Agfa-Gevaert NV

Hello, and welcome to the ACFA Q3 2023 results. My name is George. I'll be your coordinator for today's event. Please note this conference is being recorded, and for the duration of the call, your line has been listed in only mode. However, you will have the opportunity to ask questions towards the end of the presentation. This can be done by pressing star one on your telephone keypad. If you require assistance at any point, please press star zero, and you will be connected to an operator. I'd like to hand the call over to your host today, So it's Mr. Pascal Jouery, CEO, to begin today's conference. Please go ahead, sir.

Thank you very much, and good morning, everyone. Thanks for being with us for the announcement of the Q3 2023 results of ACFA. I'm sitting here in Morsel with my colleagues of the Executive Committee, our CFO, Dirk De Man, who will take part of the presentation, and also Vivian Dictus in charge of investor relations. So Q3 results in a nutshell. First, it's absolutely in line with our plan and guidance. Second, this is a positive cash flow quarter after the cash outflow of the first half, which, by the way, was more than half due to the offset divestment. Third, we have EBITDA growth from our growth engine. which is higher than the challenges we are seeing in the film and legacy businesses of the company. And four, currency has a huge impact on our activities since we are a group mainly producing in Europe and exporting in Asia and having also a significant part of our business in North America. So it's weighing off the group top line and more importantly, on the bottom line. So all in all, results in line, positive cash flow, EBITDA growth in the right areas, and currency being a negative factor for the company. If I go to our businesses now, healthcare IT had, I would say, a good quarter, significant improvement in profitability, stemming from a good mix. Although the top line was not great, what we did sell in the quarter and recognize in the quarter was of a high quality and as well a good control of our cost to serve. DPC, Zirton continues to grow significantly and the news is it's now contributing to profitability. So we have a positive trend EBITDA from Zircon. Of course, in terms of cash, it's still an investment area, and we still strongly invest, of course, to prepare our future. But it is profitable, and that's it. Also, profitability improvement in digital print. We do have sales of equipment, which is a bit subdued, of course, in the current climate. But the good news is... When we look at the mix of our equipment, we are selling more high-end equipment than, I would say, mid-range equipment, and the in-business is doing very well. In DPC, we have also firm activities, and that's under pressure. We mainly expose in China in electronics, which is not today a very favorable market. So, healthcare IT and DPC, I would say healthcare IT... Good improvement, GPC in line. However, radiology was a bit subdued this quarter. DR still improved profitability, but the market is soft for the top line. And the medical field continues to be impacted from the centralized procurement practices in China. That's not new. It's continuing and I would say. We are also, of course, impacted by the currency with a very weak R&D. So overall, EBITDA for the quarter at 17 million, a clear improvement from last year, a clear improvement from Q2, positive free cash flow. That's according to what we told you a few months ago. We are delivering on this promise and still a net growth. a net loss due to the current transformation of the company that is continuing. So if we look at the P&L, I would like to stress that indeed sales are below last year with the current impact. However, when you remove the current impact, we are still a bit ahead of last year, right? In gross profit, you will notice that indeed we are improving the percentage of our gross profit. It's a very contrasting situation across businesses, but we do have pricing power in our gross businesses. SG&A is fully under control. This is a result that you see here of all the actions that were taken in the past three years to transform the company. And it shows in terms of cost containment and the ability to really control our expenses. R&D is below Lester. I want to stress that the only place where we did significantly cuts on R&D by changing a bit the way we address the market is in DR, in direct radiography. The rest of the R&D effort of the group has been kept, it's a constant, as it's really our license to operate in this market. We continue to have significant restructuring and non-recurring. However, I would stress that you see probably the number is below last year because we are coming at the end, I would say, of the major plans. So we have now a continuous impact in terms of cash, but P&L is less than it was before. So I think that has been already commented. I will now turn to you, Dirk, to comment on the cash and the working capital, the working capital first.

