Agfa-Gevaert NV

Hello and welcome to the ACTFLA Q3 2022 Results Conference. My name is George and I'll be your coordinator for today's event. Please note this conference is being recorded and for the duration of the call, your lines will be in listen mode. However, analysts and the press will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on an example keypad to register a question. If you require assistance at any point, please press star 0. and you will be credited to an operator. And I then call our host today, Mr. Pascal Jouery, CEO, to begin this conference. Thank you.

Thank you very much, operator, and good morning and hello to everyone in the call. Welcome to this result session. I'm sitting in a room with ACFA CFO, Dirk De Man, with Vivian Dictus, Head of Investor Relations, and the executive team that stands ready to answer your questions. So let me first start by a word of context that I believe can describe and explain a bit the set of results we are presenting today. First, inflation is still at a peak in our P&L. Although we are seeing some release in some of the markets, from freight to chemicals or metals, We are still not seeing that in the P&L. And therefore, pricing today is lagging versus the inflation that we are seeing, and that shows very much in these results. Second part, we have a specific impact from China. China represents globally for Agfa a little bit over 20% of global sales. So it's one of our major markets, and especially for radiology. And we are impacted by the situation in China in terms of COVID lockdowns and economic slowdown. It's difficult to distinguish between the two. Just some statistics I'd like to share with you. It's not really publicized, but at the end of October, and it's still the case today, you've got approximately 250 million people in China still impacted by some constraints, restraints, COVID lockdowns, representing 25% of the GDP. So needless to say, it has a tremendous impact on some of our activities, and not only radiology, by the way, DPC is also impacted. Third element of context, we start seeing some signs of demand weakness in some geographies, and mainly in non-healthcare markets. We are seeing that offset is a good example for that. We have a negative volume quarter due to this . So that's a bit, the three elements of context that I would like to stress before starting to discuss ACTA performance. So indeed, if we look at the total group, EBITDA is increasing versus last year, but as you've seen, we've very contrasted performance. Let me start with healthcare IT. I'm gonna detail it of course later, but I would say here all the indicators are green. Strong organic growth, strong order intake, good profitability, good mix, and preparing for a Q4 that will be stronger than Q3. So here I'm very pleased with the development of the strategy and the roadmap. Digital print and clinicals, clearly a different story, a very, very disappointing set of results, I have to say. Also contrasted, as you know, DPC is a mixed bag of different activities. Some of them are really the engines of growth and that digital printing and here we see still very good momentum. We have, I would say, a good business development, even for the timing. Of course, the fund does not contribute to the results. Actually, it contributes a lot more to the cost. We are spending a lot of money to develop industrially, as I speak. But overall, we've seen demand weakness in some activities in DPC. DPC is also quite impacted by China. Some of the markets, like electronics and technology, And PCDs are really centered in China, and we suffered also from the lockdown. And EPC is also suffering, I would say, from a lag in implementing price increases. It doesn't mean that we're not implementing price increases. It means it takes a very long time to hit the P&L. Remember, it was a similar situation in the last year before we started to see the full impact. Radiology, well, clearly the story is around COVID lockdown here. We thought, you know, that we were going to see a rebound in Q3, but the situation has not changed. Is there an issue with the sound? Oh, yeah, sorry. I didn't change the slide. Indeed. Indeed. So we have seen the impact of lockdowns in China. We thought it was going to be better in Q3. It was not. It was a lot less publicized because it was not about big COVID lockdowns in Shanghai that made the headlines. But as I shared with you, you know, these statistics, actually it's spread out in China and it continues. I'm not going to – I'm going to say right now that for the time being, you have no signs, of course, of – policy change, and therefore, we are expecting COVID lockdown to continue as they are during Q4, even if Q4 for radiology will be higher, but mainly for seasonality reasons and also the timing of some export contacts. But we are not saying that the situation will change. Offset solutions. a quarter that is also in the continuity of the previous quarters in terms of profitability, but with a different profile. Actually, we have less volumes, and I would say good margins. So it's price over volume strategy. It works. You can see it in the bottom line, but indeed, for the first time, we've seen the first impact of an economic slowdown, mainly in Europe. So what are we doing? Actually, we are preparing some additional measures to address what we see today as challenges specifically in DPC and in radiology solution. So we have a plan that actually is almost ready and will be presented pretty soon within the group in order to quickly get back to our level of ambition in these two divisions. And also addressing, of course, the fact that offset will soon not be part of the perimeter of the group. And I take the opportunity to repeat that we are expecting to close the offset transaction. I read in an analyst report this morning that there might be a question mark. There is no question mark. Actually, the buyer is very keen to do the closing as soon as possible, but we have a technical point that we need to solve in North America related to IT systems that is really the critical path to the closing. But I repeat, there is no back close. There is no uncertainty. And if anything, the buyer is keen to close on a timely basis. So, let me now. Quickly comment the numbers. So if you look at Q3, modest growth in terms of top line, but very contrasting. Growth in DPC, growth in LKIT, double-digit growth in LKIT, by the way, corrected from currency. But in fact, decreasing top line for offset and decreasing top line for radiology. When you look at the overall equation of the group in terms of margin, you say, well, basically, it's about stable margin activity level at least compared to last year. But here, that's where we have a strong contrast with offset and LCIT doing better than last year. and DPC and radiology doing less well than Esquire. So very contrasted set of results, and I'm going to come back to that. Below EBIT, you still see the cost of the transformation of the group. As you know, we are in full swing in terms of IT transition, as well as the creation of our global business service organization. So this is reflecting in, I would say, below the EBIT in the non-recurring and restructuring line. So contrasted indeed, very, very different situation, business by business. We are still going in DPC and healthcare IT, but DPC for the time being both doesn't translate in the bottom line. I said it, we are impacted by the lockdowns in China. It has an impact on the consumption of film of about 20% for us, and China is our first market. So it has a tremendous impact on the overall film activity. And I'm going to come back to that and detail to you a bit more and disclose to you a bit more numbers regarding especially the forward looking indicators like order intake. Well, gross margin increase at the group level, no issue, but again, a very contrasted situation. We are, we have a situation where price increases have been done and completed totally not yet, where it's still a lot of work in progress, both in radiology and in DPC. We are committed to do it, and we are putting more actions, but it's fair to say that the difficulty for us is to keep up with the pace of inflation, And now the inflation that we are seeing is more about salary inflation and especially the Belgian situation with the indexation that makes it quickly to the P&L and makes it a bit difficult for us to reflect this in our prices on a timely basis. So if I now turn to the cash performance, I will leave it to our CFO, Dirk, to comment these numbers.

