Earnings Call: Q3 2020

Nov 13, 2020

Hello, and welcome to the Agfa 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. I will now hand you over to your host, Pascal Ziori, CEO to begin today's call. Thank you. Thank you very much and good morning to everyone and welcome to the Q3 2020 results of AXA Gevart. Well, obviously, Q3 was a quarter where we had a strong impact of the COVID-nineteen 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. And the structural measure that we have taken are not yet showing in Q3, but will definitely show in Q4. So the main reason for the weak results of Q3 is really offset. Then 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. But the volumes in the medical film are also being an area of weakness for the group. And 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. So if I go to the highlights, I mean, 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 and Clinical division is also impacted by COVID, especially the InJet part of it. But in spite of a significant decrease in the top line, we were able to show similar results as last year. So 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 environment. The good thing is we're passing 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 derisking measures and Dirk Damain will walk you through this once again later in the presentation. If I move to the P and L, well, as you've seen the top line of the company is still strongly impacted by COVID-nineteen is minus 16%. In fact, if I remove the currency impact, which was for the first time negative during Q3, it's minus 13.7%. As a reminder, in Q2, the sales were below by 20%. So as you see, an improvement, but certainly not back to normal situation. Of course, the weakness in the top line is showing in the gross profit. We are 1 point below in terms of profit margin, mainly coming from the offset activity. The rest of the company is being very resilient on this front. We have worked on our cost on SG and A. As you've seen, we managed to keep it more or less constant compared to the sales. However, as already indicated, the cost mitigation measures we could have in Q3, we are less than in Q2 due to the summer vacation period mainly. We have overall maintained on R and D, the R and D effort of the company. The only place where we are significantly reducing this R and D effort is in the offset printing area. But for the rest of the operations, given the midterm outlook, we see no reason to actually decrease our R and D effort. So 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, but I can already tell you that we expect EUR 9,000,000 negative in restructuring €9,000,000 negative in restructuring and non recurring, also taxes, meaning a net loss for the quarter of minus €25,000,000 If you look at the 9 months 'twenty, of course, you see the outcome of the Healthcare IT divestiture, which of course is influencing very much the 9 month results. Again, all activities are still impacted with COVID-nineteen. I cannot say there is anything that is immune, but the most significant decreases are in the printing part of the business, while healthcare tend 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, that part of our revenue is project based and we had less projects coming to fruition in Q3. But in spite of that, we kept our margin performance. DPC in line, bottom line. The only part where we feel our challenge in terms of supply in DTC is really the equipment market large format printing, although the new slow term starts turning positive also in this area. Radiology impacted by film. Film is a very profitable product range for Agfa. And therefore, any impact in the fuel volume has, of course, a significant impact to bottom line for Radiology. And 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. So 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 stated given the circumstances to delay this payment. That's one of the reason why the adjusted free cash flow is negative for the quarter. It would have been positive outside of this yearly payments. Just one point, if we were looking at the 9 months cash flow performance of the company, it would be positive, even removing the Healthcare IT impact on the 4th month of the year, which would be a positive EUR 33,000,000 Then free cash flow, before I pass on me, is before the after pension and restructuring, negative for the quarter, minus €23,000,000 It would have been negative approximately minus €20,000,000 if I would show you the year to date. And we separated clearly what is extra funding. As you know, we have started the drive to fix some of the pension liabilities we do have in the facility. And we show here clearly what we have spent during the quarter in order to do so. 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. And I will show you now the cash position of the group. So in comparison to the cash bridge, so little bit cash, less cash was 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. And Dirk, can you walk us through the pension? I think we already did it, but I think it's good to repeat again. Yes, that's basically repeat from the slide last quarter, but I basically wanted to acknowledge that we're executing on plan. So we are still planning to invest about EUR 316,000,000 to deleverage the pension liabilities. As you can see from the cash flow, there was another EUR 112,000,000 invested in Q3 on top of the EUR 40,000,000 we already did in Q2. And we're still planning to do around EUR 1,000,000 in the Q4. In the meantime also, we have engaged already regarding the derisking of the pension plans in plans in terms of reducing the gross liability. And we already successfully placed $185,000,000 in the West plan in October. So it's a Q4 event, but that was successfully executed during the month of October. So 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 €30,000,000 We have also made progress in RBS stores in trade receivables and you can translate it to a better management and a decrease of the other dues. However, as you can see, the same operating capital remained stable due to the fact that our trade payables have decreased significantly in the past 2 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 mortal in Belgium. And we are just coming out of a 2 week complete shutdown of the facilities and we will proceed to more shutdown during November December either of part of the plant and in December all of the plant again. So we are managing effectively 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 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. So there were less, I would say, project implementation start recognized in Q3. Although, as you can see, we could maintain our gross profit, increase our margin, manage our cost efficiently, keeping R and 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 variations of sales depending on the projects you recognized 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. Regarding 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. And therefore, we remain very confident going forward with this business and how the book is still more than the full year of total revenues. I remind you that approximately more than 50%, about 55% are recurring revenues and 45% project