Barco NV (BAR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. I am Carl Vanden Bussche, Head of Investor Relations for Barco. On the background of a picture with Barco technology of the very recent World Expo in Dubai, we welcome you to this conference call on the results of the fourth quarter and the full year 2021. Today with me and on stage one of our co-CEOs, Mr. Charles Beauduin and our CFO, Mrs. Ann Desender. Charles and Ann will now walk us through the full year results and provide extra color on the results as well as how we navigate the current and next quarters to come. We will do so using the full year earnings presentation, which is available on our investor portal since early this morning. [Operator Instructions] And that's it for the introduction. We'll come from Slide 3 onwards, the exec summary. Charles, the floor is yours.

Thank you, Carl. To all attendees, welcome, and thank you for joining. We can summarize Barco's results of 2021 into 3 main findings. First, we clearly see the recovery of the markets reflected in order growth for all other businesses and in all regions, which resulted in an all-time high order book. Sales follow and grow, albeit at a somewhat slower pace. This is not only because of the pandemic, but also due to constraints to the supply chain. It takes us to the second point around profitability. Gross profit margins were down a bit because of component scarcity and transport costs. Our EBITDA for the year landed at EUR 59 million or 7% over. Net income is back to a positive EUR 9 million. I'm pleased with a good evolution on working capital, contributing to a solid free cash flow of EUR 73 million (sic) [ EUR 78 million ]. And thirdly, looking towards 2022, we start the year with a very solid order book and expect to see this translated into sales. As things are fluid and may materially change over the year, we stick to our first half outlook only, and assuming no further deterioration of the supply chain, we believe we can come close to a 20% sales growth in the first half with an EBITDA margin better than the 2021 performance. Our CFO, Ann Desender, will give you now some more details about these numbers.

Thank you, Charles. Good morning to you all. We start with the overview of the financial highlights. All KPIs in '21 indicates a positive change versus 2020 with most positive outliers for the growth in orders and the growth in free cash flow. As Charles just indicated, orders are going strong. Demand across the globe is growing again. Our order intake in '21 reached nearly EUR 980 million, which is up 30% compared to 2020, with the order book at EUR 487 million were up EUR 205 million year-over-year. This represents a growth of 73% and an all-time high level order book for our company. The conversion of orders to sales is moving slower but still shows the start of a positive trend. Sales growth was mainly fueled by our Entertainment and Enterprise businesses, while sales for Healthcare were more flat year-over-year. Overall, sales, are up 4% compared to the previous year. Our gross profit margin in '21 declined 1.1 percentage points to 36%. The margin pressure is mainly linked to higher components and logistic costs, especially in the second half of the year. The price increases that we implemented did not yet fully counterbalance this. We kept operating expenses flat versus 2020, and this resulted in an EBITDA of EUR 58.5 million, which gives a 7.3% EBITDA margin. Free cash flow for '21 was EUR 78 million compared to minus EUR 36 million a year earlier. The solid cash flow generation is a result of improved operating cash flows and improved working capital. We'll come back on this later. If we now take a closer look at the fourth quarter, we can conclude that it has been one of the best quarters since the COVID pandemic started and that we are getting closer to pre-pandemic levels. Compared to the fourth quarter 2020, we can see an uptake of 50% in orders and 30% in sales. Compared to the end of 2019, we're almost flat on orders, but still behind in sales with about 20%. The strongest uptake in sales is made by Entertainment and Enterprise. Both divisions operate in markets that are recovering from the pandemic. In Healthcare, we can see a more modest sales growth, in parts hampered by component scarcity. Charles will now give an overview of the '21 results per region.

