Earnings Call: Q1 2018

May 8, 2018

As a reminder, today's call will be recorded. If you have any objections, we will discuss it at this point. Now turn the meeting over to your host, Mr. Christian Rauda. You may begin, sir. Good morning, everyone. Christian Redaudo speaking here. So we have a crowded room here in Motsel because we have 3 business group presidents with me, but also the leading CFO and the new CFO. So the call is about the Q1 results that I will comment rather quickly before I give the floor to questions. On the Slide 2, you see the traditional table of numbers, which can be read in a different way. The top line has declined by 6.7%, which is, of course, a significant decline. But if you look at it with the way we are looking at it in terms of comparison and the evolution of the company, excluding currency exchange rates, This drop is only, I would say, 1.3%, which is to a large extent explained by the drop of our graphics distribution business that we have stopped as I announced last year. So basically, the sales of the company are continuing the trend to a diminution of the top line erosion. And I stick to what we said several times, these 3 years, 2017, 2018 are 2 years of transition aiming at restoring in the medium term the growth of the top line of the company. And the results quarter after quarter so far align in this trajectory. On the gross profit line, you see that the gross profit has been more or less kept at the constant level to sales. And we will see in the comments of the 3 business groups that there are, of course, big disparities in the evolution of the top of the gross margin of the different business groups. I will come back to that later. SG and A reduced by 6.3%, in line with the top line decline, including currency exchange rates, as is basically constant in percentage of sales. R and D, nothing new compared to what we keep telling. That means the R and D expenses are constant in this company. And the recurring EBITDA stands at 6.8%, slightly above the 6.6% of last year at €37,000,000 for the quarter. If I move to the Slide 3 and comment the numbers below EBIT, we see that I would say none of these lines should be a surprise for you. The restructuring and nonrecurring at minus €4,000,000 is very similar to the one of last year and clearly in line with the guidance we give, slightly below. By the way, the guidance we give, but there is no major restructuring in the quarter. Non operating result of minus €10,000,000 is also in line with the quarter 1 of last year and reflects the guidance we have given mainly on the pension P and L effect. And therefore, the profit before taxes stands at €10,000,000 similar to the one of last year at €11,000,000 the tax at minus €3,000,000 again similar to the one of last year and the net result at €7,000,000 is very comparable to the one of last year. And I would say another positive net result. If we exclude the one off effect of the Q4, EUR 25,000,000 tax regulation changes in Belgium and the U. S, it would have been the 18th quarter in a row that we deliver with a positive net result. On the Slide 4, the traditional slide about the net debt financial debt, you see that we are basically flat. That means no cash flow evolution in the Q1 from EUR 18,000,000 debt to EUR 19,000,000 debt at the end of the quarter. Of course, the cash flow and the debt the financial debt evolution of the company stays under control and nothing new on this field also. We continue to strive to keep the net financial debt very close to 0 in our target. On the Slide 5, you have here a new slide compared to what you are used to see, the working capital figures. As you know, there are some changes in the IFRS definitions, which are applied in the Q1. So this slide, which is a bit busy, shows 3 columns. One is the Q4 presentation that we have given at the end of last year, showing inventories, trade receivables and payables, both in terms of €1,000,000 and in terms of days. You see the 2nd color, which is the restated working capital based on the new IFRS definitions. And basically, to very quickly comment, these results into a reduction of our inventory by about EUR 11,000,000 3 days of sales inventory enhanced. You see the trade receivables, which are slightly up by 4,000,000 with no major change in the DSOs and the trade payables are basically constant in euros and number of days. At the end of Q1, these numbers are showing an increase of our inventories, which is the traditional seasonal increase of inventory of the Q1. And the ones of you which are tracking this company for long are used to that. 8 days more in the days of inventory enhanced. The trade receivables are improving by EUR 27,000,000 therefore compensating basically the impact on inventories. And the trade payables are up EUR 12,000,000 therefore improving the working capital in total by about EUR 10,000,000 flat compared to percentage of sales. On Page 6, maybe I can stop a minute on this slide and repeat again what we said. So the top line has declined by 1.3% excluding the sales rates, which is basically the net effect of what we have done in the focus of Graphics outside of the reselling business in the U. S. Healthcare and Specialty Products are performing well in the Q1. All the growth engines of these two groups have been really performing well. And in Healthcare, we also note an improvement of our film business, which is the consequence of what we have done in the reorganization, in particular in China, of our distribution channels in the last year and a half. I move now to Graphics on the Slide 8. The traditional pie chart, which of