Barco NV (BAR) Earnings Call Transcript & Summary

Okay, good morning, ladies and gentlemen. I am Willem Fransoo. I'm Director of Investor Relations at Barco. We welcome you today to this conference call on the results of the second quarter of the year and the half year results 2023. Today with me here on stage are An Steegen, Co-CEO of Barco; and also Ann Desender, CFO of Barco. Co-CEO Charles Beauduin is currently on medical leave and would like to be excused for this call. An Steegen and Ann Desender will now walk us through the half year results and the update under the heading, "10% sales growth fueled by strong performance of Entertainment, step-up in profitability with EBITDA margin at 12.5%." They will provide extra color on the results using the earnings presentation which is available on our website since this morning. And that's it for the introduction. We'll take it from Slide 3, onwards, in the executive summary. An Steegen, the floor is yours.

Thank you, Willem. [ Good morning, everybody ]. [ So let me start ] [indiscernible]. So we reached top line sales of EUR 521 million, which is a 10% year-over-year growth. And also for Barco this means an all-time high for the first semester. This growth was mainly fueled by a very strong performance in the Entertainment business unit. We also saw 60% of our revenue coming from eco-labeled products, and that was mainly driven by the Enterprise division where we have now a complete portfolio of ClickShare eco labeled. And also the new LED series that we brought on the market are eco labeled. We have a positive book-to-bill larger than 1, and that results in a solid order book of EUR 506 million. EBITDA landed at EUR 65 million. That represents an EBITDA margin of 12.5%, up 2.7 percentage points year-over-year. That was mainly related due to a very good product mix, also higher gross profit margins, because we clearly see an eased supply chain situation. And that then offset, of course, the impact from higher inflation rates and our continued investments. Net earnings, net income, we landed at EUR 33 million, which represents 6.4% of our sales. So for the outlook, we are reconfirming a sustainable profitable growth. We expect now a high single-digit sales growth year-over-year because of a tempered top line growth in China where we see the post-COVID recovery slower than expected. EBITDA accretion is maintained. And we reconfirm an EBITDA margin of larger than 14% for the full year 2023.

