Agfa-Gevaert NV

Hello and welcome to the Agfa Full Year 2023 results. My name is Caroline and I'll 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 on listen only mode. However, you'll have an 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 0 and you'll be connected to an operator. I will now hand over the call to your host, Pascal Jury, the CEO, to begin today's conference. Thank you.

Thank you very much, Operator, and good morning to everyone. I'm sitting in a room in Mortsal actually with my colleagues, Vivian Dictus, our investor relationship person, and with my executive committee colleagues, Vincent Willer and Jeroen Spruyt. Unfortunately, Dirk Doman, our CFO, cannot be with us today. He's suffering from a health issue that means he cannot be with us today. He'll be back in a few weeks, okay? So Viviane and I, we will ensure, I would say, the presentation today. So time to come back and wrap up on the year 23, and we're going to walk you through the elements of the results of the group. So clearly the headline is a very strong increase in EBITDA, 52% in the year, and I think the key message is this growth is really coming from the growth engines, and for me it's a the validation of the repositioning of the company portfolio and activity to future-oriented activities. That's really the main message. If we look at quick comments for each of the components, healthcare IT, just very simple, the highest results ever for healthcare IT. So fair to say that during the year we had less visibility on how we were going to finish up the year. The truth is we finish the year extremely well, probably a bit higher compared to our expectations. And we do that on the strength also of improved customer satisfaction and innovation that we brought to the market rather at the end of the year. DPC, very strong evolution, but very contrasted. Actually, what works very well in DPC, these are the growth engines, Zirphone. Zirphone starts contributing to profitability. We are very happy. In less than a year, we could industrialize very successfully. But digital print, as well, on the strength of the Inca integration, is very well-oriented and delivers a very good performance. However, in DPC, film activities are suffering from indeed the demand, and pressure from macroeconomic conditions. So radiology is the only division that is under pressure. Actually, again, it's contrasted. The DR business, the direct radioactive business, improved very much during the year, and the film and CR, are under pressure. This being said, I want also to stress for this division that most of the profit decrease during the year is actually currency-driven. Most of this profit decrease comes from the currency, mainly the renminbi exposure. So an adjusted EBITDA at 76 million, and again, growing in the right categories, which for me validates our strategy. Also, very significant improvement in working capital management, from 32% of sales to 27% of sales in a year. And here again, we ended up in a very good place in terms of working capital. Needless to say, as you see, we are a business with seasonality system. This is the way it is, and we have a similar seasonality in health care IT, in radiology in a way, and even in part of the PC, actually. This is the way the market works. meaning actually we delivered 42% of the yearly EBITDA in one quarter, in Q4. It's not my choice, but this is the way the market operates, especially in healthcare and also in the equipment side of digital printing, which is always strong at the end of the year. We have delivered all that in a context that is not very supportive, in fact. When you look at the macroeconomic environment, it was not supportive for us. We had an adverse currency effect in all our businesses. And actually, we did that in a year where we had to cope with stranded costs coming from the divestment of assets, which represented 40% of the group activity. In spite of all this, we have delivered as described. Now, if I turn to numbers, plus 3.2% on the top line, again, it's very contrasted. as we are a company in full transformation. Actually, we have a very dynamic sales growth in our growth engine and a decline in some of our legacy and film segments, in fact. But the compounded rate is still positive top-line growth when adjusted for currency. Significantly, BDA grows, and I think the message is very clear. It's all coming from growth engines. And actually, we're going to show you in the next slide maybe a different way to look at the numbers compared to our published division to illustrate what I'm saying. look at this slide when i look at what i call our future oriented businesses meaning to make a long story short our digital solutions and their phone in digital solutions you've got msit of course you've got digital printing as well as direct radiography and they're from the green membrane so if you look at the top line and here we took four years plus 24 percent for this gross oriented businesses and the message is the growth is accelerating between 22 and 23. As you know, the maturity of these gross engines is improving. And at the same time, we have, of course, a specific decline of what we call the film and legacy business. When we turn to profit and when we look at actually the underlying improvement of the gross engines within the group, you can see that it's worth 32 million in just one year. So, the message here is we are positioned in the right segment, and the growth is accelerating. The underlying growth is accelerating, which is, of course, validating the transformation of the company. If I turn to the P&L right now, what I want to stress here is, again, we are improving our gross profit not only in absolute terms, but also in margin percent. better mix and again the impact of we are growing the right part of our businesses. And I want also to stress that we are doing that in a very good mastery of our operational expenses. This is due to the transformation program that we have launched already. some years ago that are multi-year programs that continue to deliver, and it's a very good illustration that even in an environment that is still inflationary, we are able to master pretty well this expansion. So overall, I think a very good profit recovery during the year. If we turn to the lower part of the P&L, Of course, we still have a significant loss for the year, but half of this loss is actually related to the offset divestment. So that's rather something that is now behind us, I would say. And the rest of the loss is still very much influenced by the cost of the transformation of the company. You see the restructuring non-recurring charge at 40 million. As we advance, restructuring and non-recurring will be will decrease already in 2024 significantly. And of course, the offset impact is, I would say, final. And that explains this loss as we are