Thank you for standing by, and welcome to full-year 2019 earnings call. At this time, all participants are in listen only mode until the question-and-answer session. During that time, to ask a question, please press star followed by the number one. This call is being recorded. If you have any objections, you may disconnect at this point. I will turn the meeting over to your host, Pascal Juéry, CEO of Agfa-Gevaert. Please go ahead.
Hello, everyone. My name is Pascal Juéry. I've joined Agfa-Gevaert since a few weeks now. I'm thrilled to be part of this great company. This is my first earnings call. I will walk you through the Agfa-Gevaert 2019 full-year results. I'm going to kick off by reviewing maybe the key strategic highlights for the company. 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. As I speak, we are in the last weeks of creating the carve-out of the new company. We will close the sale in the course of the second quarter. Second 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 & Chemicals division. We focus in really what we produce ourselves, meaning equipment, software, service, and inks. 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 a 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.
One of the main priorities we have, of course, is to make it simple to fix the offset business, and we are working, as I speak, on a 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. The key reason why we've been able to generate strong 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 EUR 100 million. I'm happy to report that by the end of 2019, already about two-thirds of this amount has already been achieved.
As a result, of course, the cash generation was stronger, and in spite of specific de-risking actions we took in pension, we have been able to decrease our net financial debt. The next item is also, for me, a very positive item. Apart from Offset, which we are going to detail later, all our three other divisions have generated growth and profitable growth. It's probably a little bit less visible in the Digital Print & Chemicals area. If you remove the impact of the Siegwerk partnership, in fact, the underlying business has been growing very nicely, both in terms of top line and profit. Excluding, again, Offset, the three 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.
Last but not least, of course, facing the results of Offset Solutions, we took an impairment loss of about EUR 67 million. That reflects the very difficult conditions we are facing in this business. Our key priorities going forward. First, clearly, we need to address the Offset Solutions 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 Imaging IT business. I told you already I'm encouraged by the first signals we are getting from the repositioning we've made. I'm also confident for the Digital Print & Chemicals division and the Radiology Solutions division going forward. Third, we will continue our focus on cash.
I told you we are a bit two-thirds 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 company. 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. 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. It's a real positive development to see it. Second, EBITDA is extremely resilient in taking into account what we've seen in the offset. This is a story in which we've seen, as you know, a strong deterioration of the offset situation, but counterbalanced by profitable growth in all other three divisions.
Apart from that, what you see in the other operating results is the impact of the Siegwerk partnership I was referring to, especially in the Digital Print & Chemicals division. Net/net, the key message is top line growth has resumed, and the bottom line has proved extremely resilient with a contrasted story of strong growth in everywhere but in offset. If we turn to the net result, of course, this net result has been strongly impacted by the EUR 67 million impairment charge we took for offset. If we take that into account, in fact, our net result would have been positive by EUR 19 million. I think this is the main factor that I want to stress on these numbers. 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 am going to come back to that when we look at specific division results. I already discussed HealthCare IT and Digital Print & Chemicals. As I said, positive net results. Positive net result, but before the impairment, of course. If we look at the financial debt and look at the red part, which is the financial debt, the blue part being the IFRS 16 impact on the lease retreatment. 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 three points of sales in our working capital. The main impact is in inventories. The trade receivables and payables ratio has remained a bit constant, the inventory is really where we placed our efforts.
As I told you, this is not the end of the story. We still have optimization in plan for 2020, and we are very confident to achieve the overall EUR 100 million 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 corporate structure or whatever. This is reflecting the creation of an innovation office. We've been shifting basically a small part of the R&D expense from the division to the corporate center. That's what it does reflect. Overall, I would say costs are pretty much under control. If I dive in to 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. In the main geographies, we are selling both businesses, and we retain the medical imaging IT business outside of these geographies. If we turn to the numbers, key takeaways for me. First, top line growth at 3% is positive. 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 our sales, meaning we basically want to sell more added-value services and software in this market space.
It is reflected 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. 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 in really our ability to sell a more qualitative mix than we've been able to achieve before. Overall, very positive development for this business. I'm going to skip it because I just went through it. Radiology Solutions. 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, we are still in a mode where we are improving, I would say, the customer reach, and therefore, it reflects in a significant growth in this business. We are continuing to see 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. Overall, extremely positive year for Radiology Solutions. Digital Print & Chemicals. That's where I told you the visible results are a bit more difficult, I would say, to read.
