Earnings Call: Q3 2019

Nov 6, 2019

Welcome and thank you all for joining the Quarter 3 2019 Earnings Call. At this time, all participants are in a listen only mode until the question and answer session of today's conference. As a reminder, this conference is being recorded. If you have any objections, you may disconnect at this point. I will now hand the call over to Christian Reynaldo, CEO of Agfa. You may now begin. Thank you, operator. Good morning, everyone. Thank you for attending this call. Now the Q3 results of the group. Let me first have a quick reminder. You know that this year, we have changed the organization model. We have changed the format of the presentation. IFRS 16 came into the picture. So in due time, on the slides, we use different set of numbers to compare things so that I will be clear again if needed to make sure that you have a good understanding of the comparisons. Having said so, I would like to move to the Slide 2 of this slide deck on the milestone in the transformation process. So basically, as I said, there are 2 key topics this year in terms of strategic evolution of the group. The first one is this alliance with the key that we continue to develop. And I would say that we are running as expected. As expected, in the United States, but working back in the day, but on the other side, all the milestones that we needed to achieve have been achieved, in particular, the setup of this common platform for the sales in China. That was done actually in Q2. In Q3, you start to see that on the top line of offset, we have, of course, the effect the technical effect of this consolidation in terms of decline. This is not the end of the journey, of course, but it is a significant first step that we need to implement and to deliver. I will comment on this when I speak about the asset division. The second big milestone in this transformation is obviously the action process for selling part of our IT business, which is, I remind you, the totality of our hospital IT and integrated care And the part of the Imaging IT, which is connected to the business and integrated in the hospital IT business, in particular, in Germany is the so called platform impact. And this is also, as I said last time, a process which has been launched in autumn, which is progressing well. And we strongly believe that the auction process will be finished before the end of the year. Moving now to the Slide 3 and the sales acquisition of the Q1, the 3 9 months. You see that the biggest division is still, I would say, offset in spite of the decline in the business in the market, with 37% of our activity in sales and with 23% of the Radiology Solutions. And here, we have the we enjoy a significant growth, in particular, in the hardcopy field of the huge effort we have done in China in the last 3 years and because of the Doctor business, which has performed well in the Q3. Healthcare IT was 22% is the 3rd of our division. And Digital Print and Clinical, which I remind you is basically the sum of our former ingot business and the former specialty product, is 22% of the activity. So there are 4 divisions which have very comparable size with the exception of offset, which is a bit bigger. Moving to the Slide 4. I'm very happy to report again this quarter the growth of our top line, which is a growth of 1.1% if you exclude currency exchange rates, which is 2.6% as shown in the numbers, and we should have delivered bigger 5.7 percent if we were to eliminate the business that in the comparison, the business that has decided to stop in the U. S, which was a business we inherited from the acquisition of Flipkart, dealing with the reselling of media for the agent activity, which represents roughly €50,000,000 on the quarter. And as we said, I think before, something in the range of €60,000,000 on a yearly basis, so half of that in 2019 in the Q1 where we had these numbers out of our consolidated numbers in the Q3, for which it was 15,000,000 If you, of course, respect this with the €15,000,000 on top of what we have done in Q3 or you remove the €15,000,000 from last year, you would have a growth of 5.7%. So good news. Of course, we be very clear. So far, part of that is due to the consolidation of the sale of legacy in the domestic market in China through the common sense platform. And these sales are not generating neither gross margin nor EBITDA at this stage. And it's a first step. Of course, we're going to work on the profitability of this activity in the quarters to come, and I will be more specific in a few minutes. Gross profit is down 0.8% in the quarter. And here, you have a mix of things. Of course, the mechanical effect of the consolidation of Lucky sales in the U. S, but you also have the cost of aluminum, which is not that big, significant enough. And we believe And you have, of course, the mix, both regional and product mix, in particular regional mix that we see in a lot of our traditional businesses moving to countries where the price is lower, the competition is more intense, in particular with Chinese competitors. And the value selling programs that we have launched less performing because the value is not the main characteristics in this market. So the gross margin is declining by 0.8%. On the year to date, we are slightly higher than last year. Of course, the mechanical effect of the consolidation of Lucky is weighing on that in the quarter 3. SG and A, both in value and in percentage of sales are going down. Honestly, it's not enough to my opinion, and I think this is a program we're going to re intensify in the months to come, in