revenues for this business. So 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. And that's mainly due to the fact that hospital procedures could not proceed normally due to COVID. There was probably a bit of an impact also of inventory management between Q2 and Q3. And therefore, it translates as this is a highly profitable product range in €6,000,000 impact in EBITDA. In the meantime, actually, our business in direct hydrolysis is a reverse. We have seen double digit, actually more in the 20% of growth in this business, but it is not enough to make up for the still volume loss. But in the VR market, we are gaining market share and we are significantly improving the profitability of this business in even in a year or quite disrupted by the familiar. In the computed regulatory market, which is also a sunset market, we are still rolling up very well in terms of margins and in anticipation and to preserve our competitiveness and address the further expected market decline. We had announced our plan to reorganize our equipment production footprint to reflect the expected market decline and to work on our competitiveness. It means we will shut 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. And this is going to be executed over the next, I would say, 18 months to 24 months. So that's the story for hydrology. With volumes, what I would like just to pass as a message is we are we have seen already a sequential improvement on the film volume 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 and Clinicals. Well, here, top line is still very impacted by COVID, as I said, and mainly the sale of equipment, large format printers in the inject market. So gross profit is showing is reflecting this, although we are successful in keeping our margin level. We have been able to adjust SG and A and R and 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. So I'm 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 inject area. We keep adding new products to our products 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, chlorine and leather. We will be delayed also due to the circumstances, but I'm happy to say that now we will see concrete businesses development in the next quarters. And we are also busy working on solution for new applications. So we are extending our play in this area. And I strongly believe that we have whatever it takes to win in this market. Specialty Businesses Specialty Chemicals Business, I would like to remind you that actually we are seeing also an improvement, sequential improvement in the business and markets are turning back. A good example is our connective 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 the part of the automotive market that is dynamic with hybrid and EVs. And 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. And about 95% of the installed base and the projects in Wertheim are based on the Agfa membrane technology. So very promising market for AXA. We have recognized critical to performance membrane in this area. Last but not least, the fuel and foil business also impacted because we're exposed to the material market, but we have a visible recovery also in the course of the quarter, even if we are not back whatsoever to pre COVID numbers. Offset, well, offset is the difficult part of the portfolio. It was already in the past quarter, but right now we are seeing which is the weakest quarter for Offset. Business is very, very slowly creeping back. You see it's still 18.5% below last year actually in currency. But 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 and A and our R and D, of course. And therefore, we are in a strong negative territory for EBITDA in the quarter. However, I would like to remind you that we have made the decision that we have announced in June that we are shutting down 2 manufacturing sites, in 1 in the UK, 1 in France. And actually, we were in the 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, actually the plants are being effectively shut down. So we expect already a positive impact in Q4. But of course, the full year or the real impact will be in 2021 where we'll have most of the year impact. The shutdown of these two plants is represents approximately €20,000,000 to €25,000,000 of cost a year to give you a precise idea of what it means. So what we are seeing today is a 2, 3 quarter 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. But again, these initiatives are not showing in Q3, probably will not show in Q4, but we'll start having an impact 2021 most certainly. So we are doing that. And the message to you is already in Q4, we expect to be back in a positive EBITDA territory. And in 2021, we will be also in positive EBITDA territory. So that's where we are with offsets. So outlook, really. 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 Colombia, we are not expecting a spectacular recovery year on year, but we expect to have much better performance in terms of profitability than Q3. And 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, so outlook for full year EBITDA is expected to be above EUR 1,000,000. There are any significant impacts on the condominium 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, which we are not expecting. We will be more in consolidation mode in 2021 to prepare and establish our future of top line growth. And 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 EMEA. So 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 hear about it in AXA, and that's sustainability. We do a lot of things in sustainability in AXA. 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. But we have been busy in the past months now to structure or to better these initiatives. So we are still developing this our objectives. We have defined actually, that's what you see on the slide, 4 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. CPQ in an industrial company, the most of the, 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 as a preview that's also more diverse and inclusion policy going forward. 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 present 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 the hybrid and EVs, but I could also tell you that the new generation of things that we are developing are water based instead of the solvent based. So all this is really we want to get one step further and to institute it as the way to do business in AXA. Then on our footprint, we are has a number of initiatives along recycling, whether it is recycling of metal, silver in our production process. So we are striving to continuously recycle our silver. We are looking at the recycling of our forester. We are looking at projects like solvent recovery and reduction of waste what whatsoever. So here again, we'll come up with a specific material objective for the company. And last but not least, climate change. Agfa is not a huge, I would say, CO2 emitter, but still we are using, of course, energy in our process. And 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. So bear with us, it's still in progress, but I want to tell you that the sustainability is an integral part of the vision and strategy for HEPA, and that's really the message I want to leave with you today. So again, in this quarter that was still