AGFA Gevaert NV (OTC:AFGVF) Q3 2020 Earnings Conference Call November 13, 2020 5:00 AM ET
Pascal Juery – President, CEO, President, Digital Print, Chemicals & Radiology Solutions and Director
Dirk De Man – CFO
Luc Delagaye – President, Offset Solutions
Luc Thijs – President, Agfa Healthcare
Conference Call Participants
Guy Sips – KBC Securities
Kris Kippers – Degroof Petercam
Maxime Stranart – ING Groep
Hello and welcome to the Agfa Q3 2020 Results Publication Call. My name is Jess, and I’ll be your coordinator for today’s event. [Operator Instructions].
I will now hand you over to your host, Pascal Juery, CEO, to begin today’s call. Thank you.
Thank you very much and good morning to everyone and welcome to the Q3 2020 results of Agfa-Gevaert. Well, obviously, Q3 was a quarter where we had a strong impact of the COVID-19 pandemia. The shortfall versus last year in terms of EBITDA and EBIT is mainly coming from the offset activity, which, as you know, has been challenged already in the past quarters but for which we have seen further deterioration. And the structural measure that we have taken are not yet showing in Q3 but will definitely show in Q4. So the main reason for the weak results of Q3 is really offset.
Then our medical film business has suffered also in volume. I think the impact was a bit later in the year than we expected probably due to some inventory adjustments. But the volumes in the medical film are also been an area of weakness for the group.
And last but not least, the currency turned negative for us in Q3, and the cost mitigation measures, as explained during the Q2 call, were less than we could achieve in Q2 and will achieve in Q4 due to the fact that Q3 was mainly a kind of a vacation period in which we can, of course, mitigate less the cost of the company.
So if I go through the highlights. I mean a good part of the results is we’re confirming the margin performance of the Imaging IT business. We are firmly in double-digit EBITDA territory in spite of a quarter that was more subdued in terms of revenue.
The Digital Print & Chemicals division is also impacted by COVID, especially the inkjet part of it. But in spite of a significant decrease in the top line, we were able to show similar results as last year. So really, the shortfall is coming 80% from the offset printing activities, and the rest being explained by the medical film volumes slowdown in the COVID environment.
The good thing is we have seen a gradual recovery for most of the activities during the quarter, and I can say that I see right now a similar trend. Last but not least, we have executed our pension derisking measures, and Dirk De Man will walk you through it once again later in the presentation.
If I move to the P&L. Well, as you’ve seen, the top line of the company is still strongly impacted by COVID-19 with minus 16%. In fact, if I remove the currency impact, which was, for the first time, negative during Q3, it’s minus 13.7%. As a reminder, in Q2, the sales were below by 20%. So as you see, an improvement but certainly not a back-to-normal situation. Of course, the weakness in the top line is showing in the gross profit. We are 1 point below in terms of profit margin, mainly coming from the offset activity, the rest of the company being very resilient on this front.
We have worked on our costs on SG&A. As you’ve seen, we managed to keep it more or less constant compared to sales. However, as already indicated, the cost mitigation measure we could have in Q3 were less than in Q2 due to the summer vacation period mainly. We have overall maintained R&D, the R&D effort of the company. The only place where we are significantly reducing this R&D effort is in the offset printing area. But for the rest of the operations, given the midterm outlook, we see no reason to actually decrease our R&D efforts.
So it gives an EBITDA that is roughly at 50% of last year and a 0 EBIT performance for the quarter, which is obviously the weakest quarter of the year. I will give you an outlook by the end of the presentation, but I can already tell you that we’re expecting, of course, a rebound of the EBITDA during Q4. If we look below EBIT, €9 million negative in restructuring and nonrecurring, also taxes, meaning a net loss for the quarter of minus €25 million. If you look at the 9 month point of view, of course, you see the outcome of the HealthCare IT divestiture, which, of course, is influencing very much the 9-month results.
Again, all activities are top line impacted with COVID-19. I cannot say there is anything that is immune, but the most significant decreases are in the printing part of the business while health care tends to be more resilient, of course, and really offset is the most impacted. As I said, Imaging IT, strongly ahead compared to last year as a continuous trend of the previous quarter even in a more subdued quarter in terms of revenue recognition. That part of our revenue is project based, and we had less projects coming to fruition in Q3. But in spite of that, we kept our margin performance.