still a company in full transformation. If we look at working capital, that's clearly one of the success of this year for me, from 32% to 27%. meaning we've been able to decrease working capital by more or less $50 million when I remove the impact of cleanup, which is a different perimeter story. But $50 million, more significant, five points of working capital in a year. It's an excellent job by the operational teams in ACFA. And most of it is related actually to inventory. Most of the decrease is really coming from the inventory, where we decrease the number of days of inventory by 20 days approximately. So rather positive results. Positive free cash flow in Q4, stemming, of course, from the specific improvement of working capital. We are also, I stress that we are a seasonal business and that working capital will always go up during the first six months of the year because we have more or less six months of production and then decrease during the second half of the year where we operate approximately four months. So this is a normal pattern, and here we are seeing the Q4 positive impact of this. If I talk to the full year, we still are consuming cash during the year. Part of it is also due to the cost of the offset transaction and, of course, the cost of the transformation we see with 51 million of restructuring. that corresponds more or less to the negative free cash flow of the year. What I want to stress here is we have all the liquidity we need. We have a revolving credit facility with an access to €230 million that we are hardly using today, or we're using a very small portion of it. And that is until March 26th. I want also to stress that actually we have on our balance sheet an activity where we finance some of our customers, mainly VPC and SKIT, meaning we actually provide loans to our customers to finance their acquisitions. That's also an area that is a source of cash if need be, as we can very well outsource this activity, which we are doing mostly by ourselves today. And third element in terms of cash, we are still expecting, as you know, the proceeds from the offset divestment. It's not a question of if, it's a question of when. It's a bit of a long process in order to come to the definitive conclusion, but we are still expecting to be in a position to receive this cash in Q2. And all the group is really working towards optimizing the cash generation of the group. The culture, I think, is more and more prevalent in the company. If I turn now to the business, and I'm going to start with healthcare IT, what are the highlights for me of healthcare IT during the year? First, we have launched our cloud solutions and our web screening solutions at RSNA. It's very important because basically we are catching up with the best in-class providers in the market. We were a bit behind in these elements. We are not anymore today. And actually, I would even argue that for web streaming, our technology is probably the best in the market today. So that's a significant milestone for us because we are at the eve also of starting the transformation to go to a SaaS model. That's also the message. In this context, we will continue to innovate in this area. And if anything, we want to accelerate it. So we have decided that we are going to invest a bit more in R&D for the next couple of years to speed up this transition to cloud. We are offering cloud, but we need still to optimize it and make it more efficient. And this is an effort that we expect to be 10 million in the two years, so five per year more or less, but it's not totally evenly equalized. And for the first time, we will capitalize this effort. It's a specific project. It's a specific project that we do in a specific context. And therefore, it will be another step to really get to our position of technology-based in-class in SKIT. The other highlight is really the significant improvement in customer satisfaction. We are in a service business, and customer satisfaction for me is the lead to actually success and being able to compete well in the market. And in 23, our customers have become promoters. We have seen a significant breakthrough in customer satisfaction, which is related to the quality of our enterprise imaging systems, which now is running extremely well. And this is further reinforced by the industry recognition. Everybody is looking at class in this market to look at, you know, how we position in terms of competition. For the first time ever, we had a best-in-class award on our universal viewer. This is a viewer to see the medical imaging. And we are also, we are progressing extremely well in all other rankings. So that's something that is for me a leading, saying that we are doing the right things in the market and combined with the innovation, we are in a good place to compete in healthcare IT. So if I turn to numbers, plus 5% in terms of top line, when I exclude the currency effect. And again, here, same comment, you have a positive mixed effect. Actually, we sold less hardware, and we sold more on IP software, which is what we want to do. So top line, as such, is not the only indicator. What we are looking at is really the mix. Order intake, we had a strong increase between 22 and 21. We have a modest increase between 23 and 22. plus 2% in the 12 months rolling. So that's where we are. We have order intake for the year at 125 million. I just want to say that unless some of our competitors do not include the SMA revenue in this number, so it's only kind of a capex part, but not the SMA that will be associated with it. I say it because, you know, it's important to define in terms of numbers. I also want to say that About 15% of this total order intake is already what I would call a delayed revenue and margin model because it's a service model. It's not exactly technically SaaS yet, but this is a similar model in which customers are paying according to what they consume and the service we deliver over a multi-year contract. On the EBITDA, clearly a very good second half. Again, I'm not responsible for the seasonality of the business, but 75% of the EBITDA of this business is actually during the second half. and more than 50% in Q4. I wish it were different, but unfortunately, you know, these are the market practices, and that's probably also the reason why it was a bit difficult for us to pilot exactly the landing in Q4, and we did probably, yeah, we did better than expected. We were more cautious during the first part of the year, but we took actions as well in the meantime, and this is for Q4. So I'm pleased with the overall delivery of this business. And again, strongest numbers ever. And if you look at the numbers, you see that gross margin is increasing. Again, absolute terms and concerns reflecting the quality of the mix. You see also that our expenses are under control. The reason being, we are, thanks to the