Agfa-Gevaert NV (AGFB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to full year 2019 earnings call. [Operator Instructions] This call is being recorded. [Operator Instructions] Now we'll turn the meeting over to your host, Pascal Juery, CEO of Agfa. Please go ahead.

Hello, everyone. My name is Pascal Juery. I've joined Agfa since a few weeks now, and I'm thrilled to be part of this great company, and this is my first earnings call. And I will walk you through the Agfa 2019 full year results. I'm going to kick off by reviewing maybe the key strategic highlights for the company. So the first item I'd like to stress is really that we are on track to close the sale of the HealthCare IT business. We have cleared now all regulatory and social hurdles on this deal. And as I speak, we are in the last weeks of creating the carve-out of the new company, and we will close the sale in the course of the second quarter. Second item I'd like to share with you is we are refocusing to our core business. One illustration is the fact that we have terminated a reselling business in the U.S. in the Digital Print & Chemicals division to refocus in really what we produce ourselves, meaning, equipment, software, service and inks. And at the same time, in order to prepare the separation of the medical Imaging IT business from the HealthCare IT business, we have set up a new strategy, refocusing on key geographies, key customer segments. And I'm happy to say that we are already seeing the benefits of such strategy refocus. Last but not least, as you will see, and as you know already, the Offset Solutions division operates in very difficult environment, facing a number of headwinds. So one of the main priorities we have, of course, is to make it simple, to fix the Offset Business, and we are working, as I speak, on a comprehensive plan to address the issues we are facing. If I turn to the financial highlights, I think, first, positive is the strong cash generation that we've been able to achieve at the group level, which resulted into a lower debt level. So the reason -- the key reason why we've been able to generate strong cash flow is clearly the improvements we've made in the working capital. We set up an 18-month plan to reduce working capital by EUR 100 million. I'm happy to report that by the end of 2019, already about 2/3 of this amount has already been achieved. So as a result, of course, cash generation was stronger. And in spite of specific derisking actions we took on pension, we have been able to decrease our net financial debt. Then the next item is also, for me, a very positive item. Apart from Offset, which we are going to detail later, all our 3 other divisions have generated growth and profitable growth. It's probably a little bit less visible in the Digital Print & Chemicals area. But if you remove the impact of the Siegwerk partnership, in fact, the underlying business has been growing very nicely, both in terms of top line and profit. So excluding, again, Offset, the 3 divisions of the company have been generating profitable growth. And I think it's a very positive point that gives us, of course, confidence going forward. And last but not least, of course, facing the results of Offset, we took an impairment loss of about EUR 67 million that reflects the very difficult conditions we are facing in this business. Our key priorities going forward. First, clearly, we need to address the Offset situation. And as I already mentioned, we are working on a comprehensive plan to improve the profitability of the division. Of course, second priority is to continue executing on the strategies of our growth business, so starting with the Imaging IT business. I told you already, I'm encouraged by the first signals we are getting from the repositioning we've made, and I'm also confident for the Digital Print & Chemicals division and the radiology division going forward. Third, we will continue our focus on cash. I told you, we are a bit 2/3 of the way in terms of working capital, but we are not there yet, and I can confirm our commitment to continue to optimize the cash generation of the company. I'm not going to dwell on this slide. It just reflects the share of the business by each of our divisions. And I suggest we move already to the numbers. So key headline for me for the numbers. First, top line growth, 2.2% for the overall company. I believe this has not happened in a few years. So it's a really -- it's a real positive development to see it. Second, EBITDA is extremely resilient in -- taking into account what we've seen in the Offset. So this is a story in which we've seen, as you know, a strong deterioration of the offset situation but counterbalanced by profitable growth in all other 3 divisions. Apart from that, what you see in the other operating result is the impact of the Siegwerk partnership I was referring to, especially in the Digital Print & Chemicals division. So net-net, the key message is top line growth has resumed, and the bottom line has proved extremely resilient with a contrasted story of strong growth in everywhere but in Offset. Now if we turn to the net result. Of course, this net result has been strongly impacted by the EUR 67 million charge, the impairment charge we took for Offset. If we take that into account, in fact, our net result would have been positive by EUR 19 million. I think this is the main factor that I want to stress on these numbers. Now again, if we look at how our business behaved, top line growth, all divisions have been contributing to the profit growth. Radiology Solutions did very well. I'm going to come back to that when we look at specific division results. I already discussed HealthCare IT and Digital Print & Chemicals. And as I said, positive net results, so I'm not going to -- positive net result but before the impairment, of course. So if we look at financial debt and look at the red part, which is the financial debt, the blue part being the IFRS impact, the IFRS 16 impact on the lease retreatment, but that exemplifies pretty well. In fact, the deleverage that we could achieve during the year for the company, thanks to our strong generation of cash. Zooming in to the working capital. Again, to make a long story short, we gained 3 points of sales in our working capital, mainly -- the main impact is in inventories. The net receivables and payables ratio has remained a bit constant, but the inventory is really where we place our efforts. And as I told you, this is not the end of the story, we still have optimization in plan for 2020, and we are very confident to achieve the overall EUR 100 million target that we set a few months ago. Corporate services. As you know, we have separated corporate services as a specific item. The only comment I would make here is that what you see as an increase is not an increase in corporate structure or whatever, this is reflecting the creation of an innovation office. So we've been shifting, basically, a