Here again, as you can see, significant and positive top-line growth in the business, 5%, which is, I believe, an excellent performance altogether. You can see it translated very well in gross profit, with more than 8% progress. You don't see it in the adjusted EBITDA reported. The reason being what I already explained, being the impact of the Siegwerk partnership, who 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 will increase by 50%, actually, if I take into account this specific item. Overall, quite 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 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 half of our business, at least. Our margins have been clearly under pressure, and this is exactly what you see reflected in these numbers. The issue was not so much the top-line growth because we had executed a sales alliance with Lucky in China, therefore, this is the reason why we are pretty stable in terms of overall sales.
Our margins have been suffering from the various elements I've just described, and we are coming to a situation where we could already see during the third quarter, whereby this is a business that is facing profitability challenges. 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, I would say, restore the profitability of the business. Just a word on the alliance of Lucky has two components, in fact. One component that is what I would call an OEM arrangement, in which we do have some of our digital plates being made at Lucky, and a sales alliance. It's probably the time to make a small point on the impact on the Coronavirus in the first quarter.
We do have industrial operations in China. 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. It's a bit back to normal, but it did delay, of course, some of the activities we had in the manufacturing and at Lucky as well. It did delay a bit some of the plans we were executing. Overall, clearly an area that we need to fix up today. Again, I stand in front of you and make the commitment that we are addressing the issue upfront. A word on pension as well. Pension, 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.
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. You see here the pension cash outflow. The 2018 and 2019 did include some de-risking actions on the pension, while the 2020 estimate at this stage is purely the ongoing obligation that we have. In order to conclude, I think overall, 2019 was quite a contrasted but overall positive year for Agfa, with three of the divisions providing profitable growth and a strong cash generation. Going forward, our priority is clearly to continue executing our strategy, meaning closing the sale of the HealthCare IT business, executing the growth strategies in our various divisions.
Three, fixing the profitability of our sector through, I would say, a sales cost-out plan, improvement plan. I tried to keep it short and really focus on the main messages. Of course, I'm now open for questions. 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. Maxime Stranart, ING Bank. My first question would be on pension liabilities, of course. If we exclude the positive impact of de-risking initiatives, pension liabilities would have increased by EUR 140 million, if I'm not mistaken. You mentioned in the press release that you plan to reward shareholders through the use of the proceed of the sales of HealthCare IT. What's the room basically you can have to reward those shareholders?
I think what I'm saying, 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 shareholders. That's what I'm saying. I didn't talk only of the shareholders, I believe. Okay? I know that it's a strong expectation from everyone here, and on the phone probably, that we tell you precisely what that plan is going to be. You have to bear with us a bit. This is a discussion that we have started at the board. You know pretty well which are the three 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 number, I will turn to Dirk.
On the pension, there was obviously a big impact overall due to the measurements that we had to do. 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. Overall, we had an impact of net remeasurements of about EUR 126 million.
Maybe going forward, well, we see discount interest rates going down again. What might be the impact for this year?
Yeah. 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. What I would rather refer to is, as we always say, that we need to look at the cash outlay. Basically, we see that as going forward, the prediction next year, excluding any de-risking measures, is around EUR 81 million. In 2019, it was about the same level. If you subtract the de-risking measures, there was EUR 36 million in 2019, EUR 24 million in 2018. If you just subtract, you see that the cash flow is relatively stable. Obviously, we think we have the whole pension situation well under control. The accounting rules obviously are the accounting rules, and that creates quite a bit of volatility on the balance sheet. It probably will remain so also in 2019.
The most important part is the cash outflow, and this is a part that, as you say, is stable.
Yeah.
Thank you. Second question on Offset Solutions. 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 Lucky?
What do you call like-for-like performance, in fact? You want to detail the impact on the top line of the JV with Lucky?
That's correct.
Okay. That's correct? What are the sales, the JV with Lucky? Maybe Stéphane, you can tell us.
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 -2.5%. The impact of the Lucky alliance is quite significant in the top line. Without that alliance, when you take then the rest of the business, most probably the area of decline would be excluding currencies between 8% and 10% decline, which is in line with the market growth. The market trend.