particular, in the preparation of our budget for next year. But at least, we see the cost declining in spite of the value of the dollar and these kind of things. And the percentage of sales come again back closer to the 20%, which is our target for long. The R and D costs are slightly up. There are some one off effects in the quarter because last year, we had some tax credits on the R and D that we don't have this year so far. So anyway, you should read these numbers stating that the effort in R and D, the group is constant. And the rest is in material, I would say, changes due to more one off effect. Other operating items, it's a 0 this quarter. And you see that on the year to date, we are at 9.7% compared to last year. And I would comment on that. We are ending now the first phase of the alliance with the equipment, which was about the IT selling and these kind of things, which was, of course, partly recorded in this line. And of course, this has an impact on the quarter and on the year to date numbers on this line. The result of all these numbers is that our adjusted EBITDA is at 9.1% above last year, 6.9% of the sales compared to 6.5%. The year to date is also above the value of last year of interest and reserve sales at 127,000,000 euros which is a mix effect of good things in the 3 divisions which are not offset and I think it offset as we will see later. Below a bit on Slide 5, the restructuring and nonrecurring in the quarter is not that big compared to last year. We are at EUR 7,000,000 from EUR 15,000,000. On a year to date basis, we are at 22 compared to 28. Honestly, the quarter 4 will bring some restructuring, and I keep the guidance that we took in restructuring this year will be above the average guidance that we give. The non operating result, basically financing costs pensions is constant compared to last year growth in the quarter and in the year to date. The taxes are higher, but I will not comment on that because you know there are variations based on the activity. The key thing is to keep in mind that the €70,000,000 of cash effect on taxes for the full year will be basically the number this year once again. The net result, in particular because of this taxes I recorded in the quarter, is at minus €1,000,000 compared to minus €5,000,000 last year. And year to date, December is at 9,000,000 compared to 8 last year. On Slide 6, just to make sure that we fix the things we just said. So we continue to have a positive evolution in the top line growth. The size that we have seen in the first half are continuing. This is due to 2 things at the high level. First, the mechanical consolidation of the sales of Lucky in China and 2, behavior of our growth engines in general, with double a little weakness this quarter for TRO engine business, I will come back to that, very good performance on behalf of the COVID-nineteen, which is the consequence of what we have reorganized in China. And of course, an impact, the EBITDA of €15,000,000,000 top line, which is due to the decision to stop the nonprofitable business of media reselling in the U. S. The comment on the gross margin has been paid, and I can move now to the Slide 7 showing the situation of our net financial debt. So you see in blue this chart the comparison with the past, that means excluding the effect of IFRS 16. You see that the debt is a bit higher than what it was at the end of last year, but declining compared to the end of Q2. This move will continue. Part of that, a bit more than half of this decline in the quarter is due to the massive effort we are doing on the working capital. As I announced in the second quarter results, we have decided to generate €100,000,000,000 of cash before the end of 2020 on a yearly basis out of this working capital. We are well on track. You will see in the next chart that we are already €20,000,000 below where we were at the end of 2018. The plan is to deliver about half of the plan this year in 2019. So moving on Slide 8 to make sure that we speak about the actual numbers. You see in reference, of course, reference is Q4 2018, it's not the Q2 2019. So the trends that we described are trends which are related to the situation that we had in Q2. The comparison on this chart, which is the comparison which is going to be presented quarter after quarter to track the progress we do on the €100,000,000 savings compared to 2018 is the relevant one to comment on this program. So you see that so far, inventories have been up, the trend is down massively. Trade receivables are somewhat flattish in DSOs, but going down in terms of value at €349,000,000 compared to €374,000,000 The payables are going up, both in base and in value. And the consolidation of these three elements is that our working capital is declining by 1% of sales, targeting still to achieve the 25% that we have achieved 2 years ago by reducing by €100,000,000 compared to the €653,000,000 of 2018. So on Slide 9, a very quick update on the corporate cost. And we know that we have decided to put together the real corporate functions, which are not related to the activities as such outside of the P and L of the divisions to better reflect the profitability of the divisions themselves. And these costs are constant compared to last year in the quarter 3 at €3,700,000 negative. I move now to the Upstream division on Slide 11. You see the vast majority of the business is, of course, about the digital computer to play, And only 13% is due to the analog business, in particular, the film, which is the most significant part of it. On Slide 12, the numbers. So you see what I said