Hello, and welcome to the Agfa-Gevaert Q3 2020 results publication call. My name is Jess, and I'll be your coordinator for today's event. For the duration of the call, your lines will be on listen only. However, there will be the opportunity to ask questions. This can be done by pressing star one to register your question at any time. If at any point you require assistance, please press star zero on your telephone keypad and you will be connected to an operator. I will now hand you over to your host, Pascal Juéry, CEO, to begin today's call. Thank you.
Thank you very much. Good morning to everyone, and welcome to the Q3 2020 results of Agfa-Gevaert. Well, obviously, Q3 was a quarter where we had a strong impact of the COVID-19 pandemic. The shortfall versus last year in terms of EBITDA and EBIT is mainly coming from the offset activity, which, as you know, has been challenged already in the past quarters, but for which we have seen further deterioration. The structural measure that we have taken are not yet showing in Q3, but will definitely show in Q4. The main reason for the weak results of Q3 is really offset. Our medical film business has suffered also in volume. I think the impact was a bit later in the year that we expected, probably due to some inventory adjustments.
The volumes in the medical film are also have been an area of weakness for the group. Last but not least, the currency turned negative for us in Q3, and the cost mitigation measures, as explained during the Q2 call, were less than we could achieve in Q2 and will achieve in Q4 due to the fact that Q3 was mainly a kind of a vacation period in which we can, of course, mitigate less the cost of the company. If I go to the highlights, the good part of the results is we are confirming the margin performance of the Imaging IT business. We are firmly in double-digit EBITDA territory in spite of a quarter that was more subdued in terms of revenue. The Digital Print & Chemicals division is also impacted by COVID, especially the inkjet part of it.
In spite of a significant decrease in the top line, we were able to show similar results as last year. Really the shortfall is coming 80% from the offset printing activities and the rest being explained by the medical film volumes slowdown in the COVID-19 environment. The good thing is we assumed a gradual recovery for most of the activities during the quarter, and I can say that I see right now a similar trend. Last but not least, we have executed our pension de-risking measures, and Dirk De Man will walk you through it once again later in the presentation. If I move to the P&L. As you've seen, the top line of the company is still strongly impacted by COVID-19, is -16%. In fact, if I remove the currency impact, which was for the first time negative during Q3, it's -13.7%.
As a reminder, in Q2, the sales were below by 20%. As you see, an improvement but certainly not a back to normal situation. Of course, the weakness in the top line is showing in the gross profit. We are one point below in terms of profit margin, mainly coming from the offset activity, the rest of the company being very resilient on this front. We have worked on our costs on SG&A. As you've seen, we managed to keep it more or less constant compared to sales. However, as already indicated, the cost mitigation measures we could have in Q3 were less than in Q2 due to the summer vacation period, mainly. We have overall maintained the R&D effort of the company. The only place where we are significantly reducing this R&D effort is in the offset printing area.
For the rest of the operation, given the midterm outlook, we see no reason to actually decrease our R&D efforts. It gives an EBITDA that is roughly at 50% of last year and a 0 EBIT performance for the quarter, which is obviously the weakest quarter of the year. I will give you an outlook by the end of the presentation, I can already tell you that we are expecting, of course, a rebound of the EBITDA during Q4. If we look below EBIT, EUR 9 million negative in restructuring and non-recurring. Also, taxes meaning a net loss for the quarter of minus EUR 25 million. If you look at the nine months when you, of course, you see the outcome of the HealthCare IT divestiture which of course is influencing very much the nine-month results. Again, all activities are top line impacted with COVID-19.
I cannot say there is anything that is immune, but the most significant decreases are in the printing part of the business, while healthcare tends to be more resilient, of course, and really offset is the most impacted. As I said, Imaging IT is strongly ahead compared to last year as a continuous trend of the previous quarter, even in a more subdued quarter in terms of revenue recognition. You know that part of our revenue is project-based, and we had less projects coming to fruition in Q3. In spite of that, we kept our margin performance. DPC, in line, bottom line. The only part where we still are challenged in terms of top line in DPC is really the equipment market in large format printing. The news flow starts turning positive also in this area. Radiology, impacted by film.
