Agfa-Gevaert NV

Hello and welcome to the Up for Half Year 2023 results call. My name is Laura and I will be your coordinator for today's event. Please note this call is being recorded and for the duration of the call your lines will be unlisteningly. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your questions. If you require assistance at any point, please press star zero and you will be connected to an operator. I will now hand you over to your host, Pascal Duery, the CEO, to begin today's conference. Thank you.

Thank you very much, operator. Good morning, everyone, and welcome to AXA's conference for Q2 results. I'm sitting here in Morsel with AXA executive team and, of course, our CFO, Dergaman, and our investor relationship coordinator, First, I would like to remind everyone that the story of AXA is the story of a company in full transformation and that the transformation is in progress. About 50% of the group activity is with film, a mature to declining activity, whereby the other 50% of the activity is with film. is operating in markets that we believe represent the future of the company and are offering significant growth opportunities. So it's still very much a company in full transformation, and this set of results is showing that very clearly. Why? Because first, I would say this is a positive of these results. When I look at the growth engine of the company, they are all very positive top line, and in an economic environment that is not – very supportive, in fact. When I look at healthcare IT, we are growing 6% for the semester, 8% for the second quarter, and that's actually also having a negative currency impact, by the way. For digital printing services, and remember that DPC is a growth engine, but in fact, half of DPC is in the industrial field, so in legacy activity that are declining. So digital printing, if you look at digital printing, we are growing the business 25% in the semester with the in-car acquisition. If I remove the impact of the in-car acquisition, we would be growing 5% in a market that is quite actually overall depressed. If you look at the offset printing, the flexo markets. And I would say this 5% organic without Inca, the good news, well, it's contrasted as well. And equipment sales would be below last year due to the economic environment in the first half. But the consumables will be strongly higher than last year, 8% to 10% for things like inks. Third growth engine, Zirphone. By Zirphone, I'm not going to give a percentage. It doesn't make sense. Actually, we are multiplying by four. the activity of Zircon compared to last year, as you know. And although during the first half it was not actually producing results, on the contrary, we were spending money to develop it in Australia, it will produce results during the second half of the year. So DPC is indeed a bit dragged by the traditional activities, and that's what you see in these results, which are not as good as the first quarter. Actually, two reasons for that. The first reason is traditional film activities are mainly, in fact, exposed to China, which today is not good news, let's say in terms of market perspective, in two areas, the level of demand, but also the inability to price in the Chinese market. I'm very clear about it. It's complex. And the second point that has been impacting DPC is we have suffered the manufacturing inefficiencies that led us to actually write off inventory. If I remove these impacts, actually DPC is really on track in terms of growth. And what you've seen in the second quarter will be corrected in Q3 and Q4. We do have top line pressure on the other activities. And you will see it in radiography. We have pressure in the market and in the margins. And also here we find that China has the main exposure where we have these issues. So that's very clear that it's a very contrasted evolution. And as you know, the transformation of the group is to replace the legacy activities with the growth activities. Sometimes the name of the game is to grow faster and to generate faster growth from the growth engines that we are losing out, so to speak, on the legacy activities. This quarter was a quarter where it was a bit more difficult to do it for us than the previous quarter. But I think during the second half, we'll get back to this reason. I want to stress as well that currency has been adverse to us as well. The dollar and especially the RMB for us, given the size of our Chinese exposure. So it works against us. And if I look at the impact of the currency, the story on the bottom line is also a bit different. Now the outlook. As I said, DPC will continue its progress, no doubt. I think, you know, a number of things happened at the end of Q2 that gives me the team, I believe, confidence going forward. First, we are starting in swaps. We were not in a position to do that during the first quarter. We are just starting to implement the strategy in SWAT, meaning we are addressing the Inca base with our inks and with success for the time being. As I said, Zircon has made progress on productivity. Zircon was still a drag during S1. It will be a positive factor during S2 because we have already made some progress. Are we at the end of the progress? Absolutely not. Absolutely not. But now I can firmly say, yes, Zircon will contribute positively. Radiology will be stable. In fact, more stable to where we are today. We still have the pressure from China. That's not going to go away. But the good news in this area, it's not so much margin related. It's not so much volume related in China. We are not seeing a decrease of the volume of the market. We are seeing a pressure on the margins with pricing in China due to the procurement activities in China. The market does not really disappear. So we expect stable radiology with film declining and VR making progress on the bottom line. Well, the good news is, you know, the story of LSKIT was first to restore profitability, which we did a couple of years ago, in fact, but now we're in a phase where we start generating some growth. It's only the second year, actually, in a row that we generate growth. This growth does not get fully transpired to the PLL. The growth is more on the project side, while we still have a bit of a challenge in the service revenue part, where we are hit by two things. Actually, inflation that is difficult to reflect on selling price due to the nature and the structure of our contract, but we are working on that. And the second part is... The growth that we have been generating now for, I would say, a year and a half has yet to fully translate into service recurring revenues. There is always a bit of a lag. And in some specific case, there could be a larger lag, especially when we make contracts with the Department of Defense in the U.S. So I think it's important for me to repeat, if we are growing in the market, it's because we are growing our presence. We have new, net new customers. These net new customers are not yet contributing to service for the new, but they will. So, I want to stress it again today, meaning that on the outlook, we still say, yeah, overall, S2 is going to be a lot stronger than S1. We've got also a seasonability impact, whereby we make most of our Actually, our profit in ICICI is too far. It has been the case in the past few years. It will still be the case today. So, that's the overall comment I wanted to make very quickly. Therefore, I'm not going to dwell so much on this slide and the next. As you see that – sorry, that's the wrong speaker. You see that – it translates, you know, after six months with modest growth, but in fact, the significant growth in the growth engine and the decline in the film traditional activity, and where the second quarter was not as favorable as the first, we were below last year, for the first six months, we were above last year, and I expect us to be better, actually, than last year, that we restore a bit our First, there are still a lot of restructuring and bond recurring, less than last year. We start to, this is coming, we say, not to an end, but it's going to decrease. We gave you a guidance, I think, and we stick to this guidance today, 35 million for the year, indeed. And therefore, the cost of transformation is still going on. You see some of the benefits of it. If you look at SGMA, totally under control in a high inflation context. It's part of the effort we do on productivity, and that is also fueling the transformation of the group. I'm going to now turn to you, Dirk, to present the cash elements.

