Earnings Call: Q2 2018

Aug 22, 2018

This call is being recorded. If you have any objections, you may disconnect at this time. May I introduce your speaker, CEO, Christian Reynaldo. Please go ahead. Thank you, Perenter. Good morning, everyone. So we are here today to discuss the Q2 2018 results. Maybe as an introduction, I would like to because I read the comments this morning, and I would like to reiterate the fact that we need to read the numbers of Q2 with some perspective. First of all, we have decided in Graphics to refocus our activities and to stop some activities. Therefore, this has to be restated. Secondly, the currency impact is still very high in the first half. To some extent, the dollar currency accelerate is stabilizing around $1.15 $1.16 So we'll see if it continues. But for the first half, we have suffered from that in a significant manner. And on top of that, we are transforming the company. And therefore, there are some impacts here and there on the efficiency of the business and on the costs. Having said so, and I know that it looks a little bit strange, but I read this morning that we have lost 10%, which is in top line absolutely too inaccurate numbers. But if you restate everything and if you look at the first half of this year, restating from the portfolio change, restating from the currency exchange rates, you have, in fact, a 2% decline compared to last year. And it has to be compared to the first half last year, which was declining by 4%. So I keep continuing stating that this company is on the growth path on the medium term, and the target is to continue to limit the erosion of our top line this year during the transformation of this company. Having said so, there is one major impact on our top line this year and this quarter, which is obviously the challenges we are facing in the graphics purpose industry. And we are not the only one. We are facing it as well as our peers. And we have we faced several challenges, which are obviously the analog decline, we know that for long, the competitive pressure and even if the price pressure has been clearly easing because we all announced price increases, there is, on top of that, a reasonable missed effect where we see more and more the market moving to low priced countries. And therefore, this is also weighing on our gross margins. We have, of course, a market driven volume decline, and we have an increasing aluminum price. So this is a set of challenges that the group has to face. We are not the only one, but that's a fact. So moving now to the first slide or the second slide of this presentation. On the numbers, I commented already the decline of our sales. And the gross profit erosion, as you can see, in particular in Q2, is a lot due to this regional mix effect in graphics. So we can come back on that if you want. And we are currently trying to address this. The SG and A level is reasonably stable. Of course, as our top line is eroding and we face more and more difficulties to keep it on track. But we are taking new actions, by the way, and I will come back to that in the business group analysis. R and D is stable, and this is clearly a willingness decision on our side to not limit the efforts we are doing in R and D, even if because of the erosion of our top line, this corresponds to an increase in terms of percentage of sales. But the money we spend here and the money we invest for the future, and to some extent, is better invested here than in lousy acquisitions. The result of all that is that our EBITDA in the Q2 is down 1 point compared to last year at 8.7%. As you look at the first half, we are 0.4% below last year. And if in line with what I said, that means our EBITDA this year, we don't expect it to be better than the one of last year. Moving to the next slide. The numbers below EBIT, I don't think here we have a lot of surprises. Restructuring and non recurring is at EUR 14,000,000 in the first half, EUR 9,000,000 in the quarter. Of course, we start to have some nonrecurring costs, which are related to the transformation of the company. We have some fees for external consultants. We have some reorganization of our IT systems to split them. Therefore, there are some elements of cost in there. The non operating results of minus EUR 20,000,000 is in line with last year for the first half, minus EUR 10,000,000 in the quarter. This is obviously the limited financial expenses and the pensions. The taxes are also in line with the guidance. And the net result, of course, suffers from these kind of things at €6,000,000 in the quarter and €13,000,000 in the first half, but at least it still deliver a positive net result in the company. The financial debt is slightly up. It's a seasonal effect. We know that there is if you look at last year, last year we moved from minus €37,000,000 to plus €27,000,000 which was an increase of €64,000,000 this year. We move up quarter to quarter by, let's say, euros 30,000,000 €35,000,000 roughly. This is a similar effect. And we will comment in the next slide the working capital and which is, of course, contributing to that. You see that we have this traditional seasonal effect of inventories, which is a bit higher than a number of days. And this is a point of attention on which we are concentrating our efforts. And this is due to the fact that some of our expectations in terms of sales were a bit higher and therefore we have built up inventory. The other thing that you need to know is that after massive effort on the working capital in the past years, we have decided this year to check the sensitivity of a bit of flexibility in inventories to help the growth of our top line. And of course, in some domains, it's successful. In some domains, it is less. Therefore, we will adjust all these kind of things in the quarters to come. At the end of the year, I assume that we will be in line with our targets and in line with our normal practice. And the DSOs are basically constant. And I said the DSOs, we had a change in our software in the U. S, which has disturbed a little