DPC, in line, bottom line. Well, the only part where we still are challenged in terms of quarter in DPC is really the equipment market in large-format printing, although we — the new slowdown started turning positive also in this area. Radiology, impacted by film. Film is a very profitable product range for Agfa. And therefore, any impact on our share volume has, of course, a significant impact to bottom line for radiology. And offset, again, is the main reason for the overall negative performance of the group.
Now I will show you the free cash flow bridge of the company. So we start, obviously, with a very weak EBITDA, and our adjusted free cash flow for the quarter is negative. Actually, I can also comment that during September, we had paid the yearly bonuses of 2019. We kind of delayed this payment, which would have been made in Q2. We decided, given the circumstances, to delay this payment. That’s one of the reasons why the adjusted free cash flow is negative for the quarter. It would have been positive outside of this yearly payment.
Just one point. If we were looking at the 9-month cash flow performance of the company, it would be positive. Even removing the HealthCare IT impact on the first months of the year, it would be a positive 33%. Then free cash flow before it happening is before the — is, after pension and restructuring, negative for the quarter at minus €23 million. Again, it would have been negative approximately minus €20 million if I would show you the year-to-date in total. And we separated clearly what is happening. As you know, we have started a drive to fix some of the pension liabilities we do have in the company, and we show it here clearly what we have spent during the quarter in order to do so. So this is a cash flow bridge intended to give you full clarity about the cash performance for the company, which is clearly, for me, an area of great focus.
And I will show you now the cash position of the group. So it corresponds to the cash bridge, so in terms of cash, net cash, of course, which would be negative cash flow performance in the quarter and the significant contribution to pension we had made during Q3. If I turn to pension, I would turn it to Dirk. And Dirk, can you walk us through the pension? I think we already did it, but I think it’s good to repeat again.
Dirk De Man
Yes. So we basically repeat from the slide last quarter, but I basically wanted to acknowledge that we’re executing on plan. So we are still planning to invest about €350 million to deleverage the pension liabilities. As you can see from the cash flow, there was another €112 million invested in Q3 on top of the €40 million we already did in Q2. And we’re still planning to do around €1 million in the fourth quarter.
In the meantime also, we have engaged already regarding the derisking of the pension plan in terms of reducing the gross liability. And we already successfully placed $185 million in the U.S. plan in October. So it’s a Q4 event, but that was successfully executed during the month of October. So basically, the only news is that we’re proceeding according to plan and executing as we discussed.
Thank you very much, Dirk. Turning to working capital here. The trade working capital of the company is — has been stable between Q2 and Q3, however with significant moving parts actually.
We have decreased inventory during the quarter by a little bit more than €30 million. We have also made progress in our DSOs and trade receivables, and we can translate it to a better management and a decrease Of the overdues. However, as we can see, the trade working capital remained stable due to the fact that our trade payables have decreased significantly in the past two quarters. What you should translate from this is actually, we have reduced a lot our purchases in order to prepare what we are mainly doing in Q4, which is a key production adjustment.
The largest industrial unit of the company is in Mortsel in Belgium. And we are just coming out of a 2-week complete shutdown of the facility, and we will proceed to more shutdowns during November and December either of part of the plant in December, all of the plant again. So we are managing effectively. We are effectively managing the working capital, and we expect this working capital to decrease in Q4.
Now if I turn to the different businesses, I will start with HealthCare IT. As I told you, a rather subdued top line performance for the quarter. As you know, a significant portion of the sales in HealthCare IT are project-related sales and revenue are recognized where projects are online and accepted by customers. So there were less, I would say, project implementation starts recognized in Q3, although, as you can see, we could maintain our gross profit, increase our margin, manage our cost efficiently, keeping R&D at the right level of investments and, therefore, improve profitability overall in line of what we’ve done over the past quarters.
In this business, you need to be aware that indeed, you can have a slight variation of sales depending on the projects recognized in the quarter. We are coming out of Q2 where we had a significant project being recognized in our numbers. That was not the case in Q3.
