q3, maybe, in order to not only share our guidance, but probably explain a little bit more about the plan and the activities. You'll have to bear with me for a few months, Maxime. It's not going to be immediate, and I don't believe we can do that right now. This being said, that's a link to your next question regarding the share buyback. If we do a share buyback, it means we are confident going forward as well. Why do we do it?
Clearly, because following the successful divestment of HealthCare IT, we always say that we are looking at three kinds of proceeds for the cash we obtain. First, reinvest in pension and deleverage the company, that's for sure, looking at investment possibilities within the group and rewarding shareholders. As you can see, the amount of the share buyback that we've announced is quite modest compared to the cash we have on hand and the proceeds for HealthCare IT. We believed it was the right time to do it, because we believe that even if we are not totally yet out of the pandemic crisis, we see the back to normal getting probably, I would say, in the second half, soon in place. This is the reason we do it. That's also a signal. We want to run the company for value, and we need to think of our shareholders.
I think it's been a number of years since Agfa could not reward its shareholders. I think it's more than 13 years. I wouldn't say it's long overdue, but I think it's normal at some time also to be able to reward shareholders when we can do it. It doesn't mean that we do not have any growth projects or investment projects. Not at all. We do have ideas and plans for the future for the growth of our activities. For the time being, the first step is organic. We have everything that we have in place in terms of innovation and resources to grow the business organically. We believe this is why now is the time, and we can do it.
Noted. Thank you. Just maybe another question that just popped in my mind. Looking at the working capital as a percentage of sales, of course, a positive development this year with a decrease of 1%. Where do you see this stand again over the medium term? Because, well, looking at free cash flow right now, we can see that the clear bulk was basically generated by the positive development in working capital. Thank you.
No, for sure we will continue to work on it. We will continue to optimize it. I personally believe there is still room for improvement in the way we are managing our working capital. We made a step in 2020. We will try and make another step in 2021 in terms of indeed percentage of sales.
Thank you for your answers.
Thank you, Maxime. We have our next question coming from the line of Kris Kippers from Degroof Petercam. Kris, please go ahead.
Yes. Good morning. Thank you for taking my questions. Firstly, a question quickly on Offset. Coming back to indeed the situation is, of course, a market where sales are facing difficulties. You've got overcapacity, and you now clearly flag the fact indeed there is some inflation coming up in raw mats and logistics. Given the fact that there's overcapacity, what are your options for pricing this to the market in these circumstances, and what is the delay that we should anticipate? Thank you.
Excellent question. Yes, indeed. I say there is overcapacity, but also it's an industry where today, I would say, the whole industry is in the red. I think there is no choice, and when we are talking shipping costs, currencies, or raw materials, these are the same for all players in the market. Therefore, yes, the way we are going to mitigate and are mitigating is through price actions indeed, and we expect to be in a position to be successful in this drive to increase prices, even in a situation where I do recognize that indeed there is still more capacity in the market. At the same time, nobody's making money in this market.
Okay. Thank you.
We have to do it, and we'll do it.
Of course. Understood. A question on Radiology. If you look at the comments, it's a bit different direction, but could you share with us some indication of profitability between the segments that you have in Radiology? Could you shed some light on that?
Let me say that the film business is by far the largest profit contributor in this division. That's a fair comment that I could make.
Okay, thank you. Just a last question, a bit coming back to the question of Maxime slightly, but if you look at your cash position, the fact that you've now spent EUR 50 million on the share buyback, it's still of course, a very healthy situation. Is the current situation with COVID with some of your peers or interesting smaller players? Could it be an ideal moment to shift gear more rapidly, strategically, and use that cash also for add-on M&A?
My priority is first to grow organically, and we have still a lot to deliver in our various businesses, and that's clearly the name of the game. Now, from what you say, we are not ruling that out. I'm not ruling out there is something smart to do in bolt-on M&A to accelerate growth. This is not the first priority. The first priority is to grow organically and to improve the profitability of the group. Indeed, the fact that we have cash indeed creates opportunities for us.
Okay. Very clear. Thank you. No further questions from my side.
Thank you, Kris. We currently have one more question in the queue. As a reminder, if you would like to ask a question, please press star one now. Our next question comes from the line of Guy Sips. Guy, please go ahead.
Yes. I have one additional question on slide 29 on the cost and the cash outflow from the pension. The EUR 293 for 2020, that includes the EUR 218 extra funding from the pensions. The remaining, can you break that down between above and below EBIT, please?
Yeah. Guy, I'm not sure if I understood fully, but if you break it down, our normal cash out is probably the question that you're asking.
Mm-hmm.
Yes.
In 2020 was EUR 75 million.
We project that to be EUR 75 million this year and EUR 71 million next year.
The one below EBIT, I think I heard from-
Oh, yeah, but I don't have it handy, but it's basically, you need to eliminate the pension cost and EBIT.
Yeah, absolutely.
You calculate backwards.
We calculate it's EUR 60 million+ .
Yeah.
We calculate backward, yeah.
Yeah.
For this year, EUR 75 million, next year, EUR 71 million.
Okay. Thank you.
Yeah.
Yeah.
Thank you, Guy. We currently have no more questions in the queue. As a final reminder, press star one to ask a question. Thank you.
Well, maybe not expecting any more questions from.
Yeah, if you are-
If there are no more questions, thanks a lot for attending our conference. Of course, Viviane is also here to answer more follow-up questions if you need. Again, a contrasted result for 2020, but as you've seen, the commitment to work both on short-term and mid-term, and confidence also on the outlook for the overall group in what is still today quite a volatile and uncertain environment. Confidence in terms of what we want to achieve and the way we're going to do it. Thanks a lot, everyone. Thank you. Have a good day. Bye-bye.
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