bit. So we still have a gap of cash flow generation in the U. S, which will be recuperated in Q3. So if you exclude that, the DSOs would have been totally in line with last year, even a bit better maybe. And the payables are up to date, which is good news. Overall, 27% of our sales reflect the fact that our top line declines and we had to adjust the working capital in the meantime, the inventory delta, this is something we are going to address. Therefore, you should see numbers which are better in and Q4. I commented this slide already, so I'll skip immediately to the business group analysis starting with graphics. And therefore, on Slide 8 now is a traditional pie chart, pie chart which is showing that nothing is really changing a lot. We see a little bit of digital pay press down and a little bit of inkjet and software and services up in the percentage of our sales. But in the business, which is overall declining by roughly 6% if you exclude the portfolio changes and the currency exchange rates in the first half and by roughly 8% or 9% 6.5%, sorry, in the quarter, too. The gross profit, I mentioned that, suffers from a set of parameters which are headwinds for this business, in particular in free press. SG and A is as much as possible under control in terms of percentage, well under control in terms of cost. I was saying in the introduction that we are taking actions to further reduce our SG and A, in particular, in Europe. We are going to reorganize, to some extent, the way we operate in Europe in our branches. And we are also reducing our costs in the U. S. As you can see through the distribution of profit, net profit, the JV in China works well so far again. And the EBITDA of the business group of Graphics suffers from all these kind of evolutions down to 4% for the first half and 5% roughly for the Q2. Comparing these numbers to our peers, you will see that we are resisting quite well in this industry. Just on the Slide 10, a comment on the business highlights. The introduction of 2 new software solutions, InkTune and Questune, which are basically software aiming at reducing the total cost of operation of our customers is part of our strategy for selling more value to our customers to reduce on the price erosion that we see on our plate, digital plates. Basically, we try to help our customers to reduce to the pressure they have to support, of course, on this market. And the introduction of the new Toro 3.3 meter, the Edge 3,300 with lead system is obviously corresponding to the evolution of the market, which is in massive consolidation, therefore, asking for more and more high capacity equipment. This is what we are we have started to deliver. And I would say there is a good traction on the market, but it's a bit early to be absolutely conclusive on that. The Toro product range is well accepted in general terms by the market, which is a machine which is very robust, very reliable. And therefore, we expect this machine to be serving the high end of our product offering in the right way. Moving now to the Slide 12 is the pie chart for Healthcare. We see now that in a very stable way, the IT business is half of our healthcare business, roughly 49% after 2 quarters. We see also that the CR modality business, which is the geography equipment is existing well with 20% of the total sales. So it means that the evolution compensate for the CR decline. The hard copy seen progressively, in particular, thanks to our efforts in China, continues to recover. It's 25% in the first half of the year in our total Healthcare business and the classic cardiology is continuing its its decline at 6% of our sales. Slide 13, sales of Healthcare. So you see that on the first half, we've been slightly growing, 1.9%, slightly down in the second quarter. This is due to, I would say, variations quarter after quarter of different businesses. Overall, we see that we have a business which is at least flattish in terms of sales evolution at this stage. The gross profit is under control, flat in the first half, slightly down in the second quarter. But this is due to the fact that in our IT business, our imaging IT has been a bit weaker, in particular after a strong first quarter. And therefore, we have a bit of a softness in the margin of the IT business. SG and A is more than under control because this group is able to reduce the percentage of SG and A on sales. The R and D is constant because it's, again, a decision of this company to keep constant there and the expenses. And the EBITDA is flattish in the quarter at 12%, growing in the first half from 10% to 11%, let's say. Comments on the Slide 14. As I said, we have an improvement in our Chinese distribution channels. I think I can say now that we have solved all the difficulties of the transition from the previous model to the new model. And obviously and hopefully, we are going to recover in the next quarters continue to recover in the next quarters the volume and the margins that we may have put in danger at a certain point in time with this transformation. But I repeat again, that was a good transformation that we made in this business. The high point of satisfaction is the behavior of our hospital systems, information solutions, health care information solutions, which continues to have a strong top line, a strong order book evolution and good profitability. Following the strong start of the year, the other division in IT, which is the Energy and IT, delivered a little bit less in the quarter, too. We still have some pace of the massive success we had in order intake in the U. S. In particular 2 years ago and last year. And we still continue to struggle a bit. So Big Tex has hired an external consultant to help us to improve in this domain. I will come back to that a bit later in the transformation project of this company. And we hope that with this kind of support and benchmarking, we are going to make even better progress in the quarters to come. The gross margin, as I said, is stable in the first half, slightly down in the quarter too. The