Earnings Call: H2 2019

Mar 11, 2020

Thank you for standing by and welcome to Full Year 2019 Earnings Call. At this time, all participants are in a listen only mode until the question and answer This call is being recorded. If you have any objections, you may disconnect at this point. Now, I will turn the video over to your host, Pascal Jewerrey, CEO of Agfa. Please go ahead. Hello, everyone. My name is Pascal Jewry. I've joined Agfa since a few weeks now, and I'm thrilled to be part of this great company. And this is my first earnings call. And I will walk you through the AXA 2019 full year results. If I kick off by reviewing maybe the key strategic highlights for the company. So the first item I'd like to stress is really that we are on track to close the sale of the Healthcare IT business. We have cleared now all regulatory and social hurdles on this deal. And as I speak, we are in the last weeks of creating the carve out of the new company. And we will close the sale in the course of the Q2. 2nd item I'd like to share with you is we are refocusing to our core business. One illustration is the fact that we have terminated a reselling business in the U. S. In the Digital Print and Chemical division. So we focus in really what we produce ourselves, meaning equipment, software, service and inks. And at the same time, in order to prepare the separation of the medical imaging IT business from the healthcare IT business, We have set up a new strategy, refocusing on key geographies, key customer segments. And I'm happy to say that we are already seeing the benefits of such strategy refocus. Last but not least, as you will see and as you know already, the Offset Solutions division operates in a very difficult environment, facing a number of headwinds. So one of the main priorities we have, of course, is to make it simple to fix the outside business. And we are working as a split and comprehensive plan to address the issues we are facing. If I turn to the financial highlights. I think first, positive is the strong cash generation that we've been able to achieve at the group level, which resulted into a lower debt level. So the reason the key reason why we've been able to generate full cash flows is clearly the improvements we've made in the working capital. We set up an 18 month plan to reduce working capital by €100,000,000 I'm happy to report that by the end of 2019, already about twothree of this amount has already been achieved. So as a result, of course, cash generation was stronger. And in spite of specific derisking actions we took in attention, we have been able to decrease our net financial debt. Then the next item is also for me a very positive item. Apart from offset, which we are going to detail later, all our 3 other divisions have generated growth and profitable growth. It's probably a little bit less visible in the digital print and clinical area. But if you remove the impact of the Zilver partnership, in fact, the underlying business has been growing very nicely, both in terms of top line and profit. So excluding, again, offset, the 3 divisions of the company have been generating profitable growth. And I think it's a very positive point that gives us, of course, confidence going forward. And last but not least, of course, facing the results of OFTEC, we took an impairment loss of about $67,000,000 that reflects the very difficult conditions we are facing in this business. Our key priorities going forward. 1st, clearly, we need to address the offset situation. And as I already mentioned, we are working on a comprehensive plan to improve the profitability of the division. Of course, second priority is to continue executing on the strategies of our growth business, starting with the managing IT business. I told you already, I'm encouraged by the first signals we are getting from the repositioning we've made. And I'm also confident for the digital print and clinical division and the radiology division going forward. 3rd, we will continue our focus on cash. I told you we are a bit twothree of the way in terms of working capital, but we are not there yet. And we can confirm our commitment to continue to optimize the cash generation of the companies. I'm not going to dwell on this slide. It just reflects the share of the business by each of our divisions. And I suggest we move already to the numbers. So key headline for me for the numbers. First, top line growth, 2.2% for the overall company. I believe this has not happened in a few years. So it's a real positive development to see it. 2nd, EBITDA is extremely resilient in taking into account what we've seen in the offset. So this is a story in which we've seen, as you know, a strong deterioration of the offset situation that comes unbalanced by profitable growth in all other 3 divisions. Apart from that, what you see in the other operating results is the impact of the Seadwork partnership I was referring to, especially in the Digital Plumbing and Clinical division. So net net, McKinsey's top line growth has resumed. And the bottom line has proved Now if we turn to the net result, of course, this net result has been strongly impacted by the €67,000,000 