Yes, thank you, Pascal. So basically, as you can see, we continue to make significant progress in terms of working capital in line with our plans to primarily reduce inventories. So versus last year, we are $36 million below average In inventories, even though trade receivables are a bit up and trade payables a bit down, we still have close to 30 million of trade working capital improvements. So that means that we are about four percentage points below last year and, again, one percentage point below previous quarter. Obviously, we'll continue to work through that in the fourth quarter and get further the inventories down. If we move to the cash flow, so indeed a $5 million positive free cash flow, so supported by the results and the freeing up of trade working capital, the normal capex spending provisions and other versus last quarter where we paid out a lot of employee benefits is positive. Also, income taxes are this quarter positive, leading to an adjusted free cash flow of around $34 million. with pensions at minus 12 and restructuring and non-recurring items at minus 17, which, as Pascal already mentioned, is still a high number, but that number is clearly coming down as also the P&L charges are being reduced in the overall program. So on the next slide, basically our net cash position is stable versus previous quarter at 14 million. The cash flow, we do expect to be substantially better next year. And the key elements of that, we do expect the offset proceeds to come in in 24. Also, some subsidies for the Zirphone investment. And we want to continue to work on improving working capital. But also, restructuring and non-recurring, as I already mentioned, should be lowered. We do have sufficient liquidity with our revolving credit facilities. And obviously, we will continue to focus heavily on cash generation, both in the business and on the expense side. Back to you, Pascal.

Thanks very much. The healthcare IT now. So healthcare IT, as I said, this was a good quarter for healthcare IT. When you look at the top line, again, there is an impact on currency. And we... We adjusted for currency. We are improving the top line by 3.3%, but it's not high growth quarter. As you know, quarters could be a bit lumpy depending what we do recognize in the quarter. However, you see that it was a good mix quarter with the gross profit at 48%, while costs are, generally speaking, under control. So it means our adjusted EBITDA for the quarter comes much higher than last year on the previous quarter, actually. So, overall comments on the order book and order intake. Order book remains at a very healthy level. It has decreased a bit, but remains very well-oriented. Indeed, for the last 12 months, holding order intake versus last year, we have very modest growth. But this, again, is also quite volatile quarter on quarter. And Q3 is never a quarter for the order intake. I would still expect the full year 23 order intake to be much higher than full year 22. And when I say much higher, I would quote between 5% and 10% higher than 22%. I already commented the impact on the currency on the top line, the gross margin as well. So overall, I would say, for LSKRC, it was a quite satisfactory quarter. And I would like to remind everyone that the Q4 is always the strongest quarter of the year. So we'll see in Q4, but I'll come back to that in the outlook, of course, a stronger even quarter than this one. Radiology. So radiology is the one division that is the most challenged in the current conditions. You see it in the sales, with a huge impact of currency, because basically all of our films almost is exported out of Europe. So this is an area, a division that is fully exposed to currencies, mainly dollars and remedies, actually. So a huge impact of this currency, and we've seen a weakening of the volumes right at the end of the quarter, actually, having a significant impact on our gross profit. SGMA are very well under control, thanks from the fact that we did reorganize our radiology solutions set up earlier this year. R&D, I think, already mentioned it. Most of the R&D is for the direct radiography and has been the object of, I would say, of resizing and a bit of a change in the way we look at innovation in this market. And therefore, in spite of the huge gap in terms of sales, we limited the gap in terms of EBITDA, even if it's still indeed below last year. So this is the area that is, I would say, operating in market conditions that are a So first, we continue to improve the profitability in the DR market, but the top line of the DR direct radiography is pretty flat, actually, when we are, as we operate in a market where I would say even investment in medical equipment is a bit subdued. And we are seeing for medical film, the continuation of the Procurement policy practices in China further compounded, which has an impact on pricing, further compounded by the weakness of the renminbi. We also have, as it's a fairly global business, we are impacted by some of the geopolitics in the world as well. So that means radiology is indeed below last year, and we expect this trend to kind of continue into before. Before, last year was an extremely strong quarter, in fact, for the business. So now turning to DPC, DPC is growing 6.8% without the impact of currency. I would say most of this growth can be related to Zerfone, to the hydrogen membrane, while we have a more diverse situation in the rest of the business. So profit, gross profit is increasing almost two points, two percentage points compared to last year. It stems also from the price increases that we've been doing and executing since the beginning of the year, and it shows. What you see on SG&A and R&D is also the reflection of the Inca integration. So we have indeed for nine months more R&D. It is clearly a gross area in which we are preparing a major investment initiatives in the months to come. The EBITDA, of course, is higher than last year, which was a very complex and weak quarter. And in this business, of course, you have a contrasted performance. If I move a little bit more in detail, in digital printing, we have an excellent performance of the inks and the high-end equipment business. And frankly speaking, even in the complex economic environment, we continue to grow in this area, which validates for me the strategy of really investing in this digital printing track. We are on track regarding the conversion of printers to AXA insets. It works. We have already started ink swaps for a few months. As you know, we are selling now all in-car equipment with our inks, so pretty much according to our business plan. And the development of the speed set, meaning the single-pass packaging printer, which is opening a totally new market segment, is proceeding as planned. And actually, we have a customer launch event in December, and in 2024, the plan is to place two two printing lines, one in North America, one in Europe, to have a beta market introduction. Zircon, good news. We continue to grow in Zircon. And the good news for us is we have been able to improve productivity through, I would say, process improvement and modifications in our line. So we are able to supply the market and we are now able to do that profitably. Two pieces of news for Zirton. I think you know already that we have been selected for EU Innovation Fund grant. So it will cover a significant part of the investment we are currently starting to build a new capacity for Zirton. And we have also joined the Hydrogen Council, which is a global initiative of companies working in this field. So that's really the growth engines in DPC are really performing very satisfactorily. However, the rest of the business continues to be impacted by the weak electronic market worldwide, and especially in China, where most of our exposure is. as well as for product lines like ArgaCommit. However, we do see the results of our price increase actions and the cost improvement that we have made as well to mitigate inflation, meaning the business overall is really back to profitability. Now I'm turning to the division that is actually actually supplying products and services to offset with you there.