Film is a very profitable product range for Agfa and therefore any impact on the share volume has, of course, a significant impact on bottom line for radiology. Offset, again, is the main reason for the overall negative performance of the group. Now, I will show you the free cash flow bridge of the company. We start obviously with a very weak EBITDA and our adjusted free cash flow for the quarter is negative. Actually, I can also comment that during September, we have paid the yearly bonuses of 2019. We kind of delayed this payment, which would have been made in Q2. We decided, given the circumstances, to delay this payment. That's one of the reasons why the adjusted free cash flow is negative for the quarter. It would have been positive outside of this yearly payment.
Just one point, if we were looking at the nine months cash flow performance of the company, it would be positive. Even removing the HealthCare IT impact on the first months of the year, it would be a positive EUR 33 million . Free cash flow before Agfa funding is before the asset pension and restructuring, negative for the quarter on -EUR 23 million. It would have been negative, approximately -EUR 20 million, if I would show you the year-to-date performance. We separated clearly what is Agfa funding. As you know, we have started a drive to fix some of the pension liabilities we do have in the company, and we show here clearly what we have spent during the quarter in order to do so.
This is a cash flow bridge intended to give you full clarity about the cash performance for the company, which is clearly for me an area of great focus. I will show you now the cash position of the group. For instance, the cash bridge. a little bit less cash, of course, due to the negative cash flow performance in the quarter and the significant contribution to pension we have made during Q3. If I turn to pension, I would turn it to Dirk. Dirk, can you walk us through the pension? I think we already did it, but I think it's good to repeat again.
Basically a repeat from the slide last quarter, I basically wanted to acknowledge that we're executing on plan. We are still planning to invest about EUR 360 million to deleverage the pension liabilities. As you can see from the cash flow, there was another EUR 112 million invested in Q3 on top of the EUR 40 million we already did in Q2, we're still planning to do around EUR 100 million in the fourth quarter. In the meantime, also, we have engaged already regarding the de-risking of the pension plan in terms of reducing the gross liability, we already successfully placed $185 million in the US plan in October. It's a Q4 event, that was successfully executed during the month of October. Basically, the only news is that we're proceeding according to plan and executing as we discussed.
Thank you very much, Dirk. Turning to working capital. Here, the trade working capital of the company has been stable between Q2 and Q3. However, with significant moving parts, actually. We have decreased inventory during the quarter by a little bit more than EUR 30 million. We have also made progress in our DSO in trade receivables, and you can translate it to a better management and a decrease of the overdues. However, as you can see, the trade working capital remained stable due to the fact that our trade payables have decreased significantly in the past two quarters. What you should translate from this is actually we have reduced a lot of purchases in order to prepare what we are mainly doing in Q4, which is a key production adjustment.
The largest industrial unit of the company is in Mortsel, in Belgium, and we are just coming out of a two-week complete shutdown of the facilities, and we will proceed to more shutdowns during November and December, either a part of the plant, and in December, all of the plant again. We are effectively managing the working capital, and we expect this working capital to decrease in Q4. Now, if I turn to the different businesses, I will start with the HealthCare IT. As I told you, a rather subdued top line performance for the quarter. As you know, a significant portion of the sales in HealthCare IT are project-related sales, and revenue are recognized where projects are online and accepted by customers. There were less, I would say, project implementation starts recognized in Q3.
Although, as you can see, we could maintain our gross profit, increase our margin, manage our cost efficiently, keeping R&D at the right level of investment, and therefore improve profitability overall in the line of what we've done over the past quarters. In this business, you need to be aware that indeed, you can have slight variation of the sales depending on the projects you recognize in the quarter. We are coming out of Q2 where we had a significant project being recognized in our number. That was not the case in Q3. This being said, the strategy to focus on specific customer segment geographies and also specific value stream revenue, it works. It works, and it is translating, as you see, as a continuous improvement of profit margins. For the time being, top line growth is not the main measure for us.