charge we impairment charge we took for ourselves. If we take that into account, in fact, our net revenues would have been to be reduced by 19,000,000. I think this is the main factor that I want to stress on these numbers. Now again, if we look at how our business behaved, top line growth, All divisions have been contributing to the profit growth. Radiology Solutions did very well. I'm gonna come back to that when we look at specific division results. I already discussed health care IT and digital footprint people. And as I said, positive net results. I'm not going to positive net result, but before the impairment. So if we look at the financial debt and look at the red part, which is the financial debt, the group part being the IFRS impact, the IFRS 16 impact on the lease retreatment. So that exemplifies pretty well, in fact, the deleverage that we could achieve during the year for the company, thanks to our strong generation of cash. Zooming into the working capital. Again, to make a long story short, we gained 3 points of sales in our working capital. The main impact is in inventories. The trade receivables and payables ratio has remained a bit confirmed. The inventory is really where we placed our efforts. And as I told you, this is not the end of the story. We still have optimization in time for 2020, and we are very confident to achieve the overall €100,000,000 target that we set a few months ago. Corporate services, as you know, we have separated corporate services as a specific item. The only comment I would make here is that what you see as an increase is not an increase in the corporate or whatever. This is reflecting the creation of an innovation office. So we've been shifting basically a small part of the R and D expense from the division to the corporate center. That's what it has replaced. But overall, I would say, costs are pretty much under control. Now if I dive in through the divisions and provide a little bit more color on each of our business. We'll start with Healthcare IT. Here, you can see a split of the Healthcare IT business and the Imaging IT Solutions business. Be careful. This is not exactly corresponding to the perimeter of what's going to be sold because we are selling, as you know, through geographies and the main geographies. And in the main geographies, we are selling both businesses, and we're retaining the medical imaging IT business outside of this geography. If we turn to the numbers, key takeaways for me. First, top line growth at 3% is positive. But I should stress here that the name of the game for us is not necessarily to have a very strong top line growth. The name of the game is also to improve the quality of ourselves, meaning the quality of ourselves, meaning we basically want to sell more added value services and software in this marketplace. And it is reflected by with the 3% growth on the top line, by the almost 9% growth in the gross profit of this division. This is really the key takeaway that you should have on this slide. So the Healthcare IT business is a very sound business. The part that we retain in Medical Imaging IT, as we already communicated, is not as profitable as the part we are selling. However, we do believe we have the same profit potential going forward. And this is why we have reset the strategy and started to execute this strategy with, as I said, positive signal within really our ability to sell more qualitative mix than we've been able to achieve before. But overall, very positive development for this business. I'm going to skip it because I just went through it. It. Radiology, Radiology Solutions. So let's go to the numbers. Here, again, a very solid top line growth. The main explanation of this top line growth is basically we've been able, as you know, over the past year to change our go to market in China. And therefore, therefore, it reflects a significant growth in this business. So we are continuing to see this the benefits of this reorganization. We have a strong position in the film area. We have a solid profitability on this division. And the operational leverage, of course, plays fully in this division. So overall, extremely positive year for Radiology Solutions. Digital Print and Chemicals, that's where I told you the visible results are a bit more difficult, I would say, to read. But here again, as you can see, significant and positive top line growth in the business, 5.5%, which is, I believe, an excellent performance altogether. You can see it translated very well in gross profit with more than 8% products. However, you don't see it in the adjusted EBITDA reported. The reason being what I already explained, meaning the impact of the Siguerk partnership comes to an end, which, of course, is the main reason why we are in apparent decrease in terms of adjusted EBITDA. If I were to retreat this impact, in fact, the underlying progress would be quite spectacular because the EBITDA would increase by 50%, actually, if I take into account this specific item. So overall, pretty pleased with the development in this area. Offset solutions, well, clearly, we are facing challenges in this market. We are facing a number of challenges. Of