Welcome, thank you for standing by. At this time, all participants will be on listen-only mode until the question and answer session of today's conference. At that time, to ask a question, please press star followed by 1 on your phone, unmute your phone, and record your name when prompted. This call is being recorded. If you have any objections, you may disconnect at this time. May I introduce your speaker, CEO Christian Reinaudo. Please go ahead.
Thank you, operator. Good morning, everyone. We are here today to discuss the Q2 2018 results. Maybe as an introduction, 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 Agfa 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 exchange rate is stabilizing around 115, 116. We'll see if it continues, but for the first half, we have suffered from that in a significant manner. On top of that, we are transforming the company and, therefore, there are some impact here and there on the efficiency of the business and on the cost.
Having said so, I know that it looks a little bit strange, I read this morning that we have lost 10%, which is in top line, absolutely true in actual numbers. If you restate everything, 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, it has to be compared to first half last year, which was declining by 4%. I keep continuing stating that this company is on the growth path on the medium term, 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 in this quarter, which is obviously the challenges we are facing in the Agfa Graphics prepress industry, we are not the only one. We are facing it as well as our peers. We face several challenges, which are obviously the analog decline, we know that for long, the competitive pressure. Even if the price pressure has been clearly easing because we have all announced price increases, there is, on top of that, a regional mix effect, where we see more and more the market moving to low price countries. Therefore, this is also weighing on our gross margins. We have, of course, a market-driven volume decline, we have an increasing aluminum price. This is a set of challenges that the group has to face.
We are not the only one, but that's a fact. 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. We can come back on that if you want. We are currently trying to address this. The SG&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. We are taking new actions, by the way, and I will come back to that in the business group analysis.
R&D is stable. This is clearly a willingness, a decision on our side to not limit the efforts we are doing in R&D, even if, because of the erosion of our top line, this corresponds to an increase in terms of percentage of sales. The money we spend here is 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 second quarter is down one point compared to last year at 8.7%. If you look at the first half, we are 0.4% below last year, and it's 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 a bit.
I don't think here we have a lot of surprises. Restructuring and non-recurring is at EUR 14 million in the first half, EUR 9 million in the quarter. Of course, we start to have some non-recurring 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 at minus EUR 20 million is in line with last year for the first half, minus EUR 10 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 EUR 6 million in the quarter and EUR 13 million in the first half. At least we 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 -EUR 37 to plus EUR 27, which was an increase of EUR 64 million. This year, we move up quarter to quarter by, let's say, EUR 30 million-EUR 35 million, roughly. This is a singular effect. 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 the number of days, and this is a point of attention on which we are concentrating our efforts. 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 efforts 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. Of course, in some domains it is 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. The DSOs are basically constant. I say on the DSOs, we had a change in our software in the U.S., which has disturbed a little bit. We still have a gap of cash flow generation in the U.S., which will be recuperated in Q3.
If you exclude that, the DSOs would have been totally in line with last year, even a bit better maybe. The payables are up two days, 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 Q3 and Q4. I commented this slide already, I will skip immediately to the business group analysis, starting with Graphics, and therefore on slide eight now, with the traditional pie chart. Pie chart which is showing that nothing is really changing a lot. We see a little bit of digital prepress down and a little bit of inkjet and software and services up in the percentage of our sales.
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 two. The gross profit, I mentioned that suffers from a set of parameters which are headwinds for this business, in particular in prepress. SG&A is as much as possible under control in terms of %, well under control in terms of cost. I was saying in the introduction that we are taking actions to further reduce our SG&A, in particular in Europe. We are going to reorganize to some extent the way we operate in Europe in our branches. We are also reducing our cost in the U.S. As you can see through the distribution of net profit, the JV in China works well so far, again.
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 second quarter. Comparing these numbers to our peers, you will see that we are resisting pretty well in this industry. Just on this slide, number 10, a comment on the business highlights. The introduction of two new software solutions, InkTune and PressTune, 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 resist on the price erosion that we see on our digital plates. Basically, we try to help our customers to resist the pressure they have to support, of course, on this market.
The introduction of the new Tauro 3.3 meter, the H3300 with LED system, is obviously corresponding to the evolution of a market which is in massive consolidation, therefore asking for more and more high-capacity equipment. This is what 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 Tauro 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 slide twelve, with 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 two quarters.
We see also that the CR modality business, which is the angiography equipment, is resisting well with 20% of the total sales. It means the DR evolution compensate for the CR decline. The hardcopy film 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 radiology is continuing its decline at 6% of our sales. Slide 13, sales of Healthcare. You see that in the first half we have 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. 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. The SG&A is more than under control because this group is able to reduce the percentage of SG&A on sales. The R&D is constant because it's, again, a decision of this company to keep constant R&D expenses, and the EBITDA is flattish in the quarter at 12%, growing in the first half from 10%-11%. Comments on 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, 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. 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, Healthcare 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 Imaging IT, delivered a little bit less in the quarter, too.