Thank you, Ann. We are now at Slide 6. Let's now look at an overview of the 2021 results by region. Both orders and sales grew in all regions in 2021. The Americas registered a good 28% growth in orders, while sales were only slightly up. In Entertainment, investments in events and cinema are still slow with other parts of the market start to deliver solid results. Companies are also still slow to invest in the workplaces due to prolonged homework, which is reflected in the results for meeting experience. On a more positive note, we saw a good upside for the deployments of some large projects in large videowalls. For Healthcare, we had a strong order intake in the Americas, but many deployments were still passed out to 2022. EMEA delivered strongest growth, which also helped here still, while we also have here the impact of the pandemic in a number of markets. For Entertainment, the fixed installed business is doing well, while the investments in cinema and live events are still pushed out. ClickShare delivered healthy growth in a market which suffered still from investment and intermittent lockdowns. Also, large videowalls started to pick up with steady growth in the second half after a slow first half. Finally, the surgical and diagnostic markets showed good increases in orders but were flattish on sales with spending and deployments pushed into the future. For Asia Pacific, especially China, is doing well in both cinema and immersive experience. Even more than in the other regions, meeting experience remains slow in APAC due to lockdown waves. And also for, Healthcare, the growth in APAC was limited during 2021. Back now to Ann to take a closer look at the EBITDA margin evolution.

Thank you, Charles. The waterfall chart visualizes how our EBITDA accretion was realized over '21. Clearly, top line growth has been the main driver. Gross profit margins were pressured by scarcity in components and the raised in logistics. OpEx increases were contained to selective investments in R&D and in the commercialization of some selected initiatives. Moving further in the profit and loss statement from EBITDA to net earnings, with end markets clearly recovering from the pandemic crisis, Barco was able to restore net earnings again to a positive number of EUR 9 million. The higher EBITDA, lower amortizations as well as lower restructuring and impairment costs compared to 2020 resulted in an EBITDA increase of EUR 17 million year-over-year. The effective tax rate in '21 was at 18%. We are especially pleased with the cash flow generation in '21. Barco delivered a free cash flow of EUR 78 million, a clear year-over-year improvement versus the minus EUR 36 million in 2020. All of the divisions contributed to this stepped-up results. Next to the improved gross operating cash flow, Barco was able to reduce its net working capital below 6% of sales. This, compared to 11% in 2020. DSOs improved to 56 days. Payables were paid on average at 62 days. Net inventory stayed essentially flat, the net of decreased finished goods inventories and increased component inventories. We opened a new factory in Suzhou, China last year, which was a material part of our capital expenditures amounting to EUR 19 million in '21. Our net cash position is now at EUR 310 million, which is a raise of EUR 135 million versus year-end 2020, including the free cash flow and the proceeds of the sale of a minority position. We are now at Slide 10, which is our sustainability parameters covering the 3 pillars: Planet, people and communities. The planet metrics concern our own ecological footprint and that of our customers. We see a continued positive evolution in the product portfolio where each year, more eco-labeled products contribute to our revenues. Last year, good for almost 1/3 of sales. The supply constraints that were already discussed did not leave the footprint metrics untouched either. In '21, we saw higher emissions from logistic flows, for example, express flights, less sea shipments and these were partially countered by savings in mobility, which in turn were a result of lockdowns and travel restrictions. When it comes to the people pillar and employability, we started measuring an employee Net Promoter Score via poll service. This resulted in a first score of 38.5, which falls in the category 'Great' in the NPS methodology. We will keep track on how this evolves over time. Finally, when it communities, we have been doing a similar exercise towards our customers for 2 years now. Customer NPS score remained stable at 47, which also falls in the 'Great' category. We did work to solidify these metrics with more responses and more insights. Over to Charles now with more details on how our separate business units performed last year.

