Agfa-Gevaert NV

Hello and welcome to the AGFA Q1 2022 results call. My name is Jess and I'll be your coordinator for today's event. For the duration of the call, your lines will be on listen only. However, there will be the opportunity to ask questions. This can be done by pressing star 1 on your telephone keypad to register your question at any time. If at any point you require assistance, please press star zero and you will be connected to an operator. I will now hand over to your host, Pascal Ejoueri, CEO, to begin today's call. Thank you.

Thank you very much. Good morning, everyone, and welcome to AXA's Q1 earnings call. I'm sitting here in Motsau with the other man, our CFO, Vivian Dictus, in charge of investor relations and finance. and the rest of the executive team of ACFA. So if we look at Q1, what are the key highlights I would like to comment? First, the level of demand overall for the group is still very satisfactory. and that translates into a good top-line performance, not only for offset, but digital print and chemicals, and overall in our markets, except specific pockets where we have a bit of disturbance from either a lockdown in China, supply chain issues, or other issues like the Ukraine-Russia situation. the overall level of demand is rather satisfactory for us. As you know, we are living through a very important inflationary context. And if anything, in 22, inflation has accelerated compared to 21, as we all know. In this context, we have been able to remain quite resilient in terms of gross profit margins. and we have been busy increasing prices in pretty much every line of our businesses. This translates on EBITDA with an increase of 22% despite this pressure and also despite some disturbance in the supply chain that hit us in Q1 and probably will continue to be a factor in Q2. In the meantime, we are continuing our transformation. We are now in execution phase of the IT outsourcing and partnership with Atos. Our key personnel is already transferred, I would say, in Europe. And as well, we have announced a new initiative in the reorganization of our financial services that we will be implementing over the next months. The one area that I want to stress as well is indeed during Q1, we had a surge of working capital and especially inventory that was a bit higher than normal, I would say. And we will explain that. And my message to you is it's going to get back under control by the end of the year for sure. We have specific reasons for which we see this spike in working capital. And we are already, I would say, in marching order to reduce it to a more normal level. But the gentleman will explain this. If I look at the numbers here in the P&L, What we are looking at indeed is a top-line growth of 7.2%. Actually, currency was favorable during this quarter. This top-line growth is also translated into gross profit. However, half a percentage point less than last year. I would argue this is pretty resilient given the inflation that we are going through. But indeed, it's a slight margin decrease. SG&S, selling in general and administrative expenses. You see a significant increase here for three reasons. First, we have selling expenses. We have the freight to customers in this area. And I would argue this is a variable cost that increases with the level of activity. And as well, this is the result of specific inflation in this area. Second, currency is unfavorable on the cost side due to the weakening of the euro. And third, this is the impact of inflation. In percentage of sales, it doesn't move so much, but it does create a significant increase overall on FG&A. R&D is stable. And therefore, we are able to post a significant increase of EBITDA compared to last year, and indeed a much better EBIT. Now, if I look below EBIT, of course, we still have a restructuring and non-recurring charge, which is in fact the cost of the transformation of the group, which is significant. And we will also come back to that in the outlook to give you a yearly outlook for this transformation cost. Well, now if we move on and explain a bit more the performance, of course, as you know, it's quite contrasted in a way. On top line, very good performance of offset and DPC. You will see it later, but offset is price-related, and DPC is activity-related mainly. There is a bit of price on DPC, of course, as well, but it's also activity and volume-related. As expected, you all remember, we had a record quarter in 2004 for healthcare IT, so we have a more subdued quarter for Q1, but that was... That was, I would say, planned and not changing the outlook for this business at all. And radiology, we had a good growth in VR, and we had a bit of a situation in the medical field, especially in China, in terms of volume and mix. We were a bit hit in terms of volume for the first quarter, especially in China. And indeed, we had a mix that was not favorable. So I would say that the first quarter for radiology is always a weaker quarter. This quarter is in line with last year, and we're expecting this medical field business to pick up as soon as Q2. And there is no significant price issue. It's more a mixed issue that we have seen in Q1. Price actions are in progress everywhere with satisfactory results. So overall, it translates into what I would call a resilient gross profit margin at 29%. We are not getting ahead, except in offset, but we are able to manage the inflation that we see. So offset, clearly we are turning the corner is the word that I would use after we had price increase number four at the beginning of the year. We're implementing, as I speak, price increase number five. And you see that in Q1 we have started to regain the lost ground in terms of margin. And I would argue that offset is a bit ahead of the curve compared to other businesses in ACTA. SKIT radiology solution, significant cost inflation as well. For radiology, it's more mixed effects that are impacting, that is impacting the gross margin. And for SKIT, at the same time, we do have a cost inflation, but we are also investing in our capacity to deliver our services. And DPC as well is impacted by cost increases and the overall mixed impact within the divisions. But overall, that translates into a 22% increase in this quite difficult context. Now I'm going to turn to free cash flow and leave it to Dirk de Maan to explain to you the components.

Yeah, thank you, Pascal. So overall, as you can see, quite a negative free cash flow for the quarter. despite better profitability but also strong and normal performance, let's say, on CapEx provisions, income taxes, also pensions. We start seeing the effects of the reduction of cash outflow thanks to the risking actions that we took over the past year and a half. But the key story here is the trade working capital where, as you can see, 54 million of buildup, versus December is quite significant, and I'll get back to that in a couple of slides when we talk about working capital. So if we move to the next slide, in terms of our cash position, we still have a very strong net cash position, although indeed it decreased primarily due to the working capital impact. And maybe to note also that impact there visible is also the share buyback, which was in the amount of around $8 million in the first quarter. But then let's move to the next slide on working capital. So, indeed, we are, let's say, back to a 28% of sales in working capital. The key impact is driven by inventories. And so, normally, in the pre-COVID period, AFA always has had a seasonal buildup in Q1, despite the fact that last year we actually had a decline in inventories because we were building down the excess stock after the COVID demand shock that we had built up. So it is normal to have that build up. But in this year, it actually is a bit higher than we would want to. And the first key reason, obviously, is inflation. So all the costs to make products have increased, not just the key raw materials like aluminum and silver, but everything is increasing. and indeed also the supply chain disruption that we continue to see, and that's a combination of two things. On the one hand, we have the true transport disruptions that cause more goods to be on the water for a longer period of time, so goods in transit are increasing, but on top also supply chain delays, which means that sometimes we need to wait for certain components before we can complete equipment and deliver it to our customers. So overall, I think it is indeed an increase. It is normal considering the circumstances. Also, receivables are increasing, but that's more driven primarily by activity. And I'm pretty sure this will also normalize a bit more over the next quarters. We will continue to do what we usually do is focus very hard on managing those levels over the year. and trying to find ways to mitigate the increase in working capital.