recurring EBIT is decent. A few highlights, in particular, we have made a small acquisition of a company in France, in the North of France in Norvelland. We then disclose the numbers. It's not a big acquisition, but it fits very well with the portfolio complementarity that we need in our integrated care development, particularly in France, where we see the market now being clearly showing an evolution into this direction. So you see through the behavior of our hospital information systems through the investments we are doing here that we are very committed to this market, which is now showing some signs of significant informatization and we are performing well in France. So after Germany, our France is clearly on track. We have also signed some important contracts in Enterprise Imaging, so the Imaging IT, mainly in Europe, I would say, and then in the U. S. And in the U. S, the focus is more on progressing on the implementation, quality of our platform stability, convincing the customers, which are a little bit which have been a bit disappointing at the beginning, that we are very solid, building some reference sites to make sure that we can convince other new customers for the future. And finally, we have got the clearance of the LBA for the Doctor 800, which is our own dynamic Doctor that is dedicated to, amongst other things, to fluoroscopy. So it's a dynamic image. And this is, I would say, the ultimate achievement today in the eye. And this is so that Lipp could comment if he wants a bit later. Specialty Products. As always, I will be shocked because the business group continues to deliver on the right track. You see that all the lines are positive. And even excluding currency exchange rates, we have a positive evolution of the top line, both in Q2 and in the first half. The profit margin is okay. The costs are under control and the EBITDA is progressing compared to last year in a significant manner, higher than the average of the group. This is due to the good behavior of most of our growth engines. Just a bit of a comment on compared to the previous quarters, the electronic industry seems to give some signs, have a little bit of hesitation. We don't think it's a long term issue, but thanks God we have a lot of other growth engines, which have performed pretty well. And the recurring EBIT at €5,900,000 is fine. Business highlights. We have signed an agreement with De Nora about the development of a solution for hydrogen and oxygen production based on the new membranes. So this is linked to the hydrogen programs. This is a small business. It's more development issue that it shows that we continue to focus on future growth markets. Before we move to questions and answers, I just would like to take 2 minutes to clarify a bit because I read this morning that on the transformation project of this company, we have been a little bit un precise. So I would like to clarify to make sure that we have a good understanding on what we are doing. 1st of all, this transformation project goes well. So we announced last year in August that we're going to make a study, then we started to execute in October. I can tell you that the structural the technical transformation that means the split in terms of legal units, in terms of information systems, in terms of affectation of people, the split between IT Co, the future IT company and the rest of the business that we can maintain in our internal vocabulary will be finished by the end of the year. So we have been successful. All the milestones, which were the ways of transformation in different countries have been met to the day. The last one was the 1st July. The next one will be probably at the beginning of November. And everything, including hyper care and everything we have to do will be finished by the end of the year. So the year 2019 will be operated in the new structure full year, number 1. Number 2, this is obviously part of the job that we have to do, but we have to do more than that. We need to create what I call the strategic plan of the 2 future companies. And this is today operate through a set of sub projects, which are either aiming at clarifying the strategy for the different businesses. I was talking about what Lictas is doing on his IT business, but we are also doing the current things in terms of the pre press business, the inkjet business, the reliability business. So this is being prepared to have a decent strategy, including the target to have to participate actively in the consolidation of the industries which are today in this array, in particular, the Graphics Free Press business and to some extent, some elements of the Healthcare Publishing Businesses. Second thing I would like to tell you, the business the sub projects are dealing with this strategic issue, but also dealing with elements of processes, organization, simplification of operations and of course, an element of cost simplification and cost cutting. The second thing I wanted to say, and I said that the technical split is for sure going to be finished by the end of the year. It means that all our budget operation, which is starting now, and our strategic planning is based on taking into account that next year we will operate in this new structure. And finally, in terms of timing, because I don't want to give the feeling that we are floating and that takes long. If I look at what the transformation that some of our peers have done, it takes long time to do this kind of stuff. So in November, I will give you a bit of a bit more color on some of these packages. And the latest in March, when we report the Q4 results, you will have the full picture. So that's what I had to tell you about the Q2 results. So to summarize, we stick to our targets, which are medium term targets. Medium term means after we have done this transformation, which are obviously to come to a growth path for the both businesses and secondly, to deliver a 10% EBITDA in average in the years to come. For this year, as I said, the EBITDA this year, I don't expect it to be better than last year. And for the top line, I still hope that we'll be able to show some slight improvement compared to the decline rate of the year before. This is, of course, depending on the way the overall market evolution will be in the second half of the year. I'm ready now to answer questions, maybe from the rooms first. And if there are questions from our side, we will see if people have questions to ask. So first question in the room. Yes. Thank you. Stefan J. Madubroch for BTK. Perhaps two questions. 