Thank you, Ann. For the deep dive in our good results. As was already clear in the overall results, Entertainment showed the highest uptake with the fourth quarter even moving towards pre-COVID levels, slightly better in both orders and sales compared to the last pre-pandemic quarter, first quarter 2020. The Entertainment division delivered a solid 44% increase in order intake and a more modest 6% increase in sales for the year compared to 2020. The slower sales growth can be contributed to the fact that some major renewal projects were pushed to 2022, in combination with component scarcity also pushing back deliveries to customers. This gross profit margin of Entertainment improved slightly compared to last year. With good indirect expense control, we see a significant improvement in EBITDA and EBITDA margin. Taking it by business unit, cinema accounted for approximately 50% of the divisional sales in 2021, in line with the breakdown of last year. In cinema, the second half of the year saw theaters reopening in most regions, in combination with positive visitor statistics. This is, for us, a clear confirmation that further growth opportunities in the cinema industry remain intact, albeit materially delayed. Sales was mainly generated by newbuild projects in China, the Middle East and other developing regions. Renewal projects were still slow and the major programs have been pushed back. But these are expected to start kicking in again at the second half of the year. Moving over to the immersive experience segment, then we are seeing the results of the focus we put on to fixed installations, including the expansion of our product portfolio. This resulted in market share gains and growth in both orders and sales. Demand was particularly strong and growing immersive digital art experience in museum where we can claim a leadership position, is helped making up for the events subsegment, which clearly still suffered from COVID restrictions and lockdown measures. In the Enterprise division, we saw the effects of the delayed returns to the office with a gradual recovery and strong order intake in the second half of the year. Sales followed this trend in the last quarter of the year. As a result, year-over-year orders increased by more than 20% and sales by 8%. In terms of the sales mix, meeting experience accounted for about 52% of enterprise sales in 2021. For meeting experience, we see a growing adoption of wireless conferencing when and where offices are reopening. ClickShare registered good recovery mainly in EMEA and is now present in nearly 1 million meeting rooms worldwide. This number was 850,000 at the end of last year. Large videowall segments booked quarter-over-quarter progress in both orders and sales throughout the year. We were pleased to see a clear rebound in the fourth quarter, which was driven by large deployments in the Americas. Sales was still somewhat back by component shortages. In Healthcare, we see a solid order growth in line with markets, opening up again and hospitals planning investments and budget allocations for post-pandemic world. However, there, the component shortages and delayed deliveries hit our sales capability pretty hard in Healthcare, resulting in a slow conversion to sales. Still, we registered a good order intake of over 20% and helping us to end the year with a pretty strong order book. The Healthcare EBITDA margins was below that of last year, mainly as a result of higher components and freight costs. We have increased prices also for our Healthcare portfolio, and we expect this to have positive results on our gross profit margin in the course of 2022. For the diagnostics segment, we especially saw demand grow in the Americas and EMEA regions. Sales were slightly down because of the supply issues and because of a number of deployments that were delayed. In surgical and modality, we really see that the markets of digital and integrated operating rooms is growing. In 2021, we further expanded the group of partners we work with and increased our share of wallet with some of these partners. This is also reflected in a very solid order intake. Sales growth was more modest due to both temporary supply issues and hospitals still somewhat slow in deploying planned projects. Both diagnostic and surgical modality strengthened their value proposition with respectively, the world's first stand-alone display for digital pathology and Nexxis Live, which is a