small part of the R&D expense from the division to the corporate center. That's what it does reflect. But overall, I would say, costs are pretty much under control. Now if I dive into the divisions and provide a little bit more color on each of our business. We'll start with HealthCare IT. Here, you can see a split of the HealthCare IS business and the Imaging IT Solutions business. Be careful, this is not exactly corresponding to the perimeter of what's going to be sold. Because we are selling, as you know, through geographies and the main geographies. And in the main geographies, we are selling both businesses, and we are retaining the medical Imaging IT business outside of this geography. So if we turn to the numbers, key takeaways from it. First, top line growth at 3% is positive. But I should stress here that the name of the game for us is not necessarily to have a very strong top line growth. The name of the game is also to improve the quality of our sales, meaning the quality of our sales. Meaning, we basically want to sell more added-value services and software in this market space. And it is reflected by -- with the 3% growth on the top line, by the almost 9% growth in the gross profit of this division. This is really the key takeaway that you should have on this slide. So the HealthCare IT business is a very sound business. The part that we retain in medical Imaging IT, as we already communicated, is not as profitable as the part we are selling. However, we do believe we have the same profit potential going forward. And this is why we have reset the strategy and started to execute this strategy with, as I said, positive signal in really our ability to sell more qualitative mix than we've been able to achieve before. But overall, very positive development for this business. I'm going to skip it because I just went through it. Radiology Solutions. So let's go to the numbers. Here, again, a very solid top line growth. The main explanation of this top line growth is, basically, we've been able, as you know, over the past years, to change our go-to-market in China. And therefore, we are still in a mode where we are improving, I would say, the customer reach. And therefore, it reflects a significant growth in this business. So we are continuing to see this -- the benefits of this reorganization. We have a strong position in the film area. We have a solid profitability on this division and the operational leverage, of course, play fully in this division. So overall, an extremely positive year for Radiology Solutions. Digital Print & Chemicals. That's where I told you the visible results are a bit more difficult, I would say, to read them. But here again, as you can see, significant and positive top line growth in the business, 5.5%, which is, I believe, an excellent performance altogether you can see translated very well in the gross profit with an -- more than 8% progress. However, you don't see it in the adjusted EBITDA reported. The reason being, what I already explained, meaning the impact of the Siegwerk partnership who comes to an end, which, of course, is the main reason why we are in apparent decrease in terms of adjusted EBITDA. If I were to retreat this impact, in fact, the underlying progress will be quite spectacular because the EBITDA would increase by 50%, actually, if I take into account the specific item. So overall pretty pleased with the development in this area. Offset Solutions. Well, quite clearly, we are facing challenges in this market. We are facing a number of challenges. Of course, as you know, this is a declining market, actually declines quite significantly in the west, while we still see some growth in different geographies, notably the east. However, overall, for us, given our positioning, we are, of course, hit by this volume decrease. We are also being hit by higher cost of raw materials in this business and the inability to pass it on in our price for part of our business, at least. So our margins have been clearly under pressure, and this is exactly what you see reflected in these numbers. The issue was not so much the top line growth because we have executed a sales alliance with Lucky in China. And therefore, this is the reason why we are pretty stable in terms of overall sales. But our margins have been suffering from the various elements I've just described, and we are coming to a situation where we could already see during the third quarter, whereby, this is a business that is facing profitability challenges. So again, the clear priority for us is to address it, and we have started to do things. And we are, right now, I would say, designing the next phase of our plan in order to, I would say, restore the profitability of the business. Just a word on the alliance of Lucky. It has 2 components, in fact. One component that is, what I would call, an OEM arrangement, in which we do have some of our digital plate being made at Lucky and a sales alliance. We -- also, it's probably the time to make a small point on the impact on the corona in the first quarter. We do have industrial operations in China, and we were impacted, like, I would say, reproducer. We had to shutdown our plants for a few days. However, this is behind us. The plant is back in operation, I would say. So it's a bit back to normal, but it did delay, of course, some of the activities we had in the manufacturing and at Lucky as well. It did delay a bit some of the plans we were executing. So overall, clearly an area that we need to fix. But today, again, I stand in front of you and make the commitment that we are addressing the issue upfront. A word on pension as well. Pension, well, the -- as you see, we have an increase in our pension deficit, which is purely mechanical. In fact, it comes purely from the evolution of interest rates, discount rates, so it has mechanical impact on our pension obligations. And therefore, we've seen that, of course, at the end of the year. However, in terms of cash out for the company, a situation that has not changed, actually. And you see here the pension cash outflow. The 2018 and 2019 did include some derisking actions on the pension, while the 2020 estimate at this stage is purely the ongoing obligation that we have. So in order to conclude, I think, overall, 2019 was quite a contrasted, but overall positive year for Agfa with 3 of the divisions providing profitable growth and a strong cash generation. Going forward, our priority is clearly to continue executing our strategy, meaning closing the sale of the HealthCare IT business, executing the growth strategies in our various divisions. And three, fixing the profitability of Offset through, I would say, a self-help plan -- improvement plan. So I tried to keep it short and really focused on the main messages. Of course, I'm now open for questions. So I guess the idea is maybe, first, to take questions from the room, and then we'll take questions from the phone. Thank you.