already, the sales are up in the quarter 3 by 2.6%, 1.9% excluding currency exchange rate. Year to date, we are still slightly negative compared to last year. And of course, the consolidation of the sales of Lucky will continue to grow in the quarter 4, and we expect the full year sales of this division to be at least equal to the one of last year. The gross profit suffers, as I said, we tend to see from this consolidation of sales, which are not at this stage bringing any gross profit, which is about half of the gap compared to the Q3 of last year. And the rest of the gap is due to basically the benefits when the intense size on pricing, in particular, in the emerging market and the shift of the volume of sales to these markets because the mature markets are declining. And the second one is the effect of aluminum cost, of course, on the gross profit. SG and A, down in value, down in percentage of sales. My comment a few minutes ago is that this is not enough in my view. So we are going to work hard on this structure of cost and SG and A in particular in offset to adapt the cost structure of the business to the situation of the market on one side. The alliance with Lucky normally should progressively show some improvement in terms of the passenger of the alliance and in terms of hopefully the pricing capability, thanks to the technology evolution that we are bringing to our partners in China. This will take a bit of time. So we see the first effect, as I said, on the supply. That will come in the next quarters. And of course, we will comment quarter after quarter on the impact of these islands, which is a significant part of our future strategy for the remaining AXA after we have sold the IT business. The R and D is constant. You see that we still spend a significant amount of efforts from the R and D, but declined in place. You've maybe seen that we've launched the famous direct and press plate of Agfa, which was, I would say, long weighted. And this plate is bringing a lot of parameters, which are making of this plate that probably the best in the world, and we hope that we can grab a significant business in the quarters to come because of that technology. The EBITDA of the division is only at 1.6%, €3,400,000 on the comparable basis with last year, which was €5,900,000,000 Year to date, we are €13,000,000 compared to €31,000,000 last year. And the EBIT is negative this quarter, very limited value negative, but negative. And it is the first time we have a negative follow-up. So on Slide 13 to again try and sensitize the comments I just made. And then Alliance Reflective, which is coming up to the speed, showing the first effect on the top line. This alliance should continue to bring positive effect on the top line, but hopefully also on the other lines of the P and L in the quarters to come. The Austrian division is fighting in the declining market where there is a strong decline, of course, in analog, but also a significant trend in the newspaper details where we happen to be the leader in the world, but also in commercial print volumes. And there is a shift to these countries where the Chinese competitors are stronger compared to the position they may have in Western Europe, Japan or the U. S. The gross margin, as I said, for half of it, surface from the radical consolidation of sales, which are not bringing a significant gross margin, and the rest is due to the shift I was talking about plus the aluminum cost. The plan in this domain is obviously to continue to grow the sales, to work on the cost structure, in particular SG and A, to get the benefit of the new EOP plate that we have introduced that we are introducing as we speak, and of course, to work on the pricing strategy and through our programs on value selling in particular. Moving to the digital print and clinicals on Slide 15. This is a repetition of the business. So basically, the former Hingejet business is half of the division and the rest is the former SPA for 14% of the total in the electronic print and 39% in the feed and foil, where, of course, we report the November 2nd year. On Slide 16, the supply and the general of the P and L, supply is declining by EUR 13,000,000,000. But as I said, EUR 15,000,000,000 are due to the stop of the reselling activity of media in the U. S. So excluding this effect, the top line would have been slightly growing as it is since the beginning of the year. The gross profit is, let's say, flattish in the quarter, roughly still growing on the year to date numbers from 27% to almost 29%. The SG and A is declining. Of course, the value part of that is due to the fact that we have eliminated part of the PPS. But in the ratio of the sales, you see that we have positive effect of the actions we are taking. The R and D effect in the quarter is linked to the one that I was talking about on the year to date basis. You see that we are somewhat flattish also in this domain. The other pricing items, you see the effect in particular, amongst other things from the ZEQUAC alliance, which is coming to an end in this first phase because there is still some activity in terms of selling the ink and this kind of stuff. But for the first phase, it's over. And the adjusted EBITDA is €2,800,000 compared to €7,600,000 last year in the same quarter. And then of course, if you look at the impact of the line of our operating item, you understand that the major part of the difference is coming from this effect. So basically, a division which has suffered in Q3, honestly, in the equipment and the jet because as opposed to the Q2, which was pretty strong, Q2 