Yes, thank you, Pascal. So for Q3, as you can see, the adjusted free cash flow was positive at 20 million, sufficient to cover the pensions, but there was also a heavy restructuring and non-recurring quarter. So with a free cash flow netting to minus 11. Now, if you look at the trade working capital, although you will see that working capital still increased in Q3 in the latest slide, but there was no net cash impact, actually slightly positive. The capex was maybe a bit higher than what we would normally see, and that's basically driven by the fact that we were doing some front spending buying CO2 certificates that actually will be covering the year 2023. And so, accounting-wise, these are capitalized and then consumed as we are using the CO2 certificates. And then maybe the last comment to make, restructuring and non-recurring, which is really demonstrating the fact that some of our transformation projects are ongoing in full swing, and particularly the ICS transformation and the finance transformation, which basically means a lot of costs are also related to, let's say, the knowledge transfer, the shadowing, in order to transfer the internal activities to the outsourced teams. Now, another note I would like to make in the quarter, and we do not have a separate slide for that, but in Q3, we managed to further de-risk the UK pension plan. And that's with most of the remaining liabilities. And that was done through another buy-in transaction. And we were able to do that without any cash contributions. So this is actually similar to the operation we did some time ago. And this time we saw a market opportunity with all conditions pointing in the right direction. We took advantage of it and actually it was a good thing because that window of opportunity closed very fast when the UK financial markets went into turmoil. So we're really happy to have been able to perform this transaction. And this means that almost all of the UK pension plan is now fully de-listed. If we move to the next slide, just the year to date, and obviously the key comment there is that our trade working capital is still quite heavily weighing on the cash flow of the year. And this is a big increase. We were hoping to see already some improvement in Q3, but that trend hasn't turned yet. But we do predict that there will be a working capital reduction in the fourth quarter, although not fully to last year's level. And I will get back to that when we talk working capital. On the next slide, you can see the net cash position. So there is, again, a slight decrease. And maybe also a reminder that in the previous quarter in Q2, we also completed the transaction regarding Inca. And then moving to the working capital. So it remains at a high level also in Q3. And that's driven basically by all the factors we already discussed in previous quarters impacting the inventories. So this includes inflation for an exchange. supply chain and logistics issues. And as Pascal mentioned before, added to that, we also started seeing economic demand slowdowns in certain markets, but especially in China and in Europe, which basically means that demand was a bit less than predicted, and therefore inventories stayed at a high level. On the other hand, we made good progress on trade receivables. Trade payables are remaining at a good level. So, overall, the impact is limited, but obviously, our expectation was to see that coming down already in Q3. Now, we do think inventory levels will, and we know inventory levels will go down in Q4, but we do not expect networking capital to be at the same level as previously. And the two key reasons for that already are higher exchange rates, which obviously creates a higher cost on the balance sheet, but also the Inca acquisition, which in Q3 was around 20 million of extra working capital that was added already in June, but it's still there and is a part of the comparison versus last year. Now, I'll hand back to Pascal to discuss. Thank you.