course, as you know, this is a declining market. Actually, it declines quite significantly in the West, while we still see some growth in different geographies, notably the East. However, overall for us, given our positioning, we are, of course, hit by this volume decrease. We are also being hit by higher cost of raw materials in this business and the inability to pass it on in our price for part of our business at least. So our margins have been clearly under pressure, and this is exactly what you see reflected in these numbers. Issue was not so much the top line growth because we have executed a sales alliance with Lucky in China. And therefore, this is the reason why we are pretty stable in terms of overall sales. But our margins have been suffering from the various elements I've just described. And we are coming to a situation, well, which we could already see during the Q3, whereby this is a business that is facing profitability challenges. So again, the clear priority for us is to address it. And we have started to do things. And we are, right now, I would say, designing the next phase of our plan in order to, would say, restore the profitability of the business. Just a word on the Alliance of Lucky has 2 components in fact. One component that is what I would call an OEM arrangement in which we do have some of our digital page being made at Lecce and a sales alliance. We also, it's probably the time to make a small point on the impact on the corona in the Q1. We do have industrial operations in China, and we were impacted like, I would say, every producer. We had to shut down our plants for a few days. However, this is behind us. The plant is back in operation. I have. So it's a bit back to normal. But a big delay, of course, some of the activities we had in the manufacturing and at Lucky as well, did delay some of the points we were executing. So overall, clearly, an area that we need to fit. Up today, again, standing for the view and make the commitment that we are addressing the issue outside. The world and pension as well. Pension, well, the as you see, we have an increase in our pension deficit, which is purely mechanical. In fact, it comes purely from the evolution of interest rates, discount rates. So it has a mechanical impact on our pension obligations. And therefore, we've seen that, of course, at the end of the year. However, in terms of cash out for the company, the situation has not changed actually. And you see here the pension cash outflow. The 2018 2019 did include some derisking actions on the pension, while the 2020 estimate at this stage is purely the ongoing obligation that we have. So in order to conclude, I think overall, 2019 was quite a contrasted overall positive year for AXA with 3 of the divisions providing profitable growth and a strong cash generation. Going forward, our priority is clearly to continue executing our strategy in closing the sale of the Healthcare IT business, executing the growth strategies in our various divisions and 3, fixing the profitability of Offset through, I would say, a sales growth plan improvement plan. So I try to keep it short and really focus on the main messages. And of course, I'm now open for questions. So I guess the idea is maybe first to take questions from the room, and then we'll take questions from the phone. Thank you. Okay. So, Maxime Strandard, ING Bank. So my first question would be on pension liabilities, of course. So if we exclude the positive impact of derisking initiatives, pension liabilities would have increased by €140,000,000 if I'm not mistaken. And you mentioned in the press release that you plan to reward shareholders through the use of the proceeds of the sales of ITF Care. So what's the room basically you can have to reward those shareholders? I think what I'm saying in the to be fair, what I'm saying is we are going to address long term liabilities. We are going to execute the strategies of our business, and we will reward shareholder. That's what I'm saying. I didn't talk only other shareholders, I believe, okay? And I know that it's a strong expectation from everyone here and on the phone probably that we tell you precisely what our plan is going to be. You have to bear with us a bit. This is a discussion that we have started at the board. We know pretty well which are the 3 areas we are looking at. But I'm not in a position today to detail our position. Regarding your question, specifically on pension and the numbers, I will turn to Dirk. Yes. So on the pension, there was obviously a big impact overall due to the measurements that we had to do. So that is basically driven by the reduction of the discount rate. On the other hand, the performance of the investments was quite good in 2019. So overall, we had an impact of net free measurements of about €126,000,000 And maybe going forward, well, we see discounts interest rates going down again. So what might be the impact for this year? Yes. We don't know at this point in time. Obviously, it's very volatile. Things will change. Last year, it was actually also quite volatile. So what I would rather refer to is our as we always say, that we need to look at the cash