Okay. So Maxime Stranart, ING Bank. So my first question would be on pension liabilities, of course. So if we exclude the positive impact of derisking initiatives, pension liabilities would have increased by EUR 140 million, if I'm not mistaken. And you mentioned in the press release that you plan to reward shareholders through the use of the proceeds of the sales of IT HealthCare. So what is the room, basically, you can have to reward the shareholders?

I think what I'm saying in the -- to be fair, what I'm saying is, we're going to address long term liability, we are going to execute the strategies of our business and we will reward shareholders. That's what I'm saying. I didn't talk only about shareholder, okay? And I know that it's a strong expectation from everyone here and on the phone probably that we tell you precisely what our plan is going to be. You'll have to bear with us a bit. This is a discussion that we have started at the Board. You know pretty well which are the 3 areas we are looking at. But I'm not in a position today to detail our position. Regarding your question specifically on pension and the numbers, I will turn Dirk.

Yes. So on the pension, there was obviously a big impact overall due to the remeasurements that we had to do that is basically driven by the reduction of the discount rate. On the other hand, the performance of the investments was quite good in 2019. So overall, we had an impact of -- net remeasurement of about EUR 126 million. Yes.

And maybe going forward, will we see discount interest rates going down, again? So what might be the impact for this year?

Yes. We don't know at this point in time. Obviously, it's very volatile. Things about changed. Last year, it was actually also quite volatile. So what I would rather refer to is our -- as we always say, that we need to look at the cash outlay. So basically, we see that as going forward, the prediction next year, excluding any derisking measures, is around EUR 81 million. In 2019, it was about the same level. So if you subtract the derisking measures, there was a EUR 36 million in 2019, EUR 24 million in 2018. So if you just subtract, you see that the cash flow is relatively stable. And so -- yes. So obviously, we think we have the whole pension situation well under control, but the accounting rules, obviously, are the accounting rules, and that creates quite a bit of volatility on balance sheet, and it probably will remain so also in 2019. We'll have to...