This being said, the strategy to focus on specific customer segments, geographies and also specific value stream revenue, it works. It works, and it is translating, as you see, as a continuous improvement of profit margins. For the time being, top line growth is not the main measure for us. We are more tracking the desired value streams that we want to grow. And on these accounts, we are doing okay.
Regarding — this is a business where you have some visibility going forward, and I’m happy to report that even in the current circumstances, we are seeing a ramp-up in our order intake. Actually, the Q3 performance in terms of order intake was the best in the year. And therefore, we remain very confident going forward with this business, and our order book is still more than a full year of total revenues. I’ll remind you that approximately more than 50%, about 55%, are recurring revenues and 45% project revenues for this business. So the main message is we’re on track to reach the profitability target of the high teens EBITDA over the next years.
Radiology Solutions. Here, as you see, top line, 7% below last year. The story is really that the film volumes have been subdued in key markets like China, India or Latin America, and that’s mainly due to the fact that hospital procedures could not proceed normally due to COVID. There was probably a bit of an impact also on inventory management between Q2 and Q3. And therefore, it translates as this is a highly profitable product range in a €6 million impact in EBITDA.
In the meantime, actually, our business in Direct Radiography is the reverse. We have seen a double digit, actually more in the 20s percent of growth in this business, but it is not enough to make up for the film volume loss. But in the DR market, we are gaining market share, and we are significantly improving the profitability of this business in — even in a year quite disrupted by the pandemia.
In the computed radiography market, which is also a sunset market, we are still holding up very well in terms of margins in anticipation and to preserve competitiveness and address the further expected market decline. We have announced our plan to reorganize our equipment production footprint to reflect the expected market decline and to work on our competitiveness. It means we are — we’ll shut the — we will plan to shut down one site in Germany and restructure significantly another one. We will outsource part of our production and transfer another part to our Chinese factory in Wuxi. And this is going to be executed over the next, I would say, 18 months to 24 months. So that’s the story for Radiology.
With volumes, what I would like just to pass as a message is we are — we have seen already a sequential improvement on the film volumes during the course of the quarter, and we expect further improvement during Q4, which is traditionally the strongest quarter for our film business.
Digital Print & Chemicals. Well, here, our top line is still very much impacted by COVID, as I said, mainly the sale of equipment, large-format printers in the inkjet market. So gross profit is showing — is reflecting this, although we are successful in keeping our margin level. We have been able to adjust the SG&A and R&D, meaning that there is almost no EBITDA impact for the quarter, which I believe is exactly what we needed to do, and we are successful in doing it.
So I’m — when I look at this business, we are working also to prepare the future. One thing we know is that this crisis will stop, and we have been busy preparing for this by a number of initiatives in the inkjet area. We keep adding new products to our products family. We give you the example of this new printer family, but we have several initiatives in the work. We are right now entering new applications such as laminate floorings and leather. We were a bit delayed also due to the circumstances, but I’m happy to say that now we will see concrete business development in the next quarters. And we are also busy working on solutions for new applications. So we are extending our play in this area, and I strongly believe that we have whatever it takes to win in this market.
Specialty businesses — Specialty Chemical business. So I would like to remind you that actually, we are seeing also an improvement — a sequential improvement in the business and markets are coming back. A good example is our conductive polymers that are used in hybrid and electric car technology. We had a bit of a dip in Q2 and beginning in Q3, but now we see a strong rebound. This is, of course, due to the automotive market. But we are in the past exposed to a part of the alternative market that is dynamic, is hybrid and EVs.
I’m still also very bullish on the membranes for the green hydrogen. Again, it’s not going to impact the company in the next couple of years, but there is not a day without an announcement of a new green hydrogen project. The technology winning in the market in terms of capacity, in terms of capacity of megawatts is really the alkaline electrolysis. And about 95% of the installed base and the projects in lockdown are based on Agfa membrane technology. So very promising market for Agfa. We have a recognized critical-to-performance membrane in this area.
Last but not least, the film and foil business, also impacted because we are exposed to industrial markets, but we have a visible recovery also in the course of the quarter even if we are not back whatsoever to pre-COVID numbers.
Offset. Now offset is the difficult part of the portfolio. It was already in the — in the past quarter. But right now, we are seeing what is the weakest quarter for offset.