We are more tracking the desired value streams that we want to grow, and on these accounts, we are doing okay. This is a business where you have some visibility going forward, and I'm happy to report that even in the current circumstances, we are seeing a ramp-up in our order intake. Actually, the Q3 performance in terms of order intake was the best in the year. Therefore, we remain very confident going forward with this business and our order book is still more than a full year of total revenues. I remind you that approximately more than 50%, about 55% are recurring revenues and 45% project revenues from this business. The main message is we are on track to reach the profitability target of the high teens EBITDA over the next years. Radiology Solutions. Here, as you see, top line 7% below last year.
The story is really that the film volumes have been subdued in key markets like China, India, or Latin America. That's mainly due to the fact that hospital procedures could not proceed normally due to COVID-19. There was probably a bit of an impact also on inventory management between Q2 and Q3. Therefore, it translates as this is a highly profitable product range in a EUR 6 million impact in the EBITDA. In the meantime, actually, our business in direct radiography is the reverse. We have seen a double digit, actually, more in the 20s% of growth in this business. It is not enough to make up for the film volume loss. In the DR market, we are gaining market share, and we are significantly improving the profitability of this business even in a year quite disrupted by the pandemic.
In the computed radiography market, which is also a sunset market, we are still holding up very well in terms of margins and in anticipation and to preserve competitiveness and address the further expected market decline. We have announced our plan to reorganize our equipment production footprints to reflect the expected market decline and to work on our competitiveness. It means we will plan to shut down one site in Germany and restructure significantly another one. We will outsource part of our production and transfer another part to our Chinese factory in Wuxi. This is going to be executed over the next, I would say, 18-24 months. That's the story for Radiology with volumes.
What I would like just to pass as a message is we have seen already a sequential improvement on the film volumes during the course of the quarter, and we expect further improvement during Q4, which is traditionally the strongest quarter for our film business. Digital Print & Chemicals. Here, top line is still very much impacted by COVID-19, as I said, and mainly the sale of equipment, large format printers in the inkjet market. Gross profit is reflecting this, although we are successful in keeping our margin level. We have been able to adjust SG&A and R&D, meaning that there is almost no EBITDA impact for the quarter, which I believe is exactly what we needed to do, and we are successful in doing it. When I look at this business, we are working also to prepare the future.
One thing we know is that this crisis will stop, and we have been busy preparing for this by a number of initiatives in the inkjet area. We keep adding new products to our product family. We give you the example of this new printer family, but we have several initiatives in the work. We are right now entering new applications such as laminate, flooring, and leather. We were a bit delayed also due to the circumstances, but I'm happy to say that now we will see concrete businesses development in the next quarters. We are also busy working on solutions for new applications. We are extending our play in this area, and I strongly believe that we have whatever it takes to win in this market. Specialty chemical business.
I would like to remind you that actually we are seeing also a sequential improvement in the business, and markets are coming back. A good example is our conductive polymers that are used in hybrid and electric car technology. We had a bit of a dip in Q2 and beginning in Q3, but now we see a strong rebound. This is, of course, due to the automotive market, but we are in the part exposed to a part of the automotive market that is dynamic, is hybrid and EVs. I'm still also very bullish on the membranes for the green hydrogen. Again, it's not going to impact the company in the next couple of years, but there is not a day without an announcement of the new green hydrogen project. The technology winning in the market in terms of capacity of megawatts is really the alkaline electrolysis.
About 95% of the install base and the projects being worked on are based on ZIRFON membrane technology. Very promising market for ZIRFON. We have recognized critical to performance membrane in this area. Last but not least, the film and foil business also impacted because we're exposed to industrial markets, but we have a visible recovery also in the course of the quarter. Even if we are not back whatsoever to pre-COVID-19 numbers. Offset. Offset is the difficult part of the portfolio. It was already in the past quarter, but right now we are seeing what is the weakest quarter for Offset. Business is very slowly creeping back. You see it's still 18.5% below last year, actually in currency. You see more importantly, the hit in the gross profit.