was a bit weaker. We hope that Q4 will be back to the normal trend in this engine business. And the rest of the activity, which is a former specialty product, has continued to deliver strongly On Slide 17, you see that on Synapse, on security, broadband and the rest I have commented. I moved now to the former health care activities, the Radiology Solutions and then the IT. So on Radiology Solutions on Slide 19, you see the split in field, the half of the field at 58% of the sales of this division. The CRDR, which are the equipment on its way, which are 76% of the activity and the classic radiology, so called stream fields, which are 6% only on the activity, which is a business which is, as we said several times, declining pretty fast and not really profitable, but it's the business that where Agfa joins a position which is a significant one and the factory of Mortel has which are amortized also through this manufacturer. Moving on Slide 20 to the Radiology Solutions P and L. You see a strong increase of top line, which is due basically to 2 business units. They have to be filled in particular in China because we now reap the fruit of the efforts we have done in the real competition of our market, marketing market, both in terms of volumes, of course, and in terms of pricing. And the 2nd pillar of this growth is the RPS, which has performed well in the Q3, in particular with the increase of our service revenues, which is the recurring part of the business. The gross profit is down in the quarter but up on the full year. So there is a mix of both products and regional sales, which is explaining the quarter. But on the year to date basis, we see an improvement in gross margin. SG and A is declining in terms of ratio to the supply and increasing in cost. And part of it is due also here to some of the sales rates in the U. S. And in China and the overall structure of the business. Some efforts also we do in sales and EBITDA activity. R and D is constant, and EBITDA is improving to 14.9 quarter and in the year to date results compared to 12% to 13% last year. So a division which is in good shape. 2 boosters, the Aptopi field is not a pillar from China and the Doctor business and a reasonable mix effect on the gross margin in the quarter, which is not changing the trend of improving on the full year basis. Healthcare IT on Page 23, a split between the 2 major divisions, HEIS, 40% of the business and Imaging IT, 60%. As you know, part of the group IPS division is going to be attached to the part of HCIS that we sell. This is the business which is, in particular, in Germany, attached strongly to the Orbit platform, and it is a special product platform that is going back to EE basically. So in total, the part of the turnover that we sell is a little bit above 50% of the sales of this division. On Slide 24, the P and L of this division, which performs well, 5% growth in the quarter. That includes currency exchange rates, which are representing 1.3 percent. So excluding currency exchange rates, we are growing at 3.7%. And to say that this top line growth is reflecting also the fact that rightly, I think, Lutres and his team have decided to exit from some countries where the business is somewhat difficult compared to the core business, and profitability was not significant enough. So of course, if we had continued the activity and the efforts in the of the coupon would have been a bit higher. And on the quarter, 5% growth is in line with what you could expect from this business and 3.9% on the year to date basis is also affecting the situation. What I can say on this top line is that, and I think it is it's the reason why we have decided to sell on the impact of IT business. In fact, you have 2 models in this business. You have the part that we sell, which is basically around the office platform, which is a business which has become in Agfa at a certain level of maturity, which is now well established leader in Germany, Austria, Switzerland and growing leadership in France. This business is steadily growing, is steadily growing in profit also. This is the business we sell. On the other side, you have the enterprise imaging platform, which is the core of our IT imaging IT that we keep in Accra, which is excluded from the sales process, which is a business which has, as I said several times, suffered from our success in order intake in 2016 and we have finally executed in 'seventeen and 'eighteen. The good news of 2019 is that we are completely recovering now. The order intake in the U. S. Is getting up again. The platform is very stable and solid. The sales team and the sales teams have been reshuffled. And now we see a factor execution, implementation of contracts and the net profitability that you see, of course, in the improvement of the gross margin. So this business, which is going to be kept by Agfa, is going to deliver the same kind of success story, I believe, that's what we have done in the office in the past years, but this will be in the next 3 to 4 years. So that's basically the essence of what we try to do. So I can give a bit of color on this because I know that some of you are still struggling with the and I don't want to disclose the numbers at this stage, the repetition of profitability between the parts that we sell and the parts that we don't sell. It's clear that the profitability of the division is highly influenced by the profit of the part that we sell, okay? And the ratio is far above the 50%, 50% of the sales. SG and A of the division is now good control and constant, currently the same way. And the adjusted EBITDA is