We still have some tails of the massive success we had in order intake in the U.S., in particular two years ago and last year, and we still continue to struggle a bit. [Victesse] 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. 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 two. 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 Inovelan. We don't 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, in particular in France, where we see the market now being clearly showing an evolution into this direction. 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. After Germany, now 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, than in the U.S. In the U.S., the focus is more on progressing on the implementation quality of our platform stability, convincing the customers which have been a bit disappointed 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. Finally, we have got the clearance of the FDA for the DR 800, which is our own dynamic DR that was dedicated amongst other things, to fluoroscopy. It is a dynamic image, and this is, I would say, the ultimate achievement today in DR. Let's say so that Rick could comment if he wants a bit later. Specialty Products. As always, I will be short because the business group continues to deliver on the right track. You see that all the lines are positive, and even including 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, 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 of a little bit of hesitation. We don't think it's a long-term issue, thanks God we have a lot of other growth engines which have performed pretty well. The recurring EBIT at EUR 5.9 million 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. This is linked to the hydrogen programs. This is a small business.
It's more a development issue, but it shows that we continue to focus on future growth markets. Before we move to questions and answers I just would like to take two minutes to clarify a bit, because I read this morning that on the transformation project of this company, we have been a little bit imprecise. I would like to clarify to make sure that we have a good understanding on what we are doing. First of all, this transformation project goes well. We announced last year in August that we're going to make a study, we started to execute in October.
I can tell you that 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 ITCo, the future IT company, and the rest of the business, that we call Mainco in our internal vocabulary, will be finished by the end of the year. We have been successful. All the milestones, which were the ways of transformation of different countries, have been met to the day. The last one was the 1st of July. The next one will be probably at the beginning of November, and everything, including hypercare and everything we have to do, will be finished by the end of the year. The year 2019 will be operated in the new structure full year. Number one.
Number two, 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 plans of the two future companies. This is today operated through a set of sub-projects, which are either aiming at clarifying the strategy for the different businesses. I was talking about what Luc Thijs is doing on his IT business, but we are also doing the equivalent things in terms of the pre-press business, the inkjet business, the radiology business. This is being prepared to have a different sub-strategy, including the target to participate actively in the consolidation of the industries which are today in disarray. In particular, the graphics pre-press business, and to some extent, some elements of the Healthcare traditional businesses.
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, 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 preparation, which is starting now, and our strategic planning is based on taking into account that next year we will operate in this new structure. 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 a long time to do this kind of stuff.
In November, I will give you a bit more of color on some of these sub-packages. The latest in March, when we report the Q4 results, you will have the full picture. That's what I had to tell you about the Q2 results. 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 both businesses, and secondly, to deliver a 10% EBITDA in average in the years to come. For this year, as I said, the EBITDA of this year, I don't expect it to be better than last year. For the top line, I still hope that we'll be able to show some slight improvement compared to the decline rate of the years 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 outside, we will see if people have questions to ask. First question in the room.
Yes. Thank you. Stefan Genoe of Petercam. Perhaps two questions, one on Healthcare. Could you indicate to us the renewed growth you're seeing in hardcopy and with the new model, what margin compared to, let's say, two year ago, this hardcopy is running? If we exclude the growth from hardcopy, 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? If so, a bit more color perhaps on, it's only one quarter, I know, but a bit the slower quarter of the other businesses. 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, you indicate you have discontinued some reselling activities. I think they came from a past acquisition in the U.S. Now, some of those reselling, has that given you some, I would say, indications on better not to acquire distribution or reselling businesses?
No, purely on this one, I will very quickly. Agfa is not good at just reselling things. Agfa is an integrator, is a solution seller. It's a solution developer. We may have to integrate third parties' equipment or third party components or third party software. At the end of the day, we are an integrator, so we are not a reseller. If we have to resell, and we've done that with the acquisition of Pitman, which was 8 years ago. It was after the crisis of 2008 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. The aim of our strategy is clearly not to be a reseller of materials or whatever.
I will not disclose anything on the consolidation of what we are actually doing because this is obviously, for sure confidential. 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. This is an element. Thirdly, there are 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. Having said so, as you know, we have to navigate in the waters of antitrust issues, et cetera.
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 declining whatever, 5%, 6%, 7%, and everybody is very happy in his press release of the quarter saying that on a tiny part of his 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 first of all moving to the East, moving to the low cost countries, number 1. Number 2 is declining. We need to find a way to restructure this industry.