This is one area where we have not been successful to keep gross profit margin at the same level of last year, although we were busy taking care of our SG&A and our R&D, of course, and therefore we are in a strong negative territory for EBITDA in the quarter. I would like to remind you that we have made a decision that we have announced in June that we are shutting down two manufacturing sites, one in the U.K., one in France. Actually, we were in a social process until the end of October, and therefore, we didn't have any positive impact of this structural decision. I'm happy to report that social agreement has been signed, and actually, as I speak, the plants are being effectively shut down.
We expect already a positive impact in Q4, but of course, the full year, the real impact will be in 2021, where we'll have most of the year impact. The shutdown of these two plants represents approximately EUR 20 million-EUR 25 million of cost per year, to give you a precise idea of what it means. What you are seeing today is a two, three quarters that does not take into account yet the structural measure that we are making. This is not the only measure we are working on. We are streamlining our plate assortment. We are reviewing our go-to market, and we already take some initiatives. Again, these initiatives are not showing in Q3, probably will not show in Q4, but will start having an impact 2021, most certainly. We are doing that.
The message to you is already in Q4, we expect to be back in a positive EBITDA territory. In 2021, we will be also in positive EBITDA territory. That's where we are with Offset. Outlook. Q4 will be better than Q3, of course. Not back to normal very clearly, and especially with the recent developments in the second wave of some areas, we are not expecting a spectacular recovery year-on-year, but we expect to have a much better performance in terms of profitability than Q3. Of course, as you've seen, Offset being back in the black for being back in positive EBITDA territory will be a strong driver behind it, but certainly not the only one. This being said, outlook for full year, EBITDA is expected to be above EUR 1 million, bare any significant impact of the pandemic.
In these days, as you know, we work in a quite volatile environment. 2021. How do we see 2021? I think it's important to start sharing that with you as well. We also expect to show a continuous recovery in 2021, but we don't believe that we will be back at 2019 level. We do expect to have a structural improvement of the offset business as discussed. We believe that after the significant increase in profitability of Imaging IT in the single year, we will turn our focus in 2021 in continuing to build up a very solid order book and order intake. We'll be more in consolidation mode in 2021 to prepare and establish our future top-line growth.
For DPC and Radiology Solutions, we expect a recovery depending on the different markets, but we do expect a recovery in these areas, radiology, better film volumes and continuing growth in India. That's the outlook I wanted to share with you. I have one more thing I would like to share with you before turning to questions, and that's probably the first time you will hear about it in Agfa-Gevaert, and that's sustainability. We do a lot of things in sustainability in Agfa-Gevaert. We have been busy in the company to have initiatives along circular economy, recycling, diminishing the impact of our footprint and creating, I would say, planet-friendly products. We have been busy in the past month now to structure or do better these initiatives. We are still developing our objectives.
We have defined actually, and that's what you see on this slide, four areas where we believe that we need to really focus our efforts. The first one is about people, because it's gender equality. We will set ourselves a target to make sure that we are better at it. Typically, in an industrial company, the most of, I would say, the management positions and even more broadly, the female employment is really well below 50%. We will try to increase our exposure in this area, and that's it. There's a preview that offer more diverse and inclusion policy going forward. Promote sustainable industrialization and foster innovation. We are setting ourselves clear targets regarding the way we should be doing innovation. We make a long story short, sustainability needs to be an integral part of the way we manage our business.
We select our innovation projects, and we will prevent ourselves to put in the market new products that do not constitute a progress versus the current generation. As well as we have a lot of products in our portfolio that are part of sustainable solutions. I was mentioning the membranes for green hydrogen, and that's a clear driver of growth for us. I was mentioning the conductive polymers in hybrid and EVs, but I could also tell you that the new generation of inks that we are developing are water-based instead of being solvent-based. All this is really we want to get one step further and to institute it as the way to do business in Agfa-Gevaert. On our footprint, we are as a number of initiatives along recycling, whether it is recycling of metal. We use silver in our production process.
We are striving to continuously recycle our silver. We are looking at the recycling of our polyester. We are looking at projects like solvent recovery and reduction of waste whatsoever. Here again, we'll come back with a specific material objective for the company. Last but not least, climate change. Agfa-Gevaert is not a huge, I would say, CO2 emitter, but still we are using, of course, energy in our process. Here again, we are looking at how to make sure that we do contribute to the Paris Agreement, and we will make commitments to reduce our CO2 footprint in the next year with precise objectives. Bear with us, it's still in progress, but I want to tell you that sustainability is an integral part of the vision and strategy for Agfa-Gevaert, and that's really the message I want to leave with you today.