[indiscernible]. Good morning to everybody. And thanks, An, for the introduction. Taking over with some figures. And then I'll give the mic back to you, An, for the color on the different divisions, et cetera. Starting here on Slide 4 with the overview of the financial KPIs and in comparison with the first semester of last year, you will see that the change or the equation is all in the green, which we of course all like; double-digit sales growth. You will see later on also we have an increase in sales in all of our regions; some lower in APAC, 5%. So they're not in the double digits, and this including the lower sales growth in China. Order book at EUR 506 million, which is, compared to the beginning of the year, EUR 9 million higher. EBITDA margin really fueled by the extra on gross profit margins which we did so, on average, results our margins at better gross profit margins but also different actions we did on our costs which also helped on this gross margin. We see an increase in gross profit margins, compared to the first semester of last year, with 3 percentage points up but also 1 percentage point up compared to the second semester of last year, so we really see a steady improving in that area. OpEx has been contained. There is an increase linked to half inflation and then also further investing both on product road map and commercial activities. Free cash flow, we landed at minus EUR 24 million, including in there an step-up of our capital expenditures. More on that later on. Our ROCE landed at 18%. Net income, as indicated, at EUR 33 million, which is about EUR 11 million higher than last year. Taking it over to Slide 5. There we see a comparison of our sales versus the first semester of last year and then the split by division and the split in the different regions. Last year, you might remember that, when we came out at this point on our sales of the first semester, that's diverse and material impact of supply shortages, which was primarily hampering at that time Entertainment. That was to the tune of about EUR 40 million we at that time also included in our figures and results outlook. This has been fully solved towards the end then of the midyear last year and was largely resolved then in the second semester; and is out -- what I would say, is out of the door and no issue anymore in the first semester, which really helped that to deliver on the big order book which Entertainment had. And with that is an -- a very, very solid growth year-over-year in Entertainment; and this in both business units underneath. Enterprise, landing close to last year, which is a high single-digit growth of MX and a lower growth of Large Video Walls. And Healthcare, more on that then later on, the impact that it had, landed at 10% lower top line than last year; all in all bringing that to 10% growth. Looking to the different regions then: EMEA, the highest, plus 15% year-over-year; Americas 8% year-over-year; and APAC 5% year-over-year. Some extra then little footnote we added on that: If we look to the impact of the currencies in this first semester, then that has a neutral impact, so call it, [ no help needed, an excuse ], I would say, but [ that's needed ]. Moving over to the typical bridge which we each time share with you on our operational results, comparing the EBITDA of the first 6 months of last year to this year. And this is then the shape of a P&L which we all like to see the one-off profitable growth. So the increase of operating result is really helped by our sales improvements, extra volumes which we sold at better margins; and then OpEx which has been contained, with the impact of inflation which is about the half of the amount, which you see that, the half of the EUR 20 million, and that the other half is investments done in product portfolio and commercialization. Landing with that at an EBITDA of 12.5%. The EBITDA of the different division lands at 10% and higher. Net income, some words on that and starting from our EBITDA accretion then the other lines between EBITDA and net income. Depreciations and amortizations are a little lower than last year. We do have restructuring costs we booked this first semester to the tune of EUR 6.6 million which is containing or is linked to the strategic review we did on Large Video Walls. And more on that a little later on. Taxes: And our effective tax rate remains at 18%, which is the same as last year and also the guidance for the full year. And with that, we land at our net income of EUR 33 million, EUR 11 million higher than last year. Moving over to free cash flow; and our balance sheet, which remains very strong, as you know it. The investments or the negative free cash flow includes increased gross operating cash flow, includes an uptake in our capital expenditures. And the EUR 21 million, about EUR 10 million is related to the Cinema-as-a-Service contract and half relating to what we call manufacturing investments and in manufacturing footprint. Working capital is still high and too high; and is an focus point to -- as we announced before, to get that down. That started to get down. And primarily we are talking here about inventories as of the second quarter but, compared to the beginning of the year, not yet. These are good inventories, as we then also call them, so they do not trigger extra write-offs on it, so in that sense, that's a temporary thing to secure the supply last-time buys which are in their service inventories, et cetera; and also linked, of course, to the uptake in our -- to the uptake of our sales done, in particular in Entertainment. Our ROCE landed at 18%, which is a very nice increase compared to last year. And our net cash ended above EUR 200 million, EUR 203 million which is EUR 61 million lower than the beginning of the year, including the free cash flow but -- actually the CapEx expenditures which we did and also a full cash dividend we paid to our shareholders. On sustainability KPIs. The first one, An already indicated. So half year, 60% of the products of our revenues is including products which has an eco label A or better. Last year, this was 50%. And the target for the full year is 70%. So we've seen improvements and across the different divisions, so that's very nice. If you look to the new product introductions which we did in the first half of this year, they all have an eco label A or better, so that's also really on track over there. If you look to another one, the Net Promoter Score on our customers in the field of communities, then also there we see a nice increase, 48%. Target is 50 for the full year, so working to get there, but a very nice improvement over there. And there we see this also across the regions and across the divisions. And with that, the pleasure to give it back to An for more color on the divisional results.