The most important part is the cash outflow, and this is a part that, as you say, is stable.

Yes.

And second question on Offset Solutions. So could you shed some light on what has been the like-for-like performance, and what has been the impact of the consolidation of the sales of the JV with Lucky?

What you call like-for-like performance, in fact, you want to detail the impact on the top line of the JV with Lucky?

Yes. That's correct.

Okay. That's correct. So what are the sales of the JV with Lucky? Maybe, Stefaan, you can tell us.

So what you see is that indeed we posted in offset a growth in the last quarter with 3.3%, and that for the year, excluding currencies, it's a minus 2.5%. The impact of the Lucky alliance is quite significant in the top line. So without that alliance, when you take then the rest of the business, most probably, the area of decline would be, excluding currencies, between 8% and 10% decline, which is in line with the market growth -- the market trend.

Guy Sips, KBC Securities. I had a question on the HealthCare IT business. Can you give us a little bit a flavor of the performance of the business that will stay at Agfa? How did it perform in fourth quarter? Can you give us some indication of the measures that you are taking to improve the profitability in there and how is that evolving?

Luc will answer.

Well, thank you for the question. So the performance in Q4, even if it was lower, it was as expected. So a couple of things that you need to understand is that in the part of the business that we retained, so the Imaging IT business, outside of that, France and Brazil, we have large implementations. And depending on when the large implementations go live, in one quarter or another, you may have indeed -- and that's going to continue also, you may have an unequal quarters. But first, it was as expected, that's number one. Secondly, in terms of the improvement that, as explained by Pascal, they are driven by a strategy of refocus, refocus on specific customer segments in chosen geographies. I'm not going to go too much into detail, but one could say that we are focusing on customers with a higher IT maturity, that's number one, and customers that have expansion plans, whether in study volume or geographically. So that contributes. That's the same or by the same book, and we're also deprioritizing other types of customers, customer segments. In parallel, we have an increasing maturity of our Enterprise Imaging platform, as we've been working on that platform very intensely. And we also now zoom in on the specific needs of our chosen target customers, which also leads to a positive. And last, with more, let's say, mature platform with a focus on specific customer types, we also drive efficiencies in terms of implementations and in terms of support. And those 3 elements together show indeed an improvement, which I will not quantify precisely for the Imaging IT business as yet. But as time goes by, we'll be able to do so more objectively.

But to be fair, the starting point, as you know, is lower profitability than the average of the business today. This is why we are refocusing. So we're not looking really at top line growth as the main indicator in this business. Actually, we expect probably a stable to low growth. We are looking more at the profit improvement through what Luc has explained, this refocus. And also the fact that the mix of our sales is of much higher quality, meaning much higher margins. In fact, this is really the name of the game. Is it clear?

Stefaan, Degroof Petercam. You mentioned in the presentation that you expect from the Imaging IT the same profit potential going forward as for the one that is being divested. Can you indicate you're well advanced in the process? What's the operating margin of the IT business being divested? I think you should have a good view by now, first question.

Well, it's, I would say, between 15% and 20% EBITDA margin.

That's the average for the full year or...

This is typically the level of profitability of the HealthCare IT part that we're selling. And we have already indicated that for the one we are retaining, it's in the mid-single digits. So we have way to go to get it to the desired level, but we have a good plan, and we are confident we're going to do that.

Okay. And then you mentioned that there was a negative impact of the Siegwerk alliance termination in the inkjet business. Could you quantify this? You indicated you would have a much stronger improvement if you would not have had this impact, what improvement should we expect, for example, on a like-for-like basis in 2020 for this business?

Okay. So that's a different question. I can tell you, and it's pretty visible on the number, by the way. Let me find by the slide. You will -- as I indicated, it's pretty visible from the operating -- other operating items that you see. Full year '19 was 7%, full year '18 was 22%. You can pretty much assume that the main driver between the difference is the alliance. So it's pretty transparent in a way.