cloud-based software platform for remote collaboration and education during surgery. For our growth initiative, Demetra, growth has been slow but with a steady month-over-month increase, while we have added partners in the Americas and Europe in 2021. So that was it for our 2021 results. It's time to look towards the future now and how we see Barco evolving this year. If we look at our 3 divisions from a general multiyear perspective, you can see that Entertainment and Enterprise show a similar track throughout pandemic, one with a deep decline in the year 2020, followed by a recovery pattern. This recovery is still ongoing and believe it will transform into growth when lockdowns start to phase out. As already discussed, we expect cinema to expand with first expansion in the build -- the newbuilds in developing regions followed by renewal wave towards laser cinema in more developed regions. As for the summer, we also expect the events market to carefully pick up again. For Enterprise, we also expect in the course of 2022, employees to be able to get back to the office again. This hybrid position will continue, and in this way, real hybrid home office foreign in-house, working will become the norm, and we expect that the trend to further support our ClickShare demand. For control room environments, we expect to see a stable trend of investment in both critical infrastructure and other adjacent monitoring centers. Healthcare, shows a different track record with the pandemic expressed itself as a period of essentially no sales growth, as hospital addressed the more urgent needs around intensive and COVID cases and postponed investments in other areas. As the world gradually moves into a post-pandemic scenario also, hospitals can get back to more normal daily operations, resuming strategic investments and budget allocations, including diagnostics and surgical projects. In short, we expect to see growth in all of our 3 markets, each at a different pace. Healthcare on a steady growth track, Enterprise and Entertainment to show some more accelerated recovery and post-pandemic growth in the coming 2 years. As we believe, the world is through the worst of the pandemic we will still feel the effects on the short term, but the longer-term looks really promising. On Slide 17, it will not escape you that the company went through some quite a lot of changes last year. Let me elaborate on that for a moment because it impacts how we approach our future. We are following the strategy update, which we shared in October last year, where we elaborated on what the COVID pandemic taught us and how we can improve and work on opportunities. We have already taken a number of steps, and we'll keep working to make Barco a more effective and an even stronger company. We did reset the organizational structure in order to get the best of our workforce. Now, already, this reflects an improved customer responsiveness and engagement by our teams. We feel further leverage this business unit focus and expect also to see benefits in improved operational and commercial efficiency. We do see many significant signals of recovery and growth opportunities across all our markets and regions. We want to capture these opportunities, and we will further expand our market share in a post-pandemic world. We also want to focus on opportunities that lie in China, especially in Healthcare and Entertainment. We made also a first step there with a new factory in Suzhou. Next, we will also further rebalance investments in R&D and find a good balance between incremental improvements and new growth initiatives. Additionally, we want to expand our manufacturing activities and differentiate where possible while adjusting the way we work in line with our sustainability goals. Our outlook for the first half, and assuming the supply chain challenges will not further deteriorate, we expect the sales conversion to increase and expect that sales to grow with approximately 20%. This would result into a higher EBITDA compared to the EBITDA of 2021. Finally, a short word on dividends. Our Board of Directors will propose to the general assembly to distribute a gross dividend of EUR 0.4 per share as a token of trust in our future. This is a 5% growth. And just like last year, our shareholders will be offered the choice between payment in cash or dividend in shares. And so with that, I'm going to move it back to you, Carl, to guide us through the Q&A.