I would say, again, doing legal things and things which are absolutely following the regulation in terms of regulatory rules. This is just not sustainable. That's it. Now back to the hardcopy. I will not quote any numbers on that. You understand why. 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. To make sure that through this we will have 2 things. 1, a better understanding of the market evolution, the real sell-out to the market and the management of our supply chain and inventories. Number 2, improve a little bit our gross margin by avoiding to have too many layers of distribution.
By the way, is 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 one. Number two, leaks of margin. At the end, the public hospitals, because everything is public in China almost. The patients are paying that. Okay. We are taking all these kind of evolutions into account. I must say that after two difficult years that you have been tracking with us, 2016 and 2017, we are now out of the woods and we see progressively a recuperation of first of all the volumes that we have lost to some extent in some disputes with some of our distributors. Number two, an improvement which is going to follow in terms of our gross margins. I say already a lot.
Okay. This is
Securities. I have two questions. One on the impact of the raw mats. I was calculating in the second quarter something like, EUR 5.7 million where silver was a little bit positive and aluminum was quite negative. The recent aluminum decline will be positive for you of course in going forward. What is the impact annual? In May you announced the price increases for after the aluminum spike. How will the customers react on the recent decline in aluminum? The second question is related to Agfa Graphics. We saw an acceleration of a decline in the second quarter related to what you are doing in the U.S. Will there be a spillover effect in the third quarter or will it be even accelerate in the third quarter that effect?
On the aluminum and these kind of things, the model we guide, which is six to nine months time difference. In rough terms it works from quarter to quarter. You know that we have, for example, received an award last year or two years ago. We have some contracts where we sell net of aluminum. That means we recuperate the aluminum. Of course this distorts a little bit your model for some part of our business. Overall, the guidance we have given works. On the quarter you may have an issue. The number you quote is a bit high. In fact, the effect is a bit lower than that. On the silver you're right. 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, and in particular aluminum is increasing. Obviously part of it is due to that. It is 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. We are not a seller of raw materials. We are a seller of a complete solution for pre-press, 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.
We have software and this kind of stuff. The one which are willing to buy almost 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. These people, they cannot get the benefit of all the value that Agfa can deliver. They cannot have salespeople which are just waiting 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 spend with our plates and this kind of thing.
That is typically what we are trying to do, and this was announced last year when I said the growth program is based on four pillars, of which one is the education of our people, the culture change in our access to the market. This is part of it. 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. That is the strategic answer to your question.
Third question is related to the cost below the rebate line. Out of the EUR 9 million, you indicated that some costs were related to consultants, so that will be also related to the split off. Can we expect the same number in the second quarter, or will it be higher or somewhat lower?
In the first half, I think we can be clear. In the first half, we spent rather high single-digit costs 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 second quarter. There are costs, which are not consultant costs, by the way. It's also cost of splitting our information systems, clarifying the purchase of licenses and these kind of things. Okay? I will be clear in November on that. I think in November, we'll be able to tell you the amount of cost that in 2019, the project of 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 In the first set of questions, I don't remember.
You were saying the impact of Eurozone. The impact of Eurozone.
Yeah.
Stefan.
I think we are now at the flat level in the Q2. Stefan, am I right?
Yeah, correct.
First quarter was just a part of it. Q2 is full impact.
Yeah.
Q3, Q4.
Q3, Q4, the worst is over.
You will see the full impact. I said pretty clear it will be EUR 60 million in the year.
Yeah.
It's
We are selling out so according to plan.
I think at this stage, we are below the 50% of the EUR 60, it will be EUR 60 at the end of the year.
On cash.
On the cash and EBITDA in 2018, hopefully a simplification and a recovery the years after.
Question on the debt. To be clear, the impact for this has been more than EUR 30 million in first half?
As I said, it was a bit less than half, but it's less than EUR 30, it will be a bit more than half, a bit more than EUR 30 in the second half.
Okay.
In total, it will be 60.
Okay.
Euros.
Yeah. 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 structure, number one, because the market is declining. Also, part of this very 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. In fact, when you look at the digital 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. In the commercial printers, you have people which have different, I would say, end applications, which could be packaging, which could be something different. We try to reorganize at the European level, 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.
Do you have any questions outside of the room, operator?
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Okay. I think if we have no question outside, that's normal because most of the people who are authorized to raise questions are in the room here. I think that we have Unless you have a last-minute question in the room, we can close the call for this quarter. Thank you, everyone, and we'll meet you again or talk to you again in early November, something like the 7th of November or something like that for the Q3 results. Thank you. Bye-bye.
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