Yeah, so let's start talking about trade working capital. And just to be clear, this is the sum of the three divisions, so it does not include contractor operations because it's very hard to make comparisons versus last year. And so the key thing here is that we're seeing significant progress versus last year in terms of the reduction of inventories. And so versus last year, we reduced 21. And as you know, usually in Q1, Q2, there is a buildup. That's the seasonality of AXA. This time, also if you compare versus Q1, we're actually decreasing. And that translates into a serious reduction of inventory days also, 23 days. So we can start seeing the results of some of our efforts. It's the start because we are eliminating excess inventories from the past. So we're not yet at the level where we want to perform. But it's a good start in terms of our program to reduce the inventories. So if you look at the bottom line percent of sales working capital, So we ended up in Q2 at the same level, 32% as Q4. And Q4 usually is our lowest percentage of the year. I think the question came last time in terms of what does it mean with contractor operations? So that percentage would be 33%. In terms of where we are targeting to end up at the end of the year is at 30%. So we do still will... reduce the working capital through the second half year when we're targeting to end up around 30% for the end of the year. So if we then move to the next slide, the free cash flow, so the free cash flow is quite negative at minus 45. There's a couple of elements to highlight. First, trade working capital, despite the progress in the three core divisions, this is really the effect of the externalization of our relationship with the former offset division. So basically, the receivables that used to be intercompany, so neutral for the company, now became external receivables, and that's really the explanation of the increase. CapEx is slightly higher than last year, and it was driven by the investment program of Sifon, as well as some investments regarding energy efficiency. Provisions and other are traditionally higher in the second quarter because the core element there is the payout of the employee benefits that traditionally happens in the second quarter. Income taxes were slightly positive, so there was money received in terms of taxes. And in terms of pensions, I'm not sure if you remember, but in the first quarter, we had a slightly higher amount because we paid some of it a bit earlier in March rather than April. So here we see the other side of it a bit lower in the second quarter. But year-to-date, it's in line with expectations and guidance. Restructuring and non-recurring a bit lower than in Q1, significantly lower than last year. but still a significant amount in the quarter. So if we then move to the next slide in terms of net financial debt, so we still are in the net cash position at 14 million, but obviously decreasing quite significantly versus the previous quarter driven by all the investment programs.