Business is very, very slowly creeping back. You see it’s still 18.5% below last year actually in currency. But you see more importantly the dip in the gross profit. This is one area where we have not been successful to keep the gross profit margin at the same level of last year, although we were busy taking care of our SG&A and our R&D., of course. And therefore, we are in a strong negative territory for EBITDA in the quarter.
However, I would like to remind you that we have made a decision that we have announced in June that we are shutting down 2 manufacturing sites in — 1 in the U.K., 1 in France. And actually, with the — we were in the social contract until the end of October, and therefore, we didn’t have any positive impact of this structural decision. I’m happy to report that a social agreement had been signed. And actually, as I speak, the — actually, the plants are being effectively shut down. So we expect already a positive impact in Q4. But of course, the full year — the real impact will be in 2021, where we’ll have most of the year impact.
The shutdown of these 2 plants is — represents approximately €20 million to €25 million of costs per year, to give you a precise idea of what it means. So what you are seeing today is a Q3 quarter that does not take into account yet the structural measure that we are making.
This is not the only measure we are working on. We are streamlining our plant assortment, we are reviewing our go-to-market and we already take some initiatives. But again, these initiatives are not showing in Q3, probably will not show in Q4 but will start having an impact 2021 most certainly. So we are doing that.
And the message to you is already in Q4, we expect to be back in a positive EBITDA territory. And in 2021, we will be also in positive EBITDA territory. So that’s where we are with offset.
So outlook today. Q4 will be better than Q3, of course. Not back to normal very clearly. And especially with the recent developments, the second wave of pandemia, we are not expecting a spectacular recovery year-on-year, but we expect to have a much better performance in terms of profitability than Q3. And of course, as you’ve seen, I’ve said being back in the black here for — being back in positive EBITDA territory will be a strong driver behind it but certainly not the only one.
This being said, so our outlook for full year EBITDA is expected to be above €1 million bar any significant impacts from the pandemia. In these days, as you know, we work in a quite volatile environment.
2021. How do we see 2021? I think it’s important to start sharing that with you as well. We also expect to show a continuous recovery in ’21, but we don’t believe that we will be back at 2019 level. We do expect to have a structural improvement of the offset business as discussed. We believe that after the significant increase in profitability of Imaging IT in the single year, we will turn our focus in 2021. We’re continuing to build up a very solid order book and order intake, but we are not expecting — we are — we’ll be more in consolidation mode in 2021 to prepare and establish our future top line growth.
And for DPC and Radiology Solutions, we expect a recovery depending on the different markets, but we do expect a recovery in these areas: radiology, better film volumes and continuing growth in EMR. So that’s the outlook I wanted to share with you. I have one more thing I would like to share with you before turning to questions. That’s probably the first time you hear about it in Agfa, and that’s sustainability.
We do a lot of things in sustainability in Agfa. We have been busy in the company to have initiatives along circular economy, recycling, diminishing the impact of our footprint and creating, I would say, planet-friendly products. But we have been busy in the past months now to structure a bit better these initiatives. So we are still developing this — our objectives. We have defined — actually, that’s what you see on this slide — 4 areas where we believe that we need to really focus our efforts. So the first one is about people because it’s gender equality. We will set ourselves a target to make sure that we are better at it. Typically in an industrial company, the — most of, I would say, the management positions and, even more broadly, the female employment is really well below 50%. We will try to increase our exposure in this area. And that — see it as a prelude of a more diverse and inclusion policy going forward.
Promote sustainable industrialization and foster innovation. We are setting ourselves clear targets regarding the way we should be doing innovation. To make a long story short, sustainability needs to be an integral part of the way we manage our business. We select our innovation projects, and we will prevent ourselves to put in the market new products that do not constitute progress versus the current generation.
As well as, we have a lot of products in our portfolio that are part of sustainable solutions. I was mentioning the membranes for green hydrogen, and that’s a clear driver of growth for us. I was mentioning the conductive polymers in hybrid and EV. But I could also tell you that the new generation of things that we are developing are water based instead of being solvent based. So all this is really we want to get one step further and to institute it as the way to do business in Agfa.