Yes. So let me take you a little bit deeper on our 3 divisions, and I'll start with Healthcare. So in Healthcare, we saw decline in orders of 14%; and decline in sales of about 10%, mainly in the Americas region. And this basically is related to -- that relates and that lands an EBITDA margin of 10% related to a lower top line and also our continued investments in product R&D and manufacturing and the ramp-up of our factories in Suzhou and [indiscernible]. When you look at the 2 business units. In Diagnostic Imaging, we saw strong performance in radiology and also in digital pathology. Especially in the Americas, we saw slower order intake because we see the customers going back to normal investment levels after a period of high spend due to government funding right after the post COVID -- right after COVID; and also, of course, some uncertainties in the market, high interest rates slowing down the orders. Surgical and Modality had a slower start of the year. Sales decline there is mainly related to phasing out and phasing in and the gap between phasing out and phasing in new contracts, also especially in the Americas. Here we see definitely a lot of promise. On the longer term, we basically see confirmed contracts coming in that should kick in towards 2024. For Enterprise. So we are winning momentum and gaining share with ClickShare. We see project delays in Large Video Walls due to again an uncertain investment climate. Overall, orders pick up in Enterprise 4%; and a small sales decline of 2%. And EBITDA landed here at 15 -- EBITDA margin landed at 15.7 percentage. That's down 2.7 percentage points, and that's mainly driven by a higher spending in product road maps and R&D. When we look at Meeting Experience. We see actually hybrid meetings are there to stay. We also see a slight market slowdown because companies are at this moment rethinking the way they will organize their office space and their meeting rooms. Now we see ClickShare gaining a lot of momentum here; ClickShare being simple, being very flexible, agnostic. This basically is a big advantage compared to -- in this new way of hybrid working in a flexible environment. We have today installed base of 1.2 million meeting rooms. That is up from 1 million last year. We also see our ClickShare Conference product now being 70% of the total of the revenue income in ClickShare. We also launched a new product -- was very successfully launched in the market in the first semester. That is our CX-50 next generation, with new features basically enabling flexible switching, also a 20 x 9 format and dual display. Now in Large Video Walls, we see order growth driven by a strong demand in Europe and the Middle East. Sales was hampered by slower project implementation, so delays in project implementation. Also lower government-supported investments, uncertainty in the markets basically hampered also our sales in Large Video Walls. We're still loss making in the first half of the year on Large Video Walls. And we completed our strategic review, and I'll get back to that in a minute, but here the focus is going to be more investments into software. And that will basically accelerate our path to profitable growth in Large Video Walls. In Entertainment, yes, strong demand across all our markets despite a weaker performance in China, slower post-COVID recoveries there. That, of course, helped our operating leverage and our margin accretion in both business units. So we see orders going up 24%. We see sales going up 43% year-over-year, and that resulted in an EBITDA margin of 12%. The EBITDA margin: again operating leverage, as well the fact that we do not longer see supply chain constraints; less brokerage costs, less logistic costs. So that helped, of course, in bringing up our EBITDA margin. In Cinema, clearly the lamp-to-laser replacement wave is in full gear. This was paused in 2019 because of COVID, but we see this ramping up at full speed right now. We have an installed base of 35,000 laser projectors right now. And that is about 25% to 30% of the total installed base in cinema theaters, so there is still a lot of -- to go there in the replacement wave. For Immersive Experience, we actually also saw very solid double-digit growth. We see uptake actually in all our markets, especially in events and simulation but also in fixed install. We saw also growth that was mainly led by EMEA but also -- and there, especially also Middle East; and also closely followed by the Americas; softer in APAC due to, of course, slower recovery rates in China. So this brings me to an update on our Large Video Walls strategic review. And here it's good to say that, when you look at the control room market, we see changing dynamics in the control room market with much more focus on operating workflows, hybrid remote collaboration and also distributed working in a secure and sustainable way. Barco has a long history in this market and is very committed to basically perform in this market. When you look at the market, you see many verticals in this market. And then basically where Barco was positioned for a long time is in displays, so in the hardware and then content management sort of firmware for the hardware. With the dynamics changing in this market, we are going to step up to operator workflows and also customized operation for specific verticals, and that's mainly focusing then on software. So for our strategic review, what will we focus on? Well, there are 3 clear pillars that we are going to focus on. The first one is focus on profitable products and markets. This means that we're going to focus on control rooms and we will have less focus on broadcasting and corporate markets. We will also accelerate our investment in software and in dedicated workflow solutions. The target industry verticals are the ones that we are very familiar with, so that's energy and utilities, the public sector and transportation, but we also are expanding now in horizontal opportunities. And these are these network operating centers and security operating centers, where we have with our new Barco CTRL product, a product that we launched earlier this year, basically a very good platform to also feed the NOC and SOC markets. For geographies, we're focusing on EMEA and Americas and Middle East and also Southeast Asia, which means that we're going to rebalance our R&D portfolio with more investments in software and workflow solutions, our Barco CTRL. So our new platform is there, the ideal starting base. We continue in hardware to optimize our rear projection cubes and LCD display portfolio. For LED, we have an up-to-date state-of-the-art portfolio today, and towards the future, we will focus on image processing. We basically have also a future-proof organization, which means that we need to make sure that the supporting sales and marketing activities are also gearing now towards software and workflows. And we also basically changed leadership in our Large Video Walls. And we promoted -- or we appointed our former CDIO, Tom Sys, to be the new Executive Vice President for Large Video Walls. He has a long history in software developments. This leaves me with the outlook and closing. So sales and EBITDA margin are expected to be higher in the second half of the year compared to the first half of the year. We are expecting tempered top line growth due to China, resulting in an expected sales growth for the full year in the high single-digit range. EBITDA accretion will be maintained. The impact of the lower sales is offset by gross margin improvements and favorable product mix, so management, again, reconfirms its expectation for an EBITDA margin above 14% for the full year. We also reconfirm our long-term guidance for high single-digit sales growth and an EBITDA margin in the range of 14% to 18%. Back to you, Will.

Yes.

[ Wim ] can give the mic to [indiscernible].

There we go, good. Thank you, An and Ann, for the presentation today. We are now ready to move into Q&A. And I'd like to repeat some householding rules. [Operator Instructions] And I would like to ask the operator to bring the first question in the spotlight.

There's a question...

Kris Kippers, Degroof Petercam. Can you hear me?

Yes, we can.

Yes, yes.