Yes, indeed. So in contractor operations, we do see this quarter a negative EBIT. And before we told you that it was designed to have a neutral EBIT since it should be covering all the costs. The effect we're seeing, though, is related to a lower production volume in the film business, since the film business is under stress. And that results into non-absorbed costs that cannot be transferred to offset. So meaning we need to absorb them across all the film divisions, and that is what's creating the negative adjusted EDT. We expect a similar amount in the fourth quarter. However, for next year, it should be part of the resetting of the price where the overall volumes of the manufacturing sites will be taken into account. And we should go again to a neutral adjusted period.

Back to you, Pascal. Thank you. Okay, Outlook, we are basically confirming that we have a recovery in profitability versus the full year 2022. However, I'd like to precise that then when we say that, we look like for like, meaning we remove the impact of offset in 2022 and we look at the performance without offset in 2022. So I can confirm that, yes. will significantly improve the profitability in the full year 23 versus 22. Now, if I turn by division, not changing the outlook for healthcare IT, I think we are going to be broadly in line with last year. Actually, as you know, there is also a currency impact due to the fact that a significant part of our business is indeed in U.S. dollars. Radiology solutions, we have, as explained, the continuity of the situation in China and the situation for medical film continue to degrade a bit. So clearly we are seeing a bit of a weaker performance versus last year, and especially last year Q4 was a very, very strong quarter for us. So we are We are seeing indeed pressure in this area. In DPC, we will continue on the trend that we have seen actually since the beginning of the year, especially in Q1 and Q3, maybe, that will continue to improve profitability. Q4 is also a strong quarter for DPC in terms of equipment sales. This is the strongest quarter of the year, and we are already, I would say, quite covered in terms of order books in order to deliver this quarter, and Zircon will continue to deliver as planned. So we stick to our guidance. So maybe just a word on sustainability, and I will only mention what is new for us. We have been working a lot on our carbon emission reduction plan. Actually, I've set our mission for Scope 1 and 2 at 62% reduction by 2030, which, by the way, is totally in line with the Fit for 55 European package. And we have also decided to join the initiative, Science-Based Target Initiative, to commit actually to more reduction targets for the group within two years, and including Scope 3. So that's really what's new in terms of sustainability, I would say, and shows the commitment we have in this area. I'm going to now stop here and take the questions of the analysts.

And thank you very much, sir. Ladies and gentlemen. If you would like to ask a question, once again, please press star 1 and just make sure your mute function is not activated and allowed until you reach your equipment. So once again, star 1 for questions. Our very first question is coming from Laura Roba, calling from the group Peter Camp. Please go ahead.

Good morning. Thank you for taking my questions. Two questions from my side. First on DPC, to what extent was profitability in Q3 still impacted by the manufacturing efficiencies we saw in Q2? Because I think that during the H1 meeting, you mentioned the small remaining share would impact Q3. I was wondering where we stand there. And then my second question is on radiology. When do you foresee the progress in DR to start offsetting the decline in the medical business, in the medical film business?

Okay, so on DPC manufacturing efficiency, maybe I can turn to Vincent Willer, the head of DPC, who can give an answer on that question. Sure.

Thank you, Pascal. So the answer is that indeed in Q3 we still had impacts. They were significantly less than in Q2, but the impact was still higher than a million, let's say, on the full quarter.