at 3.8% in the quarter compared to 8% last year, and we see a similar pattern in the year to date of plus 3 points so far and 4 points in the quarter increase of EBITDA, which is the combination of everything I said so far. Good service efficiency, improvement of speed of implementation, good sales of software in the business and both divisions also in a different stage in their majority performing well. Slide 25 summarize basically what I already said, commenting the numbers. And I believe we can move now to your questions. First question comes from the line of Stefan. Your line is now open. Yes. Good morning, Stefan. Just to follow-up on some of the last remarks, could you confirm to us that if we look at the margin in Healthcare IT, the deep enterprise imaging IT, which will be kept within the current infrastructure, is profitable at EBIT level? That's the first question. The second question on the HubSpot business or no, sorry, on the hardcopy business in Health Care. Hardcopy is quite well. Direct for geography also, despite this, gross margin is lower and it's declining. Can you give some more color on the margin impact on the Health Care business and the Radiology business? Stefan. Yes, on the speed of profit in the IT division, I confirm, of course, the EBIT is positive. Is positive from the immateriality we keep in the company. As I said several times, the EBITDA is not into the level of what we expect to do. If we have a positive EBITDA, let's say, we take a decision to make it clear from while the rest is at the level of peers, as I said. The HACOBE and the Doctor. So it's obviously, you rightly said DVR gross margin is lower than the average of this business. Several factors in this. Number 1, we are still a sub figure in size. 2nd, the business model of Doctor is a business model which is highly based upon the service efficiency and the service structure in this business on the time being because it's a that we have been doing in the 1st years after we decided to launch this business. And that is totally in our hands, I would say. There are some and some issues in some products based on the material, etcetera, but the business is now growing. And of course, the margin on service has to be improving over time, but this is clearly on track. So the rate of this being said in the total, as you see on the pie chart, is lower than the hardcopy field, which has the biggest margin. The situation on the hardcopy field is that there is a little trend in the market to price erosion. But what we have done in China has helped us to recover, of course, in terms of margin in China because we have eliminated a laser or sometimes more of distribution. And presently on CR, we have a margin which is starting to erode because the business is declining pretty fast and it plays a resistance on the market. So the mix is in line with what I just said. So I would be worried about the change of the margin in the profit stream, which is really due to some shift, and strong growth in Doctor, lower growth, of course, that is a decline in CR. So that's an impact of gross margin in CRDR. And they have to be filled up plus and minuses, we grow in China, we have a more complicated business as we speak in Latin America. So this is really the kind of things which are impacting the gross margin. But look at the year to date numbers, and this is more, I think, more reflective of the reality of this business. Okay. And perhaps the third question on the Offset Printing and the alliance in China, where you have lower gross margin. Do you believe that leveraging sales in the next quarters, you can increase gross margin for the Lucky Alliance in China? Or is there a risk for having additional sales growth with structural price pressure and so a growth in business that has structural pressure on margin? Let me Let me be clear once again. The Cylance was lucky, as we said since the beginning, basically 3 drillers. 1 drillers, which is the cost effective case of manufacturing because we benefit from the cost manufacturing in China more and more. Both our factory, by the way, our internal factory in our JV and the factories of Lekki are cheaper, of course, than the factories we have in the rest of the world. That's the first key now. This is starting to begin, but not yet fully. 2nd, there is a technology pillar, which is in terms of process, the support we give to likely to make sure they deliver without a significant decrease of their cost, the data quality which normally should help us in the mix of products to sell at a bit of price. And thirdly, there is the go to market. The go to market is starting in China. That's what we have established. But the go to market is, I would say, a commoditization of our sales platform, which gives Agfa visibility, of course, on the pricing strategy, general terms in China. Therefore, when you have information, you have a better way to act and react on things. Of course, the product evolution, which is in DOP, these kind of things, has to be also carefully watched because we don't want to produce a product like our new BLT plate, which is probably the best in the market from the global which is now with prices which are the level of constituent levels in China, that's very clear. But the journey that we are trying to push with Flaky is based on the Flaky line. So the first stage of the rocket, you see it now starting to begin, but the growth of our top line. The next stage is something we have to do internally anyway in the aircraft, which is to cut our cost. The SG and A costs are not adapted to the evolution of the