Again indeed a quarter that was still very much impacted by COVID-19, especially on the offset part. The key message is I want to leave you with plans are ready and already implemented to really improve and recover the profitability in the offset. On the rest, as I told you, we are seeing a gradual recovery, if not to pre-COVID levels, of course, but still a sequential improvement versus Q3 in our businesses. I remain extremely confident that midterm, the portfolio of Agfa-Gevaert solutions is actually well-placed to address the market demands. Thanks a lot for your attention. I propose now that we turn to question and answers. I will answer questions from analysts and from the press. If you have any questions, this is the time. Thank you.
If you would like to ask a question, please press star one on your telephone keypad. Please ensure your line is unmuted locally, as you will be advised when to ask your question. Once again, that's star one if you would like to ask a question. The first question comes from the line of Guy Sips from KBC Securities. Please go ahead.
Yes, thank you. My question is on offset. You mentioned that you estimate that the current pricing levels in the industry are not sustainable, and that you are looking into ways to adapt the earnings model for certain services that you're providing to customers. Can you elaborate a little bit on that and how do you see this going forward? Thank you.
Sure. Thanks very much for the question. Yes, clearly, the offset is in a declining volume. Clearly the margins as you see are not enough. What are we doing? We are looking at our go-to market. We are looking at our presence in geographies, for instance. We are looking at our channel to market. Should we go direct? Should we use indirect channel? We are looking also at repricing part of our segments in the offset market. We are analyzing actually customer by customer profitability, and we are doing this work in order to reprice whenever we believe we need to reprice. That's a few examples of the action. Luc Delagaye, do you want to comment further on this?
Very good sample of what we are doing at this moment in time. More to come later on.
Yeah, absolutely.
Any relationship to your partner in China, how do you see this going forward?
Our relationship to our partner in China, we have a JV partner in which we are in JV, and we have good relationship and it goes well, I would say. Our relationship is Lucky. As you know, is of two different relationships. One on the China sales platform, which is running by the way, running pretty well. It's beneficial to all because we have a place in common, actually our channel to market, although we market our place separately and we have the manufacturing agreement. I must say that the ramp-up in production is slower than expected. Here it's also due to the fact that of course we cannot go to China for the time being. Therefore, I would say the ramp-up of the production, the OEM production we have with Lucky in China is slower than we would have expected.
That's the comment I would make, but the partnership is running well.
Okay, thank you.
Thank you.
The next question comes from the line of Kris Kippers from Degroof Petercam. Please go ahead.
Yes, good morning. Thank you for taking my questions. Just a question on relatively on the healthcare segment, but also on radiology of course. We see some decline in revenues. I was just wondering to what extent is actually, if you look at certainly in Europe of course, but the semi lockdown which we currently face, to what extent is that hindering any new ordering in that business? Is it actually, let's say, hospitals, do you see any financial jeopardy stemming from that side which could, let's say, delay orders in those segments? Thank you.
Okay. Two very different situations. I'm going to answer on the film part, and I will leave it to Luc Thijs, my colleague, to answer you on the HealthCare IT part. On the film part, the key markets for film are really China, India, Latin America, the rest of, I would say the emerging market world. Here it's just access to hospital that was very difficult still during Q3 for countries that I mentioned. Although things are going a bit better now. It was purely access to hospital, and the fact that apart from going to hospital for COVID, people couldn't go for normal things. In China, where it's a bit different. In China, where the pandemic was earlier in the year, you had a bit of inventory adjustment, of course, and now things have recovered, but not yet to the pre-COVID-19.
There is still a lingering impact on this volume for film. That's for film. That, we expect it to be temporary. We expect the situation to ease back to normal when the lockdowns. In these countries, we are more depending on China, India, and Latin America than in Western Europe, of course, on this business. That's our view. On HealthCare IT, Luc, impact of the pandemic?