course shows a clear evolution of the business with an increase of the path of inkjet software and services and the decline of the analog prepared. To be noted that the analog prepared decline is not reducing. We noticed a significant reduction of this film business, mainly in Graphics, as expected, I would say, which explains also a significant part of the prepress reduction in total. If I move to the Slide 9, and I would like to spend a minute on this slide to make sure that we have a good understanding of these numbers. So of course, the top line, gross top line decline is 13.7%. But first of all, it hides a significant currency effect, which as you see is more than 6%. So excluding currency exchange rates, the decline of this business is 7.4%. Then there are 2 events that we have to comment. First is that in the Q1, our inkjet business has performed reasonably well, but not at the level of the 10% expectations. Therefore, we have a little bit of a gap in the Q1 on the engine business. I immediately reassure you this is not the trend for the year, that means we continue to anticipate the growth of our inkjet business in the year 2018 in the range of the double digit growth that we have committed for. But in the Q1, it weighs a little bit. And the second part, of course, is that for the Q1, we have acknowledged a reduction of our reselling business in the U. S, decision that we have taken last year and I commented. I just remind you the numbers that we quoted already, which is that on the full year, we expect a €60,000,000 reduction on the stoplight because of this decision. And of course, in the Q1, we have the first part of it. So excluding all these kind of things, the prepaid price business decline would have been basically what we expected, what we have seen in the previous quarters, which is in the range of 5% decline, which is a combination of a strong decline of the analog prepress and a decline a bit lower of the digital prepress. In the digital prepress part of it, of course, there is still the same comments to make. The first one being that the volume is under pressure. I would say a bit less than what we have seen previously, but I'm before, probably because the vendors are more and more concerned about the increase of the aluminum price. So that's basically the comments I wanted to make on the sales. On the gross profit, you see that we have almost 3% reduction of the margin. This is a mix effect of different things, of which, of course, currency, raw materials are part of it. But primarily in this case, it's a mix effect of our products and regional mix. To be very clear, the growth of this business is the growth pockets of this business are in countries which are developing countries where the prices and the margins are more complicated to keep. Our value selling program, which is mainly aiming at showing the customers the value they can grab out of the full solution we offer, and in particular our Eco Free system, which is a mix of ecology, economy and efficiency of the operation is clearly picking up in the mature markets, but we still have to develop it in the emerging markets. So that's the explanation for the drop of the gross profit. On the rest, I will not comment too much. You see, of course, that the top line erosion is weighing on the percentage of SG and A in spite of a good reduction of the cost of the SG and A to €60,000,000 compared to €66,000,000 The R and D efforts are constant in this company. And of course, the EBITDA because of the in particular, the drop of the gross profit is declining by 3.4%, down to 3.2% of sales, €8,000,000 in the quarter. To be clear, this is not new. This is this quarter was somewhat expected in the picture. And of course, we are not staying still in front of this situation. We have seen this kind of complex transition period in this market when you have the raw materials which are increasing, when you have changes in the pictures and in the different regional pattern. We have seen that in 2,009, we have seen that in 2014. And therefore, every time we have been able to react, but it takes a little bit of time before we can really show and demonstrate the results of the reactions. We are acting on that, and we will comment in the next quarters the actions we are taking. If I move to the Slide 10. So I think I commented most of the elements of this slide. And I propose that we maybe just focus on the two business highlights at the bottom of this slide. The introduction of a new Anapona machine equipped with lead systems and the new ADAMAS plate, which is full ecological printing plate on which we have, of course, big expectations for the development of the future business of QuickPress, Eco Friendly QuickPress. Moving to Healthcare and the Page 12. We clearly see the here also the trends that we have anticipated. That means for the first time, I think ever, we have an IT Health Care business, which is more than half of the sales of Health Care at 51%, showing a clear improvement of the HIST part of it, which is now 20% of the total sales. And Imaging IT at 31% is also showing improvements. I will come back to that in a minute. The classic hydrolysis at 6% is continuing its decline. The hardcopy, 23%. Of course, the percentage compared to the rest is not increasing, mainly because the growth engines, which are not the hardcopy film, as you know, are growing pretty steeply in the Q1. But the hardcopy film volumes are improving compared to where they were in the Q1 last year, showing the success of our decisions to reorganize the distribution channels, in particular, in China. As I said several times, this