Perfect. I have a couple of questions, but I will stick to 2 indeed; and the first one, actually not regarding the results and what we've seen and the outlook but regarding the steering of the company. Could you share with us the actual situation of Mr. Beauduin and what the outcome will be on the steering of the group? Because we haven't heard any formal news on that. And of course, linked to that as well, we've had a [ greater ] impression on, for example, Mr. Erdem Soyal, who was the head of immersive, [ as he has left ]. I presume that's not an issue for this division. Or could you give some comment on that?

Yes, sure. So indeed Charles is on medical leave. And we do not expect him back before the end of summer. We are definitely in touch with Charles. He is up to date of what's going on at Barco, but he is at this moment not daily involved in the activities at Barco. So temporary, I took over full responsibility to guarantee continuity of the business and also decision-making. And that's where we and how we have performed over the last couple of weeks. Regarding Erdem, indeed Erdem left us in May. We actually appointed very recently the global head of sales of the Immersive Experience business units. That's Ta Loong Gan. And he is very familiar with our Immersive Experience strategy, markets, go-to-markets, product portfolio. And he is taking over from Erdem, so here again continuity is guaranteed.

Okay. And then my second question is linked to Cinema-as-a-Service but also to the working capital in general. And how should we see the buildup of that Cinema-as-a-Service in terms of free cash outflow? Because, of course, we had a strong half year now in the segment logically explaining that jump. But how should we see it a bit going forward? Is this something we can model? And then secondly, of course, linked to the working capital as such, we saw it was quite high in H1. It should have come down normally indeed as previously guided, so to what extent should it normalize in the coming quarters?

Yes, I will take that one. And thank you for the question, Kris. On the Cinema-as-a-Service, the EUR 10 million which we had as CapEx in the first semester, that is not to be extrapolated to a full year. On the other hand, yes, you can, if on your modeling, then [ type of ] it was a little bit more in the first semester than in the second semester that we have the contract. And AMC is that bigger one, as you know, so -- but overall, yes, we included yet, you can say, around EUR 15 million for the full year over there, with some more, I would say, shipments in the first semester. On working capital, yes, we knew. And then guidance was to bring that down. We did guide that, that would take, yes, I would say, then the full year. This being said, I would have loved to have it already more come down.

Yes, yes...

So that's take some time. The most important there is that these are good inventories and it does not trigger at any point inventory write-offs. Towards the end of the year, we are guiding on the full working capital on sales to get towards the 10% back.

Yes.

Towards the 10%.

Yes.

[ So it will be ] slightly higher but in that range, yes.

Yes, yes.

Yes, correct, yes.

Marc?

Can you hear me?

Yes, Marc.

We do.

Yes.

Okay. Actually 2 questions. So my first question is on the Entertainment order intake in the second quarter. So over the first half of the year, it was still very strong but maybe a bit of a dip in the second quarter. And the comments on Entertainment are very strong because it seems that this is just a timing issue, but please, can you elaborate on that? And the second question is on the restructuring of the Large Video Walls. Can you give a little bit of a feeling like how much loss making it was in the first half of the year, how quickly you expect that to repair? And yes. And so what kind of profitability level in the second half and into next year would be normal for Large Video Walls?

Okay, I'll take the first. You take the second...

Okay, fine, yes. Okay, go ahead, yes.

On Entertainment. In the first quarter, there was a very big order included relating to Cinema-as-a-Service. So in that sense, yes, you don't have that in every quarter. That doesn't mean that their order book is less healthy or has come down, to the contrary actually, on Cinema, so -- but that's just fully explains the -- I would say, the extra uptake which we had on orders in the first quarter.

And on LVX, yes, we don't disclose numbers per business unit, but in general what we saw in the first semester in LVX is in the Americas a slowdown of order intake because of uncertainties in the market. The interest rates were at a certain moment very high, so that delayed decision-making in the Americas. There we basically see that this is getting better, so -- and we expect actually that a lot of orders are going to land in the second semester for the Americas. In sales, there again, some delays. These are typically in LVX very long projects for implementation. And although our supply chain is now completely resolved, that doesn't mean that other -- there -- other supply chains are already fully recovered. So this means that, [ the integrated ], there are still delays; and that is still one of the things that we suffered from in LVX in the first semester. Now for the longer outlook there with the revised strategy as we have, the plan is to break even on this business unit for this year and in the longer term to get it to similar profitability levels as the rest of the group.

Okay, so one small follow-up maybe. Breakeven, is that then for the second half breakeven or breakeven for the full year?

No, no, for the full year. This is for the full year, yes.

Next questions? [ Nicholas ] from Kempen.

So yes, in the press release, it is mentioned that there is a slow decision-making process with regards to the upgrade cycle, yes, in the meeting rooms. Can you elaborate a bit on that and talk about the demand dynamics in this particular end market?