1 on Healthcare. Could you indicate to us the renewed growth you've seen in hardcopy? And with the new model, what margin compared to, let's say, 2 years ago this hardcopy is running. And if we exclude the growth from hard copy, because in the press release, I think you mentioned volume growth, but I don't think you mentioned sales growth. Has there also been renewed sales growth? And if so, a bit more color perhaps on it's only 1 quarter, I know, but a bit the slower quarter of the other businesses. And then secondly, in graphics, I think, unless I did not read the previous press release, well, it is the first time you mentioned explicitly to participate in the consolidation in Graphics. Could you indicate which kind of companies you would be looking at given that also in this press release, if you indicate you have discontinued some recent activities, I think they came from a past acquisition in the U. S. Some of those recent has that given you some, I would say, indications on whether not to acquire distribution or reselling businesses? No. Clearly, on this one, I was very very quickly. Agfa is not good at just reselling things. Agfa is an integrator and is a solution center. It's a solution developer. So we may have to integrate 3rd party's equipment or 3rd party components or 3rd party software. But at the end of the day, we are an integrator. So we are not a reseller. If we have to resell, and we have done that with the acquisition of Bitman, which was 8 years ago, it was after the crisis of 2,008 and 2009, it was a way to protect our business in the U. S. And to become bigger, in particular, in front of some of our competitors. But the aim of our strategy is clearly not to be a reserve of materials or whatever. So I will not disclose anything on the consolidation of what we're actually doing because this is obviously for sure confidential. But what we are convinced of is that there are too many players in this industry because on top of the 3 classical big ones, there are still 4 smaller players which are local. Local trying to be global, but there is 1 U. S. Player, 1 Brazilian player, 1 Indian player and 1 Spanish player. So this is an element. And thirdly, there are a myriad of Chinese players today, which are transforming or which are finishing to transform their old analog factories into digital factories. The market in China is growing. And therefore, there is a sort of stabilization to achieve in this market. So having said so, as you know, we have to navigate in the waters of antitrust issues, etcetera. So we are absolutely taking all that into account. But we are actively participating into actions, into reflections, which are aiming at finding a solution to this consolidation of this industry. You cannot have a market which is you can in whatever, 5%, 6%, 7%. And everybody is very happy in this press release of the quarter saying that on the tiny part of its business, which is growing, they are doing very well, okay? This is the case of some of our peers. This is our case when we say that in this domain, we are growing. Overall, the business is, 1st of all, moving to the East, moving to the low cost countries, number 1. And number 2 is declining. So we need to find a way risk procure this industry, I would say, again, doing illegal things and things which are absolutely following the regulation in terms of regulatory rules, but this is just not sustainable. That's it. Now back to the health copy. I will not quote any numbers on that. You will understand why. But the aim of what we are doing, as you understand, is to take control of our distribution in China, in particular. We have done it to some extent in Latin America also. And to make sure that through this, we will have 2 things: 1, a better understanding of the market evolution, the real sellout to the market and the management of our supply chain and inventories and number 2, improve a little bit our gross margin by running to have 2,000,000 layers of distribution, which by the way, it's something that the government, in particular in China, encourages because they don't want to have too many layers of distribution where there are risks of misbehavior, number 1 and number 2, mix of margin. And at the end, the public hospitals, because everything is public in China alone, and the patients are paying that, okay? So we are taking all these kind of evolutions into account. And I must say that after 2 difficult years that you have been tracking with us, 2015 2017, We are now out of the woods and we see progressively a recalculation of, 1st of all, the volumes that we have lost to some extent in some disputes with some of our distributors. And number 2, an improvement, which is going to follow in terms of our gross margins. I say with you a lot. Hi, Hyship, Citi Securities. I have two questions. 