outlay. So basically, we see that as going forward, the prediction next year, excluding any derisking measures, is around €81,000,000 In 2019, it was about the same level. So if you subtract the derisking measures, there was €36,000,000 in 2019, €24,000,000 in 2018. So if you just subtract, you see that the cash flow is relatively stable. And so yes, so obviously, we think we have the whole pension situation well under control, but the accounting rules obviously are the accounting rules, and that creates quite a bit of volatility on the balance sheet. And it probably will remain so also in 2019. You will have But the most important part is the cash outflow, and this is the part that, as you say, is stable. Yes. Thank you. And second question on Offset Solutions. Sir, could you shed some light on what has been the like for like performance and what has been the impact of the consolidation of the sales of the JV with Plattie? What do you call like for like performance impact? You want to detail the impact on the top line of the JV with Lucky? Yes, that's correct. Okay, that's correct. So what are the sales JV, we'd like to maybe step time, you can tell us. So what you see is that indeed we posted in offset a growth in the last quarter with 3.3% and that for the year excluding currencies, it's a minus 2.5%. The impact of the Lucky Allianz is quite significant in the top line. So without that Allianz, when you take then the rest of the business, most probably the area of decline would be, excluding currencies between 8% 10% decline, which is in line with the market growth the market trend. I have a question on the Healthcare IT business. Can you give us a little bit a flavor of the performance of the business that will stay at Agfa? How did it perform in Q4? Can you give us some indication of the measures that you are taking to improve your profitability in there and how is that evolving? Luc will Thank you for the question. So performance in Q4, even if it was lower, it was as expected. So a couple of things that you need to understand is that in part of the business that we retain, so the Imaging IT business outside of France and Brazil. We have large implementations. And depending on when the large implementations go live in one quarter or another, you may have indeed, and that's going to continue also, you may have unequal quarters. But for us, it was as expected. That's number 1. Secondly, in terms of the improvements that as explained by Pascal, they are driven by a strategy of refocus, refocus on specific customer segments in chosen geographies, yes? I'm not going to go too much into detail, but one can say that we're focusing on customers with a higher IT maturity, okay, that's number 1, and customers that have expansion plans, whether it's value volume or geography. So that contributes. At the same or by the same token, we're also deprioritizing other types of customers' customer segments. In parallel, we have an increasing maturity of our Enterprise Imaging platform as we've been working on that platform very intensely. And we also now zoom in on the specific needs of our chosen target customers, which also leads to a positive. And last, with a more let's say a more, let's say, a mature platform with a focus on specific customer, we also drive efficiencies in terms of implementations and in terms of support. And those three elements together show indeed an improvement, which I will not quantify precisely for the Imaging IT business as yet. But as time goes by, we'll be able to do so more objectively. But to be fair, the starting point, as you know, is lower profitability than the average of the business today. And this is why we are refocusing. So we are not looking really at top line growth as a main indicator in this business. Actually, we expect probably a stable low growth. We are looking more at the profit improvement through what Luca explained, this refocus and also the fact that the need of our sales is of much higher quality, meaning much higher margins, in fact. This is really the name of the game. Is it clear? Stephane de Miedergaard, BTEC. You mentioned in the presentation that you expect from the EBITDA the same profit potential going forward as for the one that is being divested. Can you indicate you're well advanced in the process? What's the operating margin of the business being divested? I think you should have a good view by now. It's, I would say, between 15% 20% EBITDA margin. That's the average for the full year or This is typically the level of profitability of the health care IT part that we're selling. And we have already stated that for the one we are retaining, it's in the mid single digits. So we have way to go to get it to the desired level, which we have a good plan, and we are confident we're going to do that. And then you mentioned there was an active impact of the Zidua clients' determination in the Jet business. Could you quantify this? Or you would think that you would have a much stronger improvement if you would not have had this impact. What improvement should we expect, for example, on a like for like basis in 2020 for this business? Okay. So that's a different question. I