transition is a long transition. Therefore, we see an improvement. We have seen that in Q4 last year. We see that in Q1 this year that we must be careful and make sure that we execute on the plan, which is a smooth transition between our current distributors and our own sales organization. So that would be a continuous quarter of focus in the next quarters. But so far, things are doing well. And finally, the CR modality business, which is 20%, basically follows the improvement of the top line of its healthcare group. And this is due to the reaction of the Doctor business in Q1, which has been clearly growing at the double digit target growth that we expect, showing an improvement compared to the situation of the last year. So that's for the pie chart. Moving to the Slide 13 and the numbers. You see that the business is flat if you take into account the currency exchange impact. But of course, if you exclude this currency exchange rate, Healthcare would have been growing by almost 5%, mainly driven, as I said, by the IT business, the Doctor, which are the growth engines and the recovery in the field. The gross profit improves, again, driven by these different elements on the top line. SG and A and R and D are kept at a constant level, therefore showing an improvement in percentage per sales. And the EBITDA at 9.7% is clearly showing an improvement of 3% basically compared to sales, which is the impact of the gross profit plus the efficiency of the cost control. So to summarize in this chart, a good quarter for Healthcare, which is clearly in line with everything we have guided for in the previous quarters. Moving to Slide 14, where I think I've commented most of the first three bullets. The last ones, business highlights. We have signed a good agreement with Premier in the U. S. Premier is one of these some part of purchasing, which is purchasing goods for the different hospitals. And this is, I think, one of the big contracts we have signed with Premier for our Imaging IT. So for Enterprise Imaging IT, it's part now of the product portfolio that we sell through this big distributor. Orbits, you know that the strategy of Orbits has been for years to concentrate on the German speaking part of Europe and French market. We said several times that we will try to penetrate the UK market, which could be a market where the margins might be a bit higher. It's a long process penetrating a market which is not very well known and which is very specific, takes time. We are happy to announce that we have been for the first time live. That means we have a hospital in Derby, Derby Teaching Hospital, which is part of the NHS, which is using Orvis now in real life in the hospital. And finally, a significant element in particular in our strategy to move through more IT, artificial intelligence and use better IT to support the agnostic of our doctors' customers. We have done a first demonstration in Dubai that we could have an artificial intelligence algorithm in radiology, which is supporting very well the diagnostic of the radiologists. I will not comment too much, and maybe Luc can comment a bit later if you have questions about this element. Moving to Specialty on Slide 16. What to say, this group is performing well, aligning quarter after quarter now on growth. You see that we are at €61,000,000 in the quarter. The gross profit is also increasing at 28% of gross margin. SG and A and R and D are clearly under control. And the result is that the EBITDA is at 13.1%, basically doubling compared to the Q1 EBITDA of last year. On Slide 17, you see a few explanations for that. If I can make a sort of high level view of this group, which as you know is basically 2 fold. It's on the one side a film activity, which is the activity not related to the graphics and the healthcare business. And here we have reached a point where the film we continue to manufacture for this group are basically reached a point where the markets which are still using films are pretty strong and resisting. This is mainly the non destructive testing films that we sell through our agreement with General Electric and the film we sell to the electronic industry. These two components of our film activity are pretty robust in terms of resistance to decline. And of course, the strategy of investing in new activities that we call the growth engines of specialty, primarily in the field of electronics inks like OrgaCon and in the field of synthetic paper and the way we can use our forge in these different domains. This is paying off and this is why at the end of the day, we have a group which is now growing the top line in profitable manner. Highlights for this business group. We have introduced a foldable version of our synthetic paper, Synapt, which was one of the limiting property of the Nattel to extend the scope of activity and the scope of usage of this synthetic paper. And we have signed an exclusive distributorship agreement with Ferbat for the European market for our back panel photovoltaic panels, Unicost. So that's in a nutshell in the quarter 1. So to summarize, clearly, the market which is showing sign of weakness in the prepaid business that we are working on it. And if it is one conclusion we can drive from this quarter, one is that we were right to force the business group to focus on its core business and in particular the prepress business. So we continue to invest in the technology and you see that we have a new plate at AMAZ. We continue to work hard on the way we can participate to the consolidation of this market, which is going to happen. And of course, we are taking measures to combat