very much impacted by COVID-nineteen, especially on the offset part. The key messages 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 the pre COVID level, of course, but still a sequential improvement versus Q3 in our businesses. And I remain extremely confident that mid term, the portfolio of AXA Solutions is actually well placed to address the market demand. So thanks a lot for your attention. I propose now that we turn to question and answer. So I will answer questions from analysts and from the press. So if you have any questions, this is the time. Thank And 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 your question. Yes, clearly, the offset is declining volume And clearly, the margins, as you see, are not enough. So what are we doing? So we are looking at our go to market. We will 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. So that's a few examples of the action. Luc De Reger, do you want to comment further on this or I think it's a good sample of very good sample of what we are doing at this moment in time. And so more to come later on. Yes, absolutely. And in relationship to your partner in China, how do you see this going forward? Our relationship to our 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 2 different relationships, 1 on the China sales platform, which is running, by the way, running pretty well. It's beneficial to all because we have placed in common actually our channel to market, although we market our place separately. And we have the manufacturing agreement. It works well, but I must say that the ramp up in production is slower than expected. And here, it's also due to the fact that, of course, we cannot go to China for the time being. And 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. Your next question comes from the line of Chris Kippus 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 We see some decline in revenues. And 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? And 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. So 2 very different situations on I'm going to answer on the film part and I will leave it to Lucaes, my colleague, to answer you on the Healthcare IT part. On the film part, we are dependent the key markets for film are really China, India, Latin America, the rest of, I would say, the emerging market world. And 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. So it was purely access to hospital. And the fact that apart from going to hospital for COVID, people couldn't go for normal things. Then in China, where the 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-nineteen. There is still a lingering impact on this volume for film. So that's for film. But that's we expect it to be temporary. And we expect the situation to ease back to normal when the lockdowns. But in these countries, we are not depending on China, India and Latin America than in Western Europe, of course, on this business. So that's our view. On Healthcare IT, Luke, impact of the pandemic? So 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. But the resurgence, of course, of the pandemic, as we see today, yes, creates a certain uncertainty because providers can indeed shift priorities either in decision making or in implementation, and we'll manage that as we do quarter over quarter. But we have not seen anything material at this time. We have not seen anything material. And again, which we are providing in Imaging IT actually as a purpose for COVID-nineteen reasons. So we would expect that anyway, it's start of solving the COVID-nineteen per minute. So we have specific program to help our care providers fight the pandemic. And that actually is creating a necessary attraction in our solutions. Yes, and fundamentally, we are part of the solution. And 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 push to be as efficient doing this and with less cost. So, so far I would say, yes, there is an impact. We are not living in a vacuum, but as car IT sees relatively minor impact so far. Okay, excellent. Thank you. Next question comes from the line of Martin Stranor from ING Bank. Please go ahead. Hi, good morning. So 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 Q4. Maybe could you provide an order of magnitude on that front? Secondly, on the adjusted EBITDA guidance, It implies an adjusted EBITDA of EUR 29,000,000 in the 4th quarter. Could you provide more color on, well, the performance of each division? And maybe finally, on guidance in terms of free cash flow and CapEx for the entire year? Thank you. All right. So working capital, indeed, we are not guiding on working capital. But if I tell you that we are shutting down and for 4 weeks, the 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. But yes, you're going to see an improvement, of course. On Q4, maybe let's be careful which we are comparing. When I say an adjusted EBITDA of above €100,000,000 I am retreating the SSO numbers. It's retreating the part of the health care IT that we have sold. So don't look at it from the historic numbers that you have actually. And I think it's important to say because indeed, you need to subtract actually the 4 months of the Healthcare IT EBITDA that we had before closing the deal of selling the business in order to compare this €100,000,000 So maybe that is something that we can treat separately and Vivian can certainly guide you after on the number because if not, we're going to have a mismatch here. So I'm not again, I'm not counting the LKAR IT EBITDA in this EUR 100,000,000 and we had 4 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. So it's a bit early for whom to say anything, but I still wanted to give you broad guidance regarding the way we are looking at the evolution of our activity and of our markets. But regarding CapEx, that I can already tell you that the CapEx needs CapEx needs in the company are extremely stable and limited. So we spend order of magnitude 35,000,000 to €30,000,000 CapEx a year. And there we know we don't have any specific CapEx in this respect for next year. This being said, again, cash flow is a specific area of focus, of course, for me. We will you've seen a cash flow bridge that I hope you've seen us transparency. I think the name of the game for me is you are the company that can sustain itself in terms of cash flow. But we won't be able to pay without cash flow, of course, the pension recovery plan as well as significant restructuring if we do that. There are currently no questions in the queue. Thanks very much. Sorry, everyone, for attending the call. Again, indeed, COVID-nineteen impact has been very important in this quarter and the Offset business is challenged. But again, I repeat, steps are being taken, measures are there. They don't show yet, of course, the impact in Q3, but everything is in place to improve the situation going forward. And then the rest of the portfolio, we expect also sequential improvement as discussed. And right now, we are busy doing 2 things: mitigate on the short term and the cost and ensuring the cash consumption of the company and on the other hand, preparing the future to grow our business profitably. So thanks a lot for your attention. Thank you. Thank you for joining today's call. You may now disconnect.