can tell you and it's pretty visible on the number, by the way, defined by the slide. You will as I indicated, it's pretty visible from the operating other operating items that you see. Full year 'nineteen was 7%, full year 'eighteen was 22. You can pretty much assume that the main driver between the difference is the Alliance. So it's pretty transparent in a way. Okay. It's because of the base effect in 2018 that you've got this So we had a positive impact in 'eighteen. We also had a positive impact in 'nineteen, but much less. In fact. So going forward, 2020 will be also being compared with the year with a positive impact, although at a lower level. Yes. Other operating items, we can take close to 0 for 20 That close to 0, yes, yes, yes, yes. Much less significant for sure. I cannot say right now it's going to be 0, of course. So which gives us a totally different picture of the business if you remove this impact. But as I said, in fact, of showing an adjusted EBITDA minus 14%, we would be showing a significant growth of 50%. However, it's from a low base of profitability. So it's not abnormal to have such a large increase, starting from a low base. We are not guiding for 2020 for the company as yet. So I don't think further guide for specific businesses, of course. I think I expressed, in fact, confidence. I think this is a business in which we also are starting new segments in industrial inject, in flooring and leather, we are in launching phase, I would say, for these initiatives. And therefore, we look at what's in store for us with confidence. And perhaps one other question. Pension outflow for next year is expected to be around €83,000,000 Is that also a run rate you can expect beyond 2020? Yes. This is the actuarial assumption that we are passing on to you. So that's a 1 year view going forward. I don't think there is a long term guidance. But overall, as Pascal mentioned, there will also probably be, as I mentioned, derisking activities planned, which will obviously affect the future cash outflows also. Two questions. First, on this tension. So this €80,000,000, is that still €40,000,000 related to Germany and €40,000,000 related to the other material countries in that range? And then question to the CEO, perhaps you're not giving any indications yet on the use of proceeds of the €975,000,000 But where is your feeling that there are, I think, 3 major possibilities? First is investing in the company. 2nd is derisking the pension liability, the pensions. Which is also in investing in the company. The third is, yes, return of capital in what any way to the shareholders? Where is your risk return and where is your position also compared to, let's say, the previous CEO? That is a quick comparison with the previous CEO. I'm not sure I can answer that. But again, bear with us a bit. Bear with us a bit. We will, as soon as we can, communicate precisely on this. Can you expect some news on that in at the moment of the Q1, so also the HCM? I'm not going to comment at this stage. I'm not going to comment on timing. But clearly, I can tell you that we know what we need to do pretty much to derisk the company intentions. It's a pretty, I would say, objective number in a way, depending on the objective you want to achieve, which is to secure, in fact, your obligations. So that we know the discussion between reinvesting in the company. And as you said, the pension is also reinvesting in the company in a way. And shareholder reward needs to take place. Of course, you understand, I've been the CEO of AXA for 6 weeks. I don't have yet the full plan going forward. So it's a bit too soon. I'm not can I give more color on that? Sorry, sorry, not for the time being. Sebastian, I will certainly take. Could you quantify the impact of corona? And second question, could you give or raise some indications on the plan for offsets where you're heading to? So quantification of the corona, I think you need to distinguish 2 things. First, I would say the specific situation in China, and we quantify it. And that's, frankly speaking, it's not significant, I would say, impact for us, but gas impact the Q1. So this part is strategic objective. We've seen some disruption and a dip in our commercial activities in China. That has recovered, by the way, as I told you during the quarter. So there will be some impact. But then the real impact of coronavirus is a question I cannot really answer today because, I mean, this is impact on the macro economy going forward with I'm not going to describe the situation that you know well, the situation in Italy and the impact on the overall economy. So although we operate in a resilient market, we are not in the hotel business here or the event business. We will be impacted if there is a macroeconomic impact for sure, as I would say, all players exposed to the overall economy. But here, I cannot give you frankly speaking, I think it's a very uncertain from what I've read this morning, I had the feeling that we should not also overstate the impact of the corona during Q1. It's not a major impact to the company, it's rather a negative impact. A follow-up on IT perhaps? Sorry. And for Offset, you