the erosion of our gross margin. On the Healthcare side, Blue Sky in the quarter 1, Blue Sky in the direction that we expected. That means we start to deliver the backlog of our Imaging IT. We continue to do very well in the hospital systems. We continue to see an evolution towards the integrated care and a few initiatives related to what we can do with our software in terms of intelligence in the support to the agnostic. So and the film start to recover after the difficult 2 years that we have been through in this reorganization of sales channels. Specialty performing according to plans. Therefore, there is no reason why we should change our guidance. The 10% EBITDA on the long term, the fact that our top line will continue to improve even if it is not growth for the time being, if we speak about limitation of the erosion of the top line. And finally, for 2018, we must stay cautious. And as I said, we don't expect the EBITDA of the year to be above the EBITDA of last year in terms of percentage of sales. That's in a nutshell, the quarter 1 and I open the floor to your questions from now. Now we have the first question over the phone, and it comes from the line of Mr. Guy Cip of JT Securities. Your line is open. Yes. This is Guy Cip from JBC Securities. I have two questions. First is on the discontinuation of the prepress related reseller activities in the U. S? Is that spread over the 4 quarters quite easily? Or will it be back end or front end loaded? And the second question is related to the aluminum, as we saw quite recently some, yes, spikes in aluminum prices. Did you change anything to your aluminum hedging? So the base question is actually can you restate your the impact of, let's say, a $100 aluminum increase on your EBIT and what is the time lag? Thank you. Okay. Good morning, Guy. We share activity stop in the U. S. On the full year, it will be in the range of EUR 60,000,000 as I said. But it's ramping up because in the Q1, we still have the tail of the inventory that we used to have before. Therefore, the Q1 has a limited impact compared to what you will see in 3Q3Q4. And the total will be €60,000,000 On the aluminum hedging strategy, we have not changed anything because the expense has demonstrated that we must stay calm in front of this kind of situation. As you know, we buy forward and therefore at the end of Q1 being already at the beginning of May, there is nothing major that we could expect from the spike. If it stays as a spike, of course, if the aluminum stays at a higher level, there will be a minimum impact in the last half of the year. But basically, we are not changing anything at this stage compared to what you do. You also have to understand very clearly that we speak about a spike in the aluminum first expressing dollars, but the dollar is weaker compared to the euro. So there is a complex equation to follow and with a lot of parameters. But basically, we stick to what we told you, stick to capital development, and you should be pretty close to the reality of what we are going to leave. Okay. And the last question also because today is the AGM. Is there special comments that you will make on the, let's say, the health care IT spinouts? Can you give us an update on the status on this one? Sure. Related to the AGM, the AGM is related to 2017. So basically, I would not say anything new in the AGM compared to what we say and we've told you in the past. Therefore, nothing new at this stage to tell you. Basically, we continue our work, what I call the technical split of the company. So we execute wave after wave and country after country. The proper split of our people, our legal units, our information systems to make sure that we have the right structure of the company. We stick to what we said before that means this is a program which will take the major part of the year 2018, and we execute on it and we are exactly on our plan. We have made a significant wave of countries during the Easter weekend at the beginning of April. We continue to execute on our plans. In parallel with that, as I told you several times and I said to the market, we are reflecting on the global strategy of the 2 future units, IT company on one side, for which the strategy has been expressed several times in the product here. And on the other side, we are looking at the way we can optimize the remaining part of the business, which will be further focused on the key strengths of the traditional businesses of ACRA. And at this stage, I will not comment, in particular, at the AGM of the group. Thank you. For the next question, it will come from the line of Mr. Stephane Genoux of Degroof Petercam. I've got three questions still actually. First on Graphics, where you indicated that the reselling activity in the U. S. That has been stopped, but we do not see this really reflected in gross margin or in margins. Can you indicate the or give some more color what are the different items at play there? Second question on inkjet, where sales are down about 10%, I think, but you indicate that volumes are increasing. Does this imply that prices are down? Because I don't believe the 10% decline is explained fully by currencies. Or is there something else that's playing a role? And last question on Healthcare. You indicated in the press release that hardcopy is supported to the gross margin increase. But if you look at hardcopy, its sales are slightly down, I think, while overall group sales are more or less health care sales are more or less stable. So can you explain the reason why hard copy in this quarter supports the gross margin? Thank you. Good morning, Stefan. Graphics, we're