quality of our products, we are driving more efficiency. In fact, we are more efficient when implementing services and whatnot. So overall, I would say positive developments. DPC, and I'm going to start with the two growth engines. DPC, double digit growth in top line for DPC on the strength of the in-car acquisition. And the even better news is actually our consumable business is growing faster than the average growth of EPS. And as you know, consumables is really the profit driver for us. It means our InSwap program for Inca is working well. And it means as well we are in the right segments of the print business. So I can tell you that in the non-digital world, I mean, 23 was not a good volume year for ink and print in general. So very pleased with what we do. Strategic partnership with EFI, acceleration for us. Significant impact on top and bottom line. We are next week at FESPA, which is a yearly fair for digital printing, and we'll be presenting our new model that we're forcing from EFI, and EFI will do the same. I think we'll have a joint PR. It's a good partnership for us. It accelerates the growth, and it also means, you know, EFI, who is larger than Agfa and a market leader, actually does recognize the quality of our solutions. It's a very heavy year for us, 2024, for digital printing. We launched the speed set back in December in Cambridge. We have our first contract signed already today. It's a customer in the UK. It's what we call a beta customer, meaning it's still a development customer, and we're going to have full access to the machine to make sure that we can really develop it further. So we are very pleased, and we're expecting probably another one very soon as well. So as planned, very heavy innovation agenda. We never had so many launches actually in EPS. We have a new generation of mid-range products. uh actually coming up the five meter all-tour machine then that we are supplying from the s5 so very very dynamic and and and really very happy with the results here zircon uh zircon over 100 i think we're at 130 so it's not anymore over 100 but it continues to evolve very well The big news is we've been able to successfully industrialize different production, which is never a given when you go to industrial production, and we make progress almost every month on the way to make it. We have started the work to build the new unit. Well, still a way to go. We don't expect the new unit to be operational before October 2025. but it's in full work. As you know, we have received 11 million of sub-GB from Europe. Again, in terms of cash, it's going to be only 2 this year and 9 in 2025, when the unit will be built, actually. I want to make this precision. and the capacity we are building both is going to be more productive and give us the capacity to access market demand. We have prolonged our cooperation with VITO. Their fund comes from this collaboration from VITO, so we are very pleased to continue to work with VITO. And for 24, it's a business in which we have a very good visibility because we have already more than 80% of the 24 volumes that are committed by our customers. So there will be no surprise here. We are relatively modest in our volume growth for 24 today, so we feel very good overall about it. Now, if you look at the numbers, how does it translate? You see 12% top line growth for overall DPC. Interesting to know that DPC is now our largest business. And all this on the strength of the growth engines. If you look at film and foil, I mean, it's a rather flattish business. The businesses that are increasing are really EPS and Zircon. So overall, very happy with the profit recovery and the profit recovery that we have has a very different profile, of course. Historically, the main profit of DTC was coming from the legacy business of film. Today, it's coming from the gross engines, actually, more and more. So very good evolution. If we look at the P&L, Again, same comment, a strong growth of the gross profit in percentage and in absolute terms. We also took price action. That's an area where we invest. Expenses are a bit higher due to the fact that we're expanding and doing Zerfom. Of course, we resource this part. A good recovery that will be confirmed in 2024, actually. If I turn now to radiology solution, the highlight, really what I want to stress is in our DR business, we believe the innovation doesn't come so much from the hardware, but it comes from the software. And here we have been very diligent in adding artificial intelligence powered solution to our X-ray modalities. So meaning we are able to do at the same time to add value through these modalities by helping to detect pathology in an automated basis, so to speak. And we are also considered as a thought leader in the X-Ray market with various recognition from different markets. So this is really what we are positioned for. Really, the differentiation for us in X-Ray is truly through the software part and the solution part. Overall, for the business, as you know, very difficult year overall, minus 4.5% outside of currency, reflecting, in fact, the difficulties we still have in the film business and especially in China, but not only China. We are also impacted by other geopolitical issues. Russia, for instance, used to be a significant market for us. But BR has been performing quite well, especially on the bottom line. The top line was rather muted. We have seen good dynamism in emerging markets, but rather subdued environment in developed markets. So overall, it's conflated indeed with a profit decrease. I repeat, most of this profit decrease is actually coming from the currency impact and mainly the exposure to China, while we are making progress in India. So profit and loss, very quickly, you see this is the only business where we have a profit actually decrease in terms of gross profit, in spite of the very good control of the operational expenses. You see a significant decrease of these expenses, but we cannot make it all up, you know, given the complex market conditions we have in China. Now, I'm going to turn to you, Viviane, to have a few words about CONOPS.

Yes, so indeed the fourth division and the smallest one, so the contractor operations and services. So that's actually the supply of film and chemicals that we do towards the new owner of our offset business, which is EcoTree, also some other services. And you see, of course, sales-wise, it was stable, 22 versus 23. EBITDA-wise, you do see a nice improvement there. But, of course, the way we report the costs is different. In 22, actually, the costs were still all in the corner division, the stranded costs. In 23, they are allocated to the other divisions. So that's, of course, why you see a huge increase there. On the other hand, we also have cost savings. So structurally, this division actually should run about with a zero EBIT going forward.