would understand that I'm not in a position to give you more specific information at that time. We are still working on the plan, and we'll communicate as soon as we can. But you will see from us in the next weeks or months specific initiatives that are going to be visible and communicated to try and fix the offset business. More questions from the room. On the impairment, without COVID-nineteen, would there have been an impairment and would it have been as large as we saw today? Absolutely. It's not absolutely not related to COVID-nineteen. Absolutely not. It has nothing to do. The impairment is based on 2019, by the way, and the BT going forward. It's a mechanism, it's a standard mechanism. Dirk can probably explain a lot better than I do. But the short answer is it has nothing to do with COVID-nineteen. Yes. There's nothing to add. So it's basically that The typical goodwill impairment testing that we do. And so based on that, we took accounting conclusions from that. So we reflected the impairment. I think you look at the 2019 results, there was no coronavirus impact at all, and the results picked for themselves, I guess. Yes. A follow-up on the leasing IT and then the remaining business because part of the items you mentioned are segments and geographies and customer refocusing, which seems to indicate if you can refocus a bit the client base, you will come to a much higher margin level. Does it imply that the gross margin of the remaining Healthcare Imaging, I think, is similar to the one that is being sold? Gross margin. Okay. Well, let me answer it this way. In the Imaging IT business, you deal with a large amount of data, much larger than in the EMR business. That's number 1. So it's much more hardware incentives, okay? Let's say that in the largest part of the business that we divest, right, the Healthcare Information Solutions business, The percentage of hardware is less. And hardware is, honestly, it's a retail business, and that already gives you an indication. And what we very consciously do on the Imaging IT business overall and also on the part that we retain is to indeed privilege the value that we bring, which is our own licenses and the support of our own licenses and not so much 3rd party, let's say, infrastructure that is needed and in certain cases that we continue to supply as a guarantee. But in many cases also is being taken care of by the type of customers that we address, the more mature, IT mature customers that actually, in many cases, take that for themselves. And I think on the days of that, you know that one is indeed intrinsically a bit higher than the other, But they will, at a certain moment, find each other. Yes. And if you indeed find each other, that means that you will probably, given the hardware content, not be able to compensate fully at gross margin if you want to move to similar margin levels. But there are probably less R and D, less SG and A expenses that in this model, which should compensate at margin level, at operating margin level? I'll keep it at that point. That's right. I prefer to keep it like that. Okay. Okay. Maybe just another quick question on restructuring expenses for 2020. So it has, of course, sharply increased this year due to the impairment, but what's your view on next year? And what might be the period of those expenses? You want to take that, Teod? Yes. I think at this point in time, I think we cannot comment that specifically. I think as we discussed on offsets, we need to take measures, and that will Maybe we should turn to questions on the phone now. I mean, we have a lot of questions from the room. So there are questions on the phone. Operator, can you Yes. Thank you, speakers. Let's now begin the question and answer session after the At this time, I'm not seeing any questions on queue. Once again, we have one for any of your questions. Good. So if the room has more questions, happy to address. If not yes, one more question from the room. Last year has been the significant improvement seen in hardcopy, again health care and in the radiology department. ARC copy has always been the biggest generator for the company and probably still is, yes? And I believe Doctor is not profitable yet in terms of cash flow. It is still as this after the recovery we've seen from hard copy in 2019, it did imply that hardcopy is now for this unit to beat earnings, radiology, the biggest earnings contributor. I think we can safely say yes. It does not change. It's an area of strength. And of course, as we are progressing in the record Has there been a big pent up in profitability due to this distribution change in China? Yes, of course. Well, I think we can maybe close the session. And again, thrilled to be part of AXA, significant priorities to take on for the next year, but you have in front of you the team in charge to deliver this priority. And I can tell you, we are fully committed to make it happen, addressing headwinds upfront and continue to execute on, I would say, the refocused strategies of our growth businesses. Thank you very much. Thank you. Thank you. That concludes today's conference. Thank you everybody for joining us. You may now disconnect.