Thank you.
Guy Sips from KBC Securities. I have a question on the HealthCare IT business. Can you give us a little bit flavor of the performance of the business that will stay at Agfa-Gevaert? How did it perform in fourth quarter? Can you give us some indication of the measures that you are taking to improve the profitability in there, and how is that evolving?
Luc will.
Thank you for the question. The performance in Q4, even if it was lower, it was as expected. A couple of things that you need to understand is that in a part of the business that we retain, so the Imaging IT business outside of DACH, 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. For us it was as expected. That's number one. Secondly, in terms of the improvements that, as explained by Pascal, driven by a strategy of refocus. Refocus on specific customer segments in chosen geographies. I'm not going to go too much into detail, but one could say that we are focusing on customers with a higher IT maturity. That's number one.
Customers that have expansion plans, whether in study volume or geographically. That contributes. 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. We also now zoom in on the specific needs of our chosen target customers, which also leads to a positive. Last, with a more, let's say, a more mature platform, with a focus on specific customer, we also drive efficiencies in terms of implementations and in terms of support. 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.
To be fair, the starting point, as you know, is a lower profitability than the average of the business today. This is why we are refocusing. We are not looking really at top line growth as a main indicator in this business. Actually, we expect probably a stable to low growth. We are looking more at the profit improvement through what Luc has explained. This refocus and also the fact that the mix 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?
Yes. Thank you, Stéphane. You mentioned in the presentation that you expect from the Imaging IT 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 IT business being divested? I think you should have a good view by now.
It's, I would say, between 15% and 20% EBITA margin.
That's the average for the full-year?
This is typically the level of profitability of the HealthCare IT part that we are selling, and we have already indicated that for the one we are retaining, it's in the mid-single digits. We have way to go to get it to the desired level, which we have a good plan. We are confident we are going to do that.
Okay, thank you. You mentioned that there was a negative impact of the Siegwerk Health alliance termination in the said business. Could you quantify this? 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, that's a different question. I can tell you, it's pretty visible on the number, by the way, defined by the slide. As I indicated, it's pretty visible from the other operating items that you see full-year 2019 was EUR 7, full-year 2018 was EUR 22. You can pretty much assume that the main driver between the difference is the alliance. It's pretty transparent in a way.
It's because of the base effect in 2018 that you've got this.
We had a positive impact in 2018. We also had a positive impact in 2019, but much less. In fact. Going forward, 2020 will be also being compared with the year with a positive impact, although at a lower level.
Yes. These other operating items, we can take close to zero for 2021.
That close to zero. Yeah. Much less significant, for sure. I cannot say right now it's going to be zero, of course. Which gives us, again, a totally different picture of the business. If you remove this impact, as I said, in fact, of showing an adjusted EBITDA - 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 we're going to guide for specific business days, 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 inkjet, in flooring and leather, we are in a launching phase, I would say, for these initiatives.
Therefore, we look at what's in store for us with confidence.
Perhaps one other question. Pension outflow for next year is expected to be around EUR 83 million. Is that also a run rate we can expect beyond 2020?
This is the actuarial assumption that we are passing on to you. That's a one-year view going forward. I don't think there is a long-term guidance, overall, as Pascal mentioned, there will also probably be pension de-risking activities planned, which will obviously affect the future cash outflows also.
Two questions. First, on this pension. This EUR 80 million, is that still EUR 40 million related to Germany and EUR 40 million? The other material countries? That range. A question to the CEO, perhaps. You're not giving any indications yet on the use of proceeds of the EUR 975 million. Where is your feeling? There are, I think, three big possibilities. First is investing in the company. Second is de-risking the pension life with the pensions.
Which is also investing in the company in a way.
Third is return of capital in 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 comparison with the previous CEO. I'm not sure I can answer that. Again, bear with us a bit. We will, as soon as we can, communicate precisely on this.
Can we expect some news on that at the moment of the first quarter, so also the AGM?
I'm not going to commit at this stage. I'm not going to commit on timing. Clearly, I can tell you that we know what we need to do pretty much to de-risk the company on pensions. 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. 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. Shareholder reward needs to take place. Of course, you understand, I've been a CEO at Agfa for six weeks. I don't have yet the full plan going forward. It's a bit too soon. I'm not going to give more color on that. Sorry. Not for the time being.