business, which is declining in most cases of the world. The third part of the program is to improve the gross margin. So there is a reflection of procurement of aluminum in China, a little more, there is a reflection of the cost in the manufacturing activities, and there is a reflection on gross margin results of the pricing strategy. Again, improving quality should be reflected in the capability of AfraLucky in price. So that's basically the program, which is a significant volume of activity. Stephane is running that largely from China, Because as you know, he's the CEO of JV and he's also the Chairman of his hands was lucky. So it helps, but it will take a bit of time. I think we need to be patient. You will see that particularly in 2020. Our next question comes from the line of Maxime. Your line is now open. Hi, Maxime, Sranan. Hi, Njibeng. Good morning. Thank you for taking my questions. So first of all, what should we expect in terms of sales from this JV reflolet for this year and for the years to come? Secondly, what would be the impact in terms of free cash flow given the fact that, well, margin is rather limited at the moment? And thirdly, we can see a decrease of 1% in SG and A over the Q3. Can you shed some light on the drivers of those decreases? Thank you for your answer. Yes. Good morning, Hakim. As you know, I'm not a big fan of giving out books on this kind of details, breakdowns of course, etcetera. So I gave in my answer to Stephane, I think, a good set of colors on the efforts we are going to do. The sales of the JV, which is lucky, are going to grow because we don't have a full quarter yet in Q3. As I said, we have a program which is a food consolidation of the sales of activity in Agfa, but the sales platform that we use together is progressively increased to the different provinces in China. So the process will take some time. And honestly, I don't know how to say and how to quantify that. The speed of this kind of evolution will depend on different things like the market evolution, the pricing strategy, the speed of our partner, which is a subsidiary of the state owned company to follow the place. There are elements also, of course, in terms of transfer of technology for processes, if we want to go outside of China one day. So there would be a continuous momentum of growing business because the market sustained growth in China because Lucky is a strong partner and the number one seller in China. And certainly because we are going to expand the scope of our common sales platform progressively. But as we explained, I cannot tell you just we are the 1st quarter, let's track that together in the next quarters and you will have an idea of the evolution. Free cash flow, again, it's too early to say. There are plenty of products as a way, and we don't expect the free cash flow from this alliance coming from this alliance itself in the very short term because as I said, it's a mechanical consolidation of sales and cash flow will come if and when we are successful in the other pillars, which are cost reduction and improvement of pricing strategy. On the SG and A, this is more an AXA question than a Chinese question. It's probably a bit early to tell you. I think we'll be clear in the thoughts of the full year because by then, we have done the work of the budget digitization and the normal efforts we do at the end of the year. What is clear is that the minimum target of this division should need to continue to have gross level declining at the same pace, at least as the business, which is becoming more and more complicated as you see, because we have reached a sort of threshold now in the activity of the world. So there are other suitable changes that we have been working. One of them is the one we have introduced this year by having a common regional management in different divisions. It proves that we have to continue to reflect on that. And I believe it will be easier to tell you that after we have done the benefit exercise. So when we get to gain, it will be early March. Thank you. At this point, we do not have any further questions on queue. Speakers, you may proceed. Okay. So maybe we can give next part 30 seconds, if it's 30 6, and if it's probably if he has questions. But if there is no question, we can end the call. Okay. Thank you very much. Thank you all of you. So just summarize 2 big things, which are realizing the top level. It's the alliance with Lecce and the same process, we are in process for the selling of the IT business. Top line growth, which is not due only to the consolidation of Lucky but also to a good behavior of most of our growth engines. And overall profitability, which is slightly above last year so far, Of course, the Q4 last year was pretty strong. So we will see what could happen in the Q4 of this year, but we must be careful at this stage. And another point that, of course, I didn't mention yet because it didn't come through the slides, the decline of the interest rate in the world is not going to help our pension liabilities. So it is something, of course, that is not really operational. There is not so much we can do, but it is something that has an information to the market, I have to say. Most of you will be aware that the interest rates and the discount rates are declining. We expect an impact on our liabilities and therefore, on our equity and our balance sheet in general terms when we actualize the numbers early next year. Thank you, and we'll talk together again early March. Bye bye. Thank you. And that concludes today's conference call. Thank you all for joining. You may now