There is definitely impact on the pandemic, but it varies a lot per care provider. It varies a lot per geography. For us, in Q3, actually, we had strong order intake. Strongest of the year, actually. The resurgence, of course, of the pandemic, as we see today, creates a certain uncertainty. Providers can indeed shift priorities, either in decision making or in implementation. We'll manage that as we do quarter for quarter.
We have not seen anything material at this time.
Not so far.
We have not seen anything material. Which we are providing in Imaging IT actually has a purpose for COVID-19 reasons. We would expect that anyway, it's part of solving the COVID-19 pandemic.
Indeed. We have a specific program to help our care providers fight the pandemic, and that actually is creating a necessary attraction in our solutions, yeah. Fundamentally, we are part of the solution.
One of the reasons for the good profitability is also the efficiency that we have now in implementation, and we have learned to work a lot more in remote, and we prove to be as efficient doing this and with less cost. So far I would say, yes, there is an impact. We are not living in a vacuum, but HealthCare IT sees a relatively minor impact so far.
Okay, excellent. Thank you.
Next question comes from the line of Maxime Stranart from ING Bank. Please go ahead.
Hi. Good morning. Three questions from my side, if I may. First of all, you were mentioning that you expect the working capital needs to decrease again in the fourth quarter. Maybe could you provide an order of magnitude on that front? Secondly, on the adjusted EBITDA guidance, it implies an adjusted EBITDA of EUR 29 million in the fourth quarter. Could you provide more color on, well, the performance of each division? Maybe finally, on 2021, could you provide us with a guidance in terms of free cash flow and CapEx for the entire year? Thank you.
All right. Working capital, indeed, we are not guiding on working capital. If I tell you that we are shutting down and for four weeks, totally our largest operating unit here in Belgium, plus partial shutdowns during the course of the quarter, it gives you already an indication that indeed, the working capital will reduce significantly. This being said, I'm going to stop short of giving a guidance in this area because you have a lot of moving parts in this area. Yes, you're going to see an improvement, of course. On Q4, maybe let's be careful what we are comparing. When I say an adjusted EBITDA of above EUR 100 million, I am retreating the SSO numbers. Retreating the part of the HealthCare IT that we have sold. Don't look at it from the historic numbers that you have, actually.
I think it's important to say because indeed, you need to subtract actually the four months of the HealthCare IT EBITDA that we had before closing the deal of selling the business in order to compare this EUR 100 million. Maybe that is something that we can treat separately, and Viviane can certainly guide you after on the number, because if not, we're going to have a mismatch here. Again, I'm not counting the HealthCare IT EBITDA in this EUR 100 million. We had four months of it at the beginning of the year. I want to make it clear. Regarding 2021, too soon to. We are right now doing our forecast for 2021. We are right in the middle of it.
It's a bit early for me to say anything, I still wanted to give you broad guidance regarding the way we are looking at the evolution of our activity and of our market. Regarding CapEx, that I can already tell you that the CapEx needs in the company are extremely stable and limited. So we spend order of magnitude EUR 30 million, EUR 35 million-EUR 40 million CapEx a year. There we know we don't have any specific CapEx needs in this respect for next year. This being said, again, cash flow is a specific area of focus, of course, for me. You've seen a cash flow bridge that I hope gives enough transparency. I think the name of the game for me is to have a company that can sustain itself in terms of cash flow.
We won't be able to pay with our cash flow, of course, the pension recovery plan, as well as the significant restructuring if we do that. Be very clear.
Noted. Thank you for your answers.
Thank you, Maxime.
There are currently no questions in the queue, so as another reminder, please press star one if you would like to ask a question.
Thanks very much for everyone for attending the call. COVID-19 impact has been very important in this quarter and the offset business is challenged. I repeat, steps are being taken, measures are there. They don't show yet, of course, the impact in Q3, everything is in place to improve the situation going forward. The rest of the portfolio, we expect also sequential improvement, as discussed. Right now we are busy doing two things, mitigate on the short term on the cost and ensuring the cash consumption of the company. On the other hand, preparing the future to grow our business profitably. Thanks a lot for your attention. Thank you.
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