Sebastian, also to take. Could you quantify the impact of Corona? Second question, could you give already some indications on the plan for Offset, where you're heading to?
Quantification of the Corona, I think you need to distinguish two things. First, I would say the specific situation in China, and we quantify it, and frankly speaking, it's not a significant, I would say, impact for us. It does impact the first quarter. This part is pretty 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. There will be some impact. The real impact of the Coronavirus is a question I cannot really answer today because this is the impact on the macro economy. Going forward, I'm not going to describe the situation that you know well, the situation in Italy and the impact on the overall economy.
Although we operate in resilient markets, 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. Here I cannot give you frank speaking. I think it's very uncertain. From what I've read this morning, I had the feeling that we should not also overstate the impact of the Coronavirus during first quarter. It's not a major impact on the company. It's a rather limited impact.
A follow-up on IT perhaps.
Sorry. 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. You will see from us in the next week and month, 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-19, would there have been an impairment and would it have been as large as what we saw today?
Absolutely. It's not absolutely not related to COVID-19. Absolutely not. It has nothing to do. The impairment is based on 2019, by the way, and the BP going forward. It's a mechanism, the standard mechanism. Dirk can probably explain a lot better than I do. The short answer is it has nothing to do with COVID-19.
Yeah, there's nothing to add. It's basically the typical goodwill impairment testing that we do. Based on that, we took accounting conclusions from that. We reflected the impairments.
I think, look at the 2019 results. There was no Coronavirus impact at all, and the results speak for themselves, I guess.
Just a follow-up on the Imaging IT and the remaining business, because part of the items you mentioned are segments and geographies refocusing, 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 that imply that the gross margin of the remaining HealthCare Imaging IT is similar to the one that is being sold?
Gross margin. Okay.
Well, let me answer 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 one. It's much more hardware intensive. Okay. Let's say that in the largest part of the business that we divest by the HealthCare Information Solutions business, the percentage of hardware is less. Hardware is honestly, it's a resale business, and that already gives you an indication. What we very consciously do on the Imaging IT business overall, and also on the part that we retain, is to indeed privilege the added value that we bring. Which is our own licenses and the support with those own licenses. Not so much third party, let's say, infrastructure that is needed, and in certain cases that we continue to supply as a guarantee.
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. I think on the basis 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.
Yeah. If you indicate 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. There are probably less R&D, less SG&A expenses that in this model, which should then compensate that margin level, that operating margin level.
I'll keep it at that. If I should keep it at that.
Okay.
Maybe just another quick question on restructuring expenses for 2020. It has, of course, sharply increased this year due to the impairment. What's your view on next year and what might be the peak of period of those expenses? Thank you.
You want to take that, Dirk?
Yeah, I think at this point in time, I think we cannot comment that specifically. I think as we discussed on offset, we need to take measures, and that will obviously be reflected during the course of 2020.
Maybe we should turn to questions on the phone now. We had a lot of questions from the room. If there are questions on the phone. Operator, can you
Yes, thank you, speakers. Let's now begin the question-and-answer session over the phone. If you'd like to ask your question, please press star followed by the number one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To cancel, please press star followed by the number two. Once again, star one for your questions and star two to cancel your request. At this time, I'm not seeing any questions on queue. Once again, star one for any of your questions.
Good. If the room has more questions, happy to address. If not, Yes, one more question from the room.
Fab Siloania. Thank you. Last year has been the significant improvement we've seen in hardcopy, again, HealthCare and in the Radiology department. Hardcopy has always been the biggest generator for the company, probably still is. I believe DR is not profitable yet in terms of cash flow. After the recovery we've seen from hardcopy in 2019, does this imply that hardcopy is now, for this unit, the biggest earning radiology, the biggest earnings contributor, cash 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 recovery.
Has there been a big step up in profitability due to this distribution change in China?
Yes, of course. Profit and volume, margin and volume, I would say.
Okay. Thank you.
Well, I think we can maybe close the session. Again, free to depart Agfa-Gevaert, significant priorities to take along for the next year. You have in front of you the team in charge to deliver these priorities. 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. You may now disconnect.