Yeah, so unfortunately we still have a bit of issues in this area indeed, but again, we expect that to improve and we are taking... Absolutely. And actually also, for your information, we have actually a change of leadership for the operation management of our industrial footprint, especially in Belgium. And we are looking at making improvements here as well. On radiology, we have three components to our radiology business. One is growing, DR. One is declining, has been declining for many, many years, that's CR, Computed Radiography. It's a trend. It's a market declining by 10% to 15% a year, but it's a relatively small share of the radiology market. And the film business. So we have these three businesses. And therefore, you have one business improving profitability, that's DR. and you have the CR business profit declining according to the decline of the activity, and the film business, which actually today, if I was looking at the film business and I would remove the currency impact, actually, it would be almost stable. So the decline in profitability that we are seeing in the film is currently related almost exclusively in a way. So it means today that DR cannot cover this gap. DR is able to cover part of the gap and cannot cover the full gap. So that's the best way I can characterize the situation as it is today.

Okay. Yeah, that's very clear. Thank you.

Thank you very much, ma'am. Our next question is coming from Maxime Strallert, calling from ING Bank. Please go ahead.

Hi. Good morning. Hope you can all hear me well. Thank you for taking my questions. Free on my end if it's possible. First of all, looking at DPC, if I understand your comment correctly, Pascal, Ings performed pretty good. Your phone was positive, so I would assume that the remaining part was quite negatively impacted. any building blocks you could shed some light on there. Secondly, looking at the corporate cost line, quite a steep reduction compared to last year. I would presume this is related to the transformation plan you have put, well, you have implemented previously. Any comment on that and what's the new normal for corporate costs? And finally, on cash flows, you mentioned that you expect a better cash flow

into 24 i would assume this is mostly related to the grant you would receive on their phone and the sales proceed here again any detailed information you could provide on this thank you okay so on on dpc indeed we are suffering in the film business for electronic market in the same way as for medical we're suffering from the currency the weak the weak demand actually with the industry operating today as maybe between 50% and 60% of capacity, I would say, for PCB, and as well on weak pricing in a complex currency environment. So yes, indeed, we continue to suffer from that. You're quite right, but it's not only Zirton that is improving, that's also digital printing. The two areas, I mean, the two growth areas of DPC are improving, while the rest of the business is indeed under pressure. Regarding the corporate cost line, yes, indeed, we have taken steps to reduce corporate costs, especially when we sold offset. And what you are seeing here is a result of that. Going forward, I would not change the level and the guidance. I don't see anything there.

Yeah, maybe I need to add something at that point. In the corporate costs, we also have the stock-related compensation that is reflected. And due to the reduction in stock price, the mark-to-market has also reduced dramatically. So that means, obviously, that the costs have been reducing due to that mark-to-market effect. Yeah, that's on top of... Going forward, I think we're still in the budgeting process and we need to sort out the levels.

Okay, now regarding cash flow, mainly your question, if I understand, is cash flow for 24 outlook. I think, again, we can maybe come back to that. I think I gave my points, so I don't have anything really to add. On the amount of the asset proceeds, we always guide it for about...

Yeah, I think we set 28, but that is subject to adjustments due to the closing balance sheet. We, at this point, think it will be higher than 28.

And the subsidy, we said it's north of 10 million, actually.

Yeah, so on the subsidies, we still need to go through the full process to close on the submission. So we will get confirmation of that number once that is done.

Yeah. And then third item, I mean, to be considered for cash flow 24, as you know, we've been spending a lot of restructuring costs. Actually, it was also mentioned, expect to see a significant decrease of that because we are at the end of our kind of major restructuring plan. However, as you know as well, CapEx for Zircon will be higher in 24. That's also very clear, right? But that goes also with the subsidy.

That's very clear. Thank you for the answers. Thank you.

The only component I've not mentioned in cash flow for 2024, because it's too soon, is, of course, the view on the business for 2024. We are currently in the budget process, so it's way too soon for me to comment anything about it.

Okay. So, thanks again.

Thanks a lot. Again, I want to come back to the main messages. For us, we are in line with our plan. Positive cash flow quarter as expected, as announced. EBITDA growth from growth engine while film is under pressure and currency being the main culprit for us in terms of profitability for especially the film business. which, again, is almost 100% an export business for AXA. Thanks a lot, and have a good day. Thank you for your participation.

Thank you very much, sir. Ladies and gentlemen, that was today's presentation. Thank you, Terence. You may now disconnect. Have a good day, and goodbye.