Okay. So it's because of the base effect in 2018 that you've got this...

So we had a positive impact in '18. We also had a positive impact in '19, but much less, in fact. So going forward, 2020 will be also being compared with the year with a positive impact, although at a lower level.

Yes. The other operating items, we can take close to 0 for 2019.

That -- close to 0. Yes. Yes. Yes. Less -- much less significant for sure. Because I cannot say right now, it's going to be 0, of course. So which gives us, again, a totally different picture of the business. If you remove this impact, because as I said, in fact, of showing an adjusted EBITDA minus 14%, we would be showing a significant growth of 50%. However, it's from a low base of profitability. So it's not abnormal to have such a large increase, starting from a low base. We are not guiding for 2020 for the company as yet. So I don't think we're going to guide for specific businesses, of course, but I think I expressed, in fact, confidence. I think this is a business in which we also are starting new segments in industrial inkjet, in flooring and leather. We are in a launching phase, I would say, for these initiatives. And therefore, we look at what's in-store for us with confidence.

And perhaps one other question. The pension outflow for next year is expected to be around EUR 80 million, is that also a run rate we can expect beyond 2020? Everything...

Yes. This is the actuarial assumption that we are passing on to you. So that's a 1-year view going forward. I don't think there is a long-term guidance. But overall, as Pascal mentioned, there will also probably be pension derisking activities planned, which will obviously affect the future cash outflows also.

Two questions. First, on this pension. So this EUR 80 million, is that still EUR 40 million related to Germany and EUR 40 million related to the other material countries that range?

Yes, roughly. Yes.

And then a question to the CEO, perhaps you're not giving any indication yet on the use of proceeds of the EUR 975 million, but where is your feeling? There are, I think, 3 big possibilities. First is investing in the company. Second is -- yes, derisking the pensions.

Which is also investing in the company in a way.

And third is -- yes, return of capital in any way to the shareholders. Where is your -- yes, where is your risk return, and where is your position also compared to, let's say, the previous CEO, where...

That is a comparison with the previous CEO, I'm not sure I can answer that though. But again, bear with us a bit. Bear with us a bit. We will, as soon as we can, communicate precisely on this. Well, you still...

Can we expect some news on that at the moment of the first quarter, so also the AGM?

I'm not going to commit at this stage. I'm not going to commit on timing. But clearly, I can tell you that we know what we need to do pretty much to derisk the company on pensions. It's a pretty, I would say, objective number in a way, depending on the objective you want to achieve, which is to secure, in fact, your obligations. So that we know the discussion between reinvesting in the company. And as you say, pension is also investing in the company in a way, and shareholder reward needs to take place. Of course, we understand I've been the CEO of Agfa for 6 weeks. So I don't have yet the full plan going forward, so it's a bit too soon. I'm not going to give more color on that. Sorry. Sorry. Not for the time being.

[indiscernible]. Could you quantify the impact of corona? And second question, could you give away some indications on the plan for Offset, where you're heading to?

So quantification of the corona, I think you need to distinguish 2 things. First, I would say, the specific situation in China, and we quantify it. And that's, frankly speaking, it's not significant, I would say, impact for us, but it does impact the first quarter. So this part is pretty objective. We've seen some disruption and a dip in our commercial activities in China. That has recovered, by the way, as I told you during the quarter. So there will be some impact. But then the real impact of the coronavirus is a question I cannot really answer today because, I mean, this is an impact on the macro economy going forward. We -- I'm not going to describe the situation that you know well and the situation in Italy and the impact on the overall economy. So although we operate in resilient markets, we are not in the hotel business here or the event business, we will be impacted if there is a macroeconomic impact, for sure. As I would say, all players are exposed to the overall economy. But here, I cannot give you, frankly speaking, I think it's very uncertain. But from what I've read this morning, I had the feeling that we should not also understate the impact of the corona during first quarter. It's not a major impact for the company. It's a rather limited impact.

Maybe a follow up on IT, perhaps and for Offset.