Yes, of course. Shall I answer? Or you have more questions. No, okay, so I'll answer this one. Sorry. And so yes. So what's happening since after COVID is that, first of all, we see hybrid meeting is there to stay. Also we see companies now trying to deal with how they will organize their workforce and their meeting room space and their office space with this new trend that they see. So what we see -- and that takes some time for companies to basically reorganize their office space this way, but the trend that we see is that people will come to the office to meet. And if they have individual work to do, they stay at home, which actually in the long term is a very positive trend because there is going to more meeting room capacity used in the offices. The other trend that we see is also that these meeting spaces will be much more flexible in the future. They need to be able to rearrange that according to the type of meeting that you're going to have there. And there, of course, when you think ClickShare, it is simple, one click on the button. It's agnostic, flexible, so it works with any virtual meeting conference platform, with any periphery device in your meeting room. It is also basically very agnostic towards using any type of portable mobile device. And it allows visitors to basically call in, so in general a very flexible conferencing solution. And that's where we see the momentum of ClickShare gaining momentum. So we had a high single-digit growth in ClickShare despite the fact that there is maybe some slower and -- decision-making processes in the markets because clearly the "bring your own device" type of solution is gaining momentum.

Okay. And maybe one more follow-up. So what the -- implications does it have to your market share under the ClickShare business both compared to the agnostic segment but also compared to the non-agnostic solutions out there?

Yes. So clearly there are 2 solutions out there for meeting room and -- solutions, yes. So one is the proprietary rooms and then you have the agnostic solutions. Both solutions will grow, but we see more and more that, that flexibility component is important. And there, of course, agnostic conferencing solutions have an advantage. The new ClickShare that we launched actually in the first semester has what we call this flexible switch which even allows one meeting room to switch from a proprietary setup to a wireless BYOD setup. And that is a very well-received feature actually in meeting rooms because, again, to bring in that flexibility element.

The next question? There's no other questions at this stage. [Operator Instructions] Yes, I think there is one coming in. Sébastien?

Just 2 question. And video wall: Can you update on the margin benefit at a division level? Because there is a one-off cost and it will be interesting to get what kind of payback basically you were expecting -- actually expected on. And how long basically that will take. I'm pretty sure there is some delivery of [ existing over ], but at what point should be inflection point? So that will be the first question. Second one, there is a lot of debate on China. Given that you are Barco in China with "China for China," can you update us basically and try to give us like information from the ground to see if we can expect an inflection point by H2, which is not so much [ into the consensus ]?

Sure. Do you want to...

I'll take the first. You take the second.

You take -- okay.

On the first one. We did book an -- restructuring costs relating to LVX, which you see on our P&L EUR 6.6 million which are in full layoff costs, so a reduction in force. So no impairments there. When we guide for the EBITDA breakeven by the end of the year, that's excluding that amount. And then for the payback, this is done within the next years, so in that sense, it should not take too long.

Yes. And regarding your question in China, yes, you read it...

And just, I think, can you update a bit on the margin benefit at the group level which is expected given the costs restructuring for video wall? Plus, the software mix, can you give like...

[indiscernible]. I sympathize with your trial, Sébastien, but we don't give figures on a BU level. So in that sense, that's why I did not go into there, but it's accretive, of course, yes...

Yes. So then maybe let me answer your question on China. So you read it everywhere else. So today, the economic recovery in China is going much slower than anticipated post pandemic. That's a fact. We see a slower investment and slower demand and slower investment in general, not only in our markets there. What's happening is that, because of high interest rates but also the debt of the local governments, that, of course, slows down the whole demand and order intake. Now for us, especially in Entertainment and Healthcare, yes, typically the local governments are quite important stakeholders in our business in China for China. Now we see this situation is going to improve. We see here and there already tax incentives coming in, more favorable terms on loans, but when exactly the recovery is going to kick in is, of course, something that we will have to see. But that's what's going on in China. Meanwhile, for our factories: So we have our focused factory approach, where we have factories as well in Suzhou and soon enough in Wuxi and then also Kortrijk and [indiscernible]. So there we are -- typically volume products will go to China, specialized products to Belgium and Italy, but they are flexible lines, so we basically can exchange products between those lines when needed.

Thank you, Sébastien, for these questions. And we have another question from Kris.

And another question from my side indeed. You were quite vocal some months ago on what to do with the balance sheet regarding add-on or even larger M&A. Given the current market conditions; higher interest rates; and perhaps some peers in jeopardy or, let's say, having some difficulty with the hiccups in the markets, do you see any opportunities that could -- that Barco could look at more [ interestingly ] now than, let's say, 6 months ago? Or is this -- will you have more an internal focus right now?