Then on our footprint, we are — as a number of initiatives along recycling whether it is recycling of metal, we use silver in our production process. So we are striving to continuously recycle our silver. We are looking at the recycling of our projector. We are looking at projects like solvent recovery and reduction of waste, whatsoever. So here, again, we’ll come up with a specific material objective for the company. And last but not least, climate change. Agfa is not a huge, I would say, CO2 emitter. But still, we are using, of course, energy in our process. And here, again, we are looking at how to make sure that we do contribute to the Paris Agreement, and we will make commitments to reduce our CO2 footprint in the next year with precise objectives.
So bear with us, it’s still in progress, but I want to tell you that sustainability is an integral part of the vision and strategy for Agfa, and that’s really the message I want to leave with you today. So again, indeed, a quarter that was still very much impacted by COVID-19 especially on the offset part. But the key messages I want to leave you with, plans are ready and already implemented to really improve and recover the profitability in the offset. On the rest, as I told you, we are seeing a gradual recovery. It’s not the pre-COVID level, of course, but still a sequential improvement versus Q3 in our businesses. And I remain extremely confident that midterm, the portfolio of Agfa solutions is actually well placed to address the market demand.
So thanks a lot for your attention. I propose now that we turn to questions and answers. So I will answer questions from analysts and from the press. So if you have any questions, this is the time. Thank you.
[Operator Instructions]. And the first question comes from the line of Guy Sips from KBC Securities.
My question is on offset. You mentioned that you estimate that the current pricing levels in the industry are not sustainable and that you are looking into ways to adapt the earnings model for certain services that you’re providing to customers. Can you elaborate a little bit on that? And how do you see this going forward?
Sure. Thanks very much for the question. Yes, clearly, the offset is in a declining volume. And clearly, the margins, as you see, are not enough. So what are we doing? So we are looking at our go-to-market. We will — we are looking at our presence in geographies, for instance. We are looking at our channel-to-market. Should we go direct? Should we use indirect channel? We are looking also at repricing part of our segments in the offset market. We are analyzing actually customer-by-customer profitability. And we are doing this work in order to reprice whenever we believe we need to reprice. So that’s a few examples of the action. Luc Delagaye, do you want to comment further on this? Or I think it’s a good sample of…
It’s a very good sample of what we are doing at this moment in time. And so more to come later on.
And your relationship to your partner in China, how do you see this going forward?
Our relationship with our partner in China, well, we have a JV partner in which we are in JV, and we have good relationship, and it goes well, I would say. Our relationship is Lucky. As you know, it’s of 2 different relationships, one on the China sales platform, which is running, by the way, running pretty well. It’s beneficial to all because we have a place in common, actually, our channel-to-market, although we market our place separately.
And we have the manufacturing agreement. It works well, but I must say that the ramp-up in production is slower than expected. And here, it’s also due to the fact that of course, we cannot go to China for the time being. And therefore, I would say the ramp-up of the production, the OEM production we have with Lucky in China is slower than we would have expected. That’s the comment I would make, but the partnership is running well.
The next question comes from the line of Kris Kippers from Degroof Petercam.
Just a question on — relatively on the health care segment but also on radiology, of course. We see some decline in revenues. And I was just wondering to what extent is actually — if you look at certainly in Europe, of course, but the semi-lockdown, which we currently face, to what extent is that hindering any new ordering in that business? And is it actually, let’s say, hospitals? Do you see any financial jeopardy coming from that side which could, let’s say, delay orders in that — in those segments?
Okay. So two very different situations. I’m going to answer on the film part, and I will leave it to Luc Thijs, my colleague, to answer you on the HealthCare IT part. On the film part, we are deep in — the key markets for film are really China, India, Latin America, the rest of, I would say, the emerging market world. And here, it’s just access to hospital that was very difficult still during Q3 for countries that I mentioned, although things are going a bit better now. So it was purely access to hospital and the fact that apart from going to hospital for COVID, people couldn’t go for normal things.
Then in China, where the — it’s a bit different, in China where the pandemic was — earlier in the year, you had a bit of inventory adjustment, of course. And now things have recovered but not yet to the pre-COVID-19. There is still a lingering impact on this volume for film. So that’s for film. But that’s — we expect it to be temporary. And we expect the situation to ease back to normal when the lockdowns — but in these countries — we are more depending on China, India and Latin America than in Western Europe, of course, on this business. So that’s our view. On HealthCare IT, Luc, impact of the pandemic?