selling activities was not in fact. I mean, as I said, in the Q1, we have an impact which is still limited in terms of the impact of stopping the reselling activity. And as I said, the gross margin of graphics has to be taken as several different elements. We are working hard on that to attack the different parts. But the major element is this mix, in particular the regional mix of our sense in the Q1. So we don't worry too much about the gross margin impact of reselling activity, etcetera, etcetera. The reselling activity will have an impact of €60,000,000 on the top line and the marginal effect, if any, on the EBITDA of the company. So that's the two lines that I'm looking at. Of course, the first quarter is starting to be impacted by that, but it's not a domain on which you should focus your attention at this stage. I'm surprised by what you said about inkjet because we don't have a 10% reduction of inkjet. Inkjet this quarter has been slightly up. The inkjet business mainly driven by the ink sales as opposed to the equipment, but the equipment order book is filling up. If you refer to the pie chart, we have a mix in this part of the pie chart, which is software, services and inkjet. So of course, when the inkjet is not growing the 10% that we normally have and the software and part of the service is somewhat impacted, of course, because the large part of the service is linked to the free press business. So that's the first thing. The other element is don't forget that we have a currency impact and the numbers which are given the growth numbers are always to be taken with the impact of currencies. And if you sell in particular in the U. S. And in countries which are dollar based, and the impact might be higher than what we see, for example, in the Enterprise Imaging business of Health Care that's what we see on the Inject business. And now on the hardcopy gross margin of Healthcare, part of what we wanted to do in the hardcopy business was to eliminate layers of distribution. Therefore, the end the target at the end is to improve our gross margin by reducing the number of layers in the distribution system. So volume being slightly up, of course, the gross margins are improving in this business. And that's the reason why we did this complex exercise, which has polluted our numbers in the last 2 years to harvest the fruit of these changes. So indeed, the recovery of the hardcopy business in Q1 that we start to see is playing favorably on the gross margin of healthcare. The other element is, of course, the positive evolution of the IT business, which is, by essence, a gross margin, which is stronger. Okay. That's clear. Perhaps two follow ups. Could you remind us the breakdown between software services and inkjet in the industrial inkjet business, if possible? And then another follow-up, you indicated that in Graphics, you're looking for more value approach towards customers and you manage this in the more mature countries, but not in the emerging markets. But emerging markets, of course, are the bulk of your business in the large part of the graphics business. How long how convinced are you will be able to manage this in the entire emerging market spectrum? Or and do you have any idea about timing throughout the year? Thanks. On these cost engines, they are associated technologies which are, I would say, more digitized or more based on IT and software. That's why the adoption is primarily in first in the mature markets. The traditional markets and the emerging markets are taking longer to the traditional businesses, but the evolution of technology will follow. So therefore, we see the same kind of model that we have seen in other domains, where the inkjet evolution is depending on the maturity in terms of digitization of the society of the different places. But I mean, I have no doubt that the technology the reason why this technology is going to penetrate more and more markets would be the same in the emerging markets as opposed to the mature markets. And there could be even some applications which are related to the performance of energy markets in terms of manufacturing, for example, where these kind of applications could penetrate even faster. For example, if you look at where the flooring systems are done, you will see that there is a weight which is a bit bigger than the average in the countries where we manufacture a lot. And therefore, I hope that the printing on this kind of products, which are related to buildings, to wood, to these kind of applications, we'll be developing pretty fast in some emerging markets. But again, this is something we need to track because we are at the beginning of the age of inkjet, I would say, if you exclude the SIM and display market. So but in terms of evolution, I think we will see the same kind of evolution that we have seen in other domains basically. The split of inkjet service and software, we actually do not provide it normally. What I say when I have these kind of questions in general terms is that if you take roughly 2 third of this part of the pie chart for inject, you are in the right order of magnitude. Okay. All right. Thank you. Okay, sir. As of this time, we have no further questions over the phone. You may proceed. Okay. So I believe by the way, I believe that we have received the questions that were supposed to be asked. So I propose that we close the call at this stage. Thank you very much, everyone, and I give you an appointment at the end of August for the quarter to results. Bye bye. Thank you. And that concludes today's conference call. Thank you all for joining. You may now disconnect.