Thank you, Charles. Thank you, Ann. We are now ready to move to the Q&A session. I'd like to make one addition, which you may have seen in our updated agenda and which may also be the right platform for some of your longer term or strategic questions. We do have a Capital Markets Day planned for this year. This is on September 8. And we certainly hope to welcome many of you and, if possible, in person. Okay. Now to the questions for this release. [Operator Instructions] We're ready for the first question.

Sébastien, you're the first in the queue. So we're ready to listen to your question.

Happy for your results. Just 2 questions on my side. First one, happy to see more than EUR 300 million net cash in the balance sheet. Just wondering why there is not yet any consideration of at least a small share buyback? I've been happy to see that you've been buying share internally also for stock option. But I think at one point, it will be quite fair and attractive for shareholders to benefit also from it from the low valuation. That's the first question. And second one, it's more into ClickShare, and especially the strategy in the U.S. So I understand that the guy in the U.S. are not yet back to the office. But I'm also questioning the distribution strategy there, okay? What can you do to maybe speedup the growth and to enlarge the installed base, which is still predominantly into Europe?

Yes. Thank you, Sébastien for the question. On the cash situation and cash allocation, I'll first give it to Ann.

Thank you for your questions, Sébastien. Cash and cash allocation is each time, and now it has been again on the agenda of the Board. Yes, pleased that the dividend this year has been decided with an increase versus the year before. This primarily of a token of the trust also in the future. With that on the cash allocation and the funnel of opportunities and M&A, I can just say and looking then to Charles, but not only Charles, it's also the whole Board, the appetite for acquisitions and to really use that money for sure is still there. But the opportunity of, yes, when and at the right price, bear with you that this might take some time. But it's not the lack of interest or that we do not want to use this money very wisely. After 2 years of pandemic, you will also have seen that we didn't lose on this money to the contrary.

Thank you, Ann. On the ClickShare related question. Yes, first, I think it's a very appropriate question. And so we are spearheading in the EMEA region, actually, bridging the gap quite well with pre-pandemic levels. Then, on the U.S., we're now applying a couple of recipes, which are successful in Europe and putting them in action into the U.S. as well. Just looking to Charles or Ann, whether we can add some extra color on that?

Well, I think the U.S. has for -- especially for large companies been much more aggressive in work from home, which means that the need to invest in conferencing and in basically companies has been much lower. We see that also, not only for meeting experience, but also for large videowalls that the pickup has been slow. We believe now very strongly that with large corporations, again, moving back to the office, this trend will improve. The key competitive question is, basically, you have proprietary meeting room systems like the Zoom rooms and the Teams rooms, which offered a competitive landscape compared to agnostic systems, like us. And this will be the real, if you want, excuse me, for the expression, battle for market share between agnostic systems and proprietary systems. For the moment, agnostic systems still have the largest market share, and we believe that, that trend will continue.

Thank you, Charles. So with that, I think the first two questions, Sébastien were answered. Checking in the queue, whether we have a next question. Someone coming in. Yes. I think it was Guy Sips. Can you please put them in the queue? Sorry, Marc Hesselink. Marc, you're on screen, and we're ready to take your question.

My first question is actually on the gross margin trajectory going forward. How do you expect that to move back to the traditional level, taking into account that you took some price measures, I think you're probably going to pick some price measures more during the course of the year but also a very high order book, which probably will still be executed on the old pricing levels. And so how do you see that improving over the course of '22? And my second question is on the Healthcare segment. Very strong order intake. You already explained why the conversion was lower. What would be the time period when you expect that conversion to happen? Is it fair to assume that the 26% growth, 27% growth of last year that you will see that kind of growth level for the full year? Or are there things that are also going to be pushed into '23?

Yes. Thank you, Marc. Yes, good first question. Would have been mine if I would be in your position as well. And I'm sure that Ann will be happy to take your gross profit margin question.

Gross profit margins is indeed, you first have your cost increase. And then at that moment that you do see that you yet have to translate this back also towards your end prices because it's there to stay, that's what we worked on and numerous calls we put you all over the second semester. I didn't include or indicate that there is some time lagging effect. So -- and we haven't worked on quite a lot price increases. Also, charge through of costs, higher costs to customers who are also willing to pay that. It is a challenge on the order book. That's for sure. That's an extra lagging effect, but it's not that is full order book is at old prices. So it is a combination. To the positive side, and maybe then already hinting to the second semester, we are starting to give now the outlook on the first one. On the second one, it's a little too early. The only thing I do know that at one time, yes, that lagging effect will turnaround in the sense that then these costs and the logistics flows and the broker fees will come down. And I do hope we then have some positive and lagging effect vice versa. And what quarter this will follow and assume that, that pickup then will come, it's a little early to tell. But it's clear, it's a full action point to restore and gradually, this -- and certainty funds that gross profit margin.

Yes. Thank you, Ann. So on the Healthcare question and the conversion of the large order book into sales, Charles, I see that you're ready to respond.