So there is definitely impact on the pandemic, but it varies a lot per care provider. It varies a lot per geography. For us in Q3 actually, we had strong order intake, strongest of the year actually. But the resurgence, of course, of the pandemic, as we see it today, creates a certain uncertainty because providers can indeed shift priorities either in decision-making or in implementation. And we’ll manage that as we go quarter-per-quarter.
But we have not seen anything material.
Well, so far…
At this time, we’ve not seen anything material. And again, what we are providing in Imaging IT actually has a purpose for COVID-19 reasons. So we would expect that — anyways, it’s part of solving the COVID-19 pandemic, what we do.
Okay. So we have a specific program to help our care providers fight the pandemic, and that actually is creating a necessary attraction in our solutions, yes. And fundamentally, we are part of the solution.
And one of the reasons for the good profitability is also the efficiency that we have now in implementation. And we have learned to work a lot more in remote, and we proved to be as efficient doing this and with less cost. So, so far, I would say, yes, there is an impact. We are not living in a vacuum, but HealthCare IT sees a relatively minor impact so far.
Next question comes from the line of Maxime Stranart from ING Bank.
So three questions from my side, if I may. First of all, you were mentioning that you expect the working capital needs to decrease again in the fourth quarter. Maybe could you provide an order of magnitude on that front? Secondly, on the adjusted EBITDA guidance, it implies an adjusted EBITDA of €29 million in the fourth quarter. Could you provide more color on, well, the performance of each division? And maybe finally on 2021, could you provide us with a guidance in terms of free cash flow and CapEx for the entire year?
All right. So working capital. Indeed, we are not guiding on working capital. But if I tell you that we are shutting down for 4 weeks totally our largest operating unit here in Belgium plus partial shutdowns during the course of the quarter, it gives you already an indication that indeed, the working capital will reduce significantly. This being said, I’m going to stop short of giving a guidance in this area because you have a lot of moving parts in this area. But yes, you’re going to see an improvement, of course.
On Q4, maybe let’s be careful what we are comparing. When I say an adjusted EBITDA of above €100 million, I am retreating the HCIS amount. It’s — or retreating the part of the HealthCare IT that we have sold. So don’t look at it from the historic numbers that you have actually.
And I think it’s important to say because indeed, you need to subtract actually the 4 months of the HealthCare IT EBITDA that we had before closing the deal of selling the business in order to compare this €100 million. So maybe that is something that we can treat separately. And Viviane can certainly guide you after on the number because if not, we’re going to have a mismatch here.
So I’m not — again, I’m not counting the HealthCare IT EBITDA in this €100 million. And we had 4 months of it at the beginning of the year, I want to make it clear. Regarding 2021, too soon to — we are right now doing our forecasts for 2021. We are right in the middle of it, so it’s a bit early for me to say anything. But I still wanted to give you more guidance regarding the way we are looking at the evolution of our activity and our markets.
But regarding CapEx, that I can already tell you that the CapEx needs in the country are extremely stable and limited. So we spend order of magnitude €35 million to €40 million CapEx a year. And there will no — we don’t have any specific CapEx needs in this respect for next year. This being said, again, cash flow is a specific area of focus, of course, for me. We will — you’ve seen our cash flow bridge that I hope gives enough transparency. I think the name of the game is we’ll move to, well, a company that can sustain itself in terms of cash flow. But we won’t be able to pay with our cash flow, of course, the pension recovery plan as well as the significant restructuring if we do that, to be very clear.
There are currently no questions in the queue. [Operator Instructions].
Well, thanks very much for everyone for attending the call. Again, indeed, COVID-19 impact has been very important in this quarter, and the offset business is challenged. But again, I repeat, steps are being taken, measures are there. They don’t show yet, of course, the impact in Q3, but everything is in place to improve the situation going forward. And then the rest of the portfolio, we expect also sequential improvement as discussed.
And right now, we are busy doing two things: mitigate in the short-term on the cost and ensuring the cash consumption of the company; and on the other hand, preparing the future to grow our business profitably. So thanks a lot for your attention. Thank you.
Thank you for joining today’s call. You may now disconnect your lines.