1 of the impact of the raw mats I was calculating in the Q2 something like €5,700,000 where silver was a little bit positive and aluminum was quite negative. The recent aluminum decline that will be positive for you, of course, going forward. But what is the impact? And you will maybe you announced the price increases for after the aluminum spike. How do the customers react on the recent decline in aluminum? And the second question is related to the graphics. We saw an acceleration of the decline in the 2nd quarter related to what you are doing in U. S. Will there be a spillover effect in the Q3 or will it even accelerate in the Q3 that effect? Yes. So on the aluminum and these kind of things, the model we guide, which is 6 to 9 months time difference, in rough terms, it works. From quarter to quarter, you may have that we have, for example, received an award last year or 2 years ago. We have these some contracts where we sell net of aluminum. That means we recuperate the aluminum. So of course, this distorts a little bit your model to for some part of our business. But overall, the numbers the guidance we have given works. On the quarter, you may have an issue. The number you quoted is a bit high in terms of in fact, the effect is a bit lower than that. But in the single, you're right. So that's basically where we are at this stage. The price increases, by the way, are not all linked to the fact that the raw materials, in particular, aluminum is increasing, okay? Obviously, part of it is due to that, but it's also due to the fact that the prices have been eroding a lot in the last years. And there is less and less of a tendency of some of our customers to recognize the value we sell, okay? We are not a seller of raw materials. We are a seller of a complete solution for paperless. And this is typically what we try to do. That means the customers which are willing to use the capabilities that we offer to reduce their cost and to better use the capability of Agfa as an integrator. They have to pay a bit more. And in exchange of that, they have some extra possibilities, software and this kind of stuff. The one which are willing to buy commerce on the website plates per kilo, they buy plates per kilo. We are, by the way, reorganizing part of our go to market to make sure we can also address this customer the right way. But these people, they cannot get the benefit of all the value that Agfa can deliver. They cannot have service people, which are just writing for them to be called and to come. They cannot expect to have a software, which is helping them to save even more than the cost they spent with our clients and this kind of thing. So that's typically what we are trying to do. And this was announced last year when I said the growth program is based on 4 pillars, of which one is the education of our people, the culture change in our access to the market. This is part of it. So we have made a massive plan to train our people, the salespeople in all the business groups to make sure that these people understand that they deliver value to customers and the customers have to pay the value they buy from Agfa, not only kilos of raw materials or square meters of film or whatever. So that's the strategic answer to your question. And 3rd question is related to the cost below the rebate line. So out of the €9,000,000 you indicated that some costs were related to consultants, so that will be also related to the split off. Can we expect same number in the Q2? Or will it be higher or somewhat lower? In the first half, I think we can be clear. In the first half, we have spent rather high single digit cost in this domain. In the second half, we should spend maybe a little bit more, but it will not be a massive increase compared to what we have seen in the Q2. There are costs, which are not consulting costs by the way. It's also cost of splitting our information systems, clarifying the purchase of licenses and these kind of things, okay? But I will be clear November on that. I think in November, we'll be able to tell you the amount of cost that in 2018, the project transformation will have been impacting the numbers. Just back to your question about you had a question also on the evolution of the cost. What was that? The impact? The first set of questions, I don't remember. You were saying the impact of fuel? So the impact of fuel is in Yes, yes, yes. I think we are now at the flat level in the Q2. Stephane, am I right? Yes, correct. Yes. Last quarter was just a part of it. Q2, it will impact. Yes. So Q3, Q4, you see the same impact. And I said 32 year to be 600 in the year. Yes. So we are selling out, so according to plan. At this stage, we below the 50% of the 60% and it will be 60% at the end of the year. With normally no impact on cash and EBITDA in 2018 and hopefully, the simplification and the recovery business after. Question on the debt. So to be clear, the impact for years has been more than €30,000,000 in the first half? As I said, it was a bit less than half, that means less than €30,000,000 and it will be a bit more than half, a bit more than €30,000,000 in the second half. It's totally to be €60,000,000 Yes. You also mentioned you're looking at reorganization, reorganize the way you work in the European factories. No. In Graphics, we are adjusting our model of distribution to streamline the sub tier, number 1, because the market is declining. And also, part of this value selling program, we try to adapt more than we have done in the past, the structure of our contacts with the customers to their needs. And in fact, when you look at the prepress business as such, in fact, you have different segmentations, which are very different. The newspaper customers are not the same as the commercial printers. And the commercial printers, you have people which have different, I would say, end applications, which could be packaging, which could be something different. So we try to reorganize at the European level. So taking the benefit of the structure of Europe and the mass of the business in Europe to make sure that we serve better the different segments. So do you have any questions outside of the room, operator? We will now begin the question and answer session over the phone. Phone. Okay. I think if we have no question outside, that's normal because most of the people who authorized to raise questions are in the room here. So I think that we have at least you have a last minute question in the room, we can close the call for this quarter. So thank you, everyone, and we'll meet you again or talk to you again in early November, something like the 7th November or something like that for the Q3 results. Thank you. Bye bye. That concludes today's conference. Thank you for participating. You may now disconnect.