So traditionally, Healthcare has indeed bulk orders, which usually cover 1 year or slightly more than 1 year. But we indeed foresee a continuous growth, steady growth in the same region as last year for Healthcare division. So the -- what we see the conversion of the order book, we will gradually overcome by aggressive redesign measures and by actually implementing a whole kind of also manufacturing measures, the shortages that we suffer for the moment from the supply chain. So a confident message on Healthcare, combined also with the opening of a new factory in Suzhou to specifically then address the Chinese health care market but also to be able to tap into the supply chain in China, which will help us overcome the shortages that we feel in Europe or the Americas.

Yes. Thank you, Charles. And thank you, Marc. If you have more questions, don't hesitate to queue again. Next person in the queue is coming on. I was waiting for the operator. Okay. While, we wait, yes, [ Inget ], we can indeed take a question from the chat.

Thank you, Carl. So Carl, I have a question of Christophe Beghin. The order intake is strong and the positive sign, which is great. My question is, however, that several companies reported similar signals and some mentioned that as the effect of prebuying ahead of price increases. Do you see similar reactions at Barco's clients?

Okay. Good. I think Ann, that's a question you're willing to take?

We do have some orders that this is the case, but by large and far, it is actually not. So most of the order book is just a recovery of our end markets and as we're capturing that rebound actually. So in that sense, there will be to some extent. There are also, to some extent, the fact that they pull forward some orders that's not too large amount and all to a short the supply. So in that sense, that's both. So it's not largely driven by just having lower prices. It's just a very positive sign of the recovery of our end markets.

Yes. Thank you, Ann. Thank you, Christophe, for the question. And now we have Kris Kippers on the weConnect. Please go ahead.

First, congrats on the numbers. I've got two questions actually. The first one looking at the H1 guidance, I think quite good to see that growth is about to be guided at 20%. On the margin front, the question was a bit asked already directly, but what's the reason to be so prudent in that first half? Is it due to the fact that despite this growth, you see the lagging effect of the pricing implications? Or is it also the effect of Enterprise? What is the balance actually of both?

Yes. So a question on the guidance on the EBITDA margin.

Thanks for the question and to the same talk on the answer or at least in your first part. So it is indeed the lagging effect and see how fast we can yes, turn the round to make that up actually. And as this work on the uncertainty then on facts into it as well, that again, linked to certain components we missed and how fast we can ramp that up. So it's primarily really linked to the call it's done, the recovery of, again, towards the same gross margins and better.

Yes. Okay. And then I've got a second question, if I may, on the Entertainment. Quite a strong margin already, I think, in '21. So a good surprise, at least versus my expectations. But if you look at the history, does it imply that given the fact that you're rolling out more efficient projectors in this part and the cost alignment you've made that -- does it imply that from second half, we could indeed see margins going higher than the previous record levels of, let's say, 8%, 9%? Is that a plausible assumption or is it too early?

Okay. Yes. So on the Entertainment margins, you call it a good margin. I think we call it a good step-up from the breakeven level of last year. We would not call it a good level yet. But on the expected evolution, Charles, happy to give you the word.

Well, it's a two-sided story. Yes, we have a more efficient lineup in cinema. At the same time, we have ambitions to grow very strongly in also immersive experiences. The market is ripe. The demand is coming. And we need to not only grow the market share, but also increase our product portfolio to meet the -- of the customers. So the two combined will give us potential to even grow sales and therefore, also EBITDA. Percentage-wise, we are optimistic, but we don't give clear guidance on that for the moment.

Thank you, Charles. And we're ready for another question in the queue. And normally, this should be Trion coming up. We're waiting for the image. Yes. Here you go.

Yes, I've got a couple of questions as well. I'm just looking at your guidance, I appreciate you're not giving full year guidance because of the lack of visibility. But if we allow us to look at 2019, obviously, the last pre-pandemic year, you added 20% growth between H1 and H2. Today, we've got strong order intake, high order book, you talked about renewal programs starting in H2. I guess we would hope also some of these supply chain issues that have affected you at the end of last year and the start of this year to ease. Is it fair to say that we would hope at least to see that kind of seasonality again or maybe even a bit more this year? That's my first question.