Sorry. And for Offset, you would understand that I'm not in a position to give you more specific information at the time. We are still working on the plan, and we'll communicate as soon as we can. But you will see from us in the next weeks and months specific initiatives that are going to be visible and communicated to try and fix the Offset business. More questions from the room.

On the impairment, was -- without COVID-19 would there have been an impairment? And would it have been as large as we saw today?

Absolutely. It's not -- absolutely not related to COVID-19. Absolutely not. It has nothing to do, and the impairment is based on 2019, by the way, on the [ BP ] going forward. It's a mechanism in the standard mechanism, Dirk can probably explain a lot better than I do. But the short answer is, it has nothing to do with COVID-19.

Yes. I've got nothing to add. So it's basically the typical goodwill impairment testing that we do. And so based on that, we took the accounting conclusions from that. So we reflected the impairment.

I think look at the 2019 results, there was no coronavirus impact at all, and the results speak for themselves, I guess.

Yes. I have follow-up on the Imaging IT and remaining business because part of the items you mentioned are segments and geographies, refocusing -- customer refocusing, which seems to indicate if you can refocus a bit the client base, you will go to a much higher margin level. Does this imply that the gross margin of the remaining HealthCare Imaging IT business is similar to the one that is being sold?

Gross margin. Okay.

Well, let me answer it this way. In the Imaging IT business, you deal with a large amount of data, much larger than in the EMR business. That's number one. So it's much more hardware intensive, okay? Let's say that in the largest part of the business that we divest, the Healthcare Information Solutions business, the percentage of hardware is less and hardware is, honestly, it's a resale business, and that already gives you an indication. What we very consciously do on the Imaging IT business overall and also on the part that we retain is to indeed privilege the added value that we bring, which is our own licenses and to support to those licenses and not so much the third party, let's say, infrastructure that is needed and in certain cases that we continue to supply as a turnkey. But in many cases, also, is being taken care of by the type of customers that we address, the more mature -- IT-mature customers that actually, in many cases, take that for themselves. And I think on the base of that, you know that one is indeed intrinsically a bit higher than the other. But they will, at a certain moment, find each other.

Yes. And if you indicate find each other, that means that you will probably, given the hardware content, not be able to compensate fully at gross margin, if you want to move to similar margin levels, but there are probably less R&D, less SG&A expenses that that's in this model, which should compensate at margin -- at operating margin level?

Well, I'll keep it at what I said. I prefer to keep it at that.

Maybe just another quick question on restructuring expenses for 2020. So it has, of course, sharp increase this year due to the impairment, but what's your view on next year? And what might be the payback period of those expenses?

You want to take that, Dirk?

I think at this point in time, I think we cannot comment that specifically. I think as we discussed on Offset, we need to take measures, and that will obviously be reflected during the course of 2020.

Maybe we should turn to questions on the phone now. I mean we had a lot of questions from the room. So are there questions on the phone. Operator, can you...

[Operator Instructions] At this time, I'm not seeing any questions on queue. [Operator Instructions]

Good. So if the room has more questions, happy to address, if not -- yes. One more question from room.

[indiscernible] Yes. Last year has been the -- significant improvement we've seen in hardcopy, again, healthcare in the Radiology department. Hardcopy has always been the big cash generator for the company, probably still is. And I believe DR is not profitable yet in terms of cash flow. Is this still -- has this -- after the recovery we've seen from hardcopy in 2019, does this imply that hardcopy is now for this unit the biggest earning -- Radiology, the biggest earnings contributor -- cash contributor?

I think we can safely say yes. It does not change. It's an area of strength. And of course, as we are progressing in...

Has there been a big step up in profitability due to this distribution change in China?

Yes. Of course. Profit and volume, margin and volume, I would say. Well, I think we can maybe close the session. And again, thrilled to be part of Agfa. Significant priorities to take along for next year, but you have in front of you the team in charge to deliver these priorities. And I can tell you, we are fully committed to make it happen, addressing headwinds upfront and continue to execute and I would say the refocused strategies of our growth businesses. Thank you very much. Thank you.

Thank you. That concludes today's conference. Thank you, everybody, for joining. You may now disconnect.