Barco NV (BAR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. My name is Willem Fransoo. I'm Director of Investor Relations at Barco. On behalf of Barco, I would like to welcome you today to this analyst and investor call on the trading update of the third quarter of 2023. I'm happy to have both our co-CEOs in the room with me An Steegen and Charles Beauduin and also our CFO, Ann Desender. This call is unusual for a third quarter trading update for which we normally only provide a written press release. We're happy that you could join today on this short of notice. The purpose of this call is not to bring extraordinary news. However, we would like to keep the market informed, but Barco's focus on profitability in the current market conditions, which have led to lower-than-expected sales, yet stable and growing market shares for Barco. Charles Beauduin, An Steegen and Ann Desender will now walk us through the third quarter trading update for which the presentation can be found on our website since this morning. And Charles will kick it off and take it from Slide 3 onwards.

Good morning, ladies and gentlemen. I am happy to take you today through the highlights of this update. Barco's orders for the third quarter were about flat versus the same quarter last year. Year-to-year date, they are 4% higher than last year. We saw growth in the Enterprise and Entertainment divisions and a decline for the Healthcare. China remains weak as the expected recovery of the pandemic has not materialized yet. The order book stands at a healthy EUR 523 million, which is 3% higher than at the end of last quarter [Audio Gap] for the quarter was higher than 1. [Audio Gap] quarter was 12% lower than in the third quarter last year. [indiscernible] currencies, this was 9% lower. Year-to-date sales were 2% higher than last year. In the Enterprise division -- sorry, in the Entertainment division, sales were solid, and we are comparing a year against a strong third quarter last year when we saw a rebound of activity after prior supply chain issues. Sales were lower in Healthcare and Enterprise, with softer demand in Americas and a slower-than-expected recovery in China after the pandemic. When we look at the outlook for the full year 2023 and given the current market conditions, we are expecting sales to be in line with 2022. At this top line, the EBITDA margin is expected to be around 14% for the full year 2023.

So as Charles mentioned already, the headwinds that we saw already in second quarter continued and even intensified in some areas in the third quarter, where we had expected some recovery in China when we talked to you in July. That recovery did not materialize in third quarter. Also, our Healthcare and Enterprise divisions see softer demands due to weakening macroeconomic conditions. At the other hand, the Entertainment market continues to build on a very strong momentum as of last year, and that shows again the post-COVID trends that people really want to go out of house for entertainment. Now while we're navigating through these tougher market conditions, we are confident that the fundamentals of our key markets are healthy and remain intact. And while we're navigating through the short-term tougher markets through gaining market share, through cost containment and also margin improvements, we also continue to focus on our strategic initiatives. So those strategic initiatives are, as you know, focused on our road map of new product introductions as well as our operational efficiencies that we can be more cost competitive and volume product through our focused factories approach.

Taking a deep dive to the -- good morning from my side. Taking a deep dive more into the figures of the third quarter [indiscernible] orders [ and sales by division, starting with ] Healthcare. In China, we did not yet see the recovery impact [indiscernible] also coming from anti-bribery actions, which is ongoing, which is against [indiscernible] hospital officials which Barco has no impact besides from a temporary freeze of certain demands. We do not expect this very long term, but anyhow, this has impacted the third quarter. Likewise, we do see in Diagnostic Imaging sales being impacted by highest inventories in the channels or by our distributors actually bringing down their inventories. When we look to the sales down on -- versus last year, there's the impact. You have also in Surgical and Modality, which we indicated before, the phasing in and phasing out of modality projects [indiscernible] with the pipeline as a healthy [indiscernible] sales. When we look to Enterprise [indiscernible] higher than sales and further build up on the order book, in particular making of a Video Walls -- when we ClickShare is typically a business with book and [indiscernible] business. When we look to the ClickShare business, [indiscernible] tough on back to this overall weaker markets, ClickShare really did well, and we see in the agnostic space that ClickShare is further gaining market share. And that's there was an impact and slightly impact on the sales not growing in this third quarter. [ But should you all ] still more impacted by the decisions which we took to withdraw from a couple of small markets. This in favor of better profitability. Entertainment as third division, did very well on both orders and sales, further build up also their order book is continuing of the further lamp-to-laser replacements. Mind that also in these figures, there is a impact of recurring revenues, meaning of deferred on contracts for Cinema-as-a-Service, so all the clients or sales would have been even higher. If you compare the sales to the third quarter last year, this is in line. Mind that the third quarter was a very strong third quarter when the supply constraints were released after we solved these issues in midyear last year. And now I'll give it back to An for more [indiscernible] the division.

Let me walk you through the divisions. I'll start with Healthcare. Diagnostic Imaging. As you know, in Diagnostic Imaging, we provide medical -- high-end medical displays for diagnosis and of course, also software platforms to calibrate colors and images. So Barco has a very high market share there, typically healthy markets. The markets are a little bit softer, as Ann explained already. And that's, of course, also compared to a very high reference in third quarter last year when we had a strong rebound of the supply shortages. So today, we see markets -- strong markets in North America, but China is still challenged. While we, of course, are focusing on maximizing the sales and, of course, also on our profitability growth in the Diagnostic Imaging business unit, we also basically prepare our innovation pillar and our focused factory approach to prepare actually for future growth in this business unit. So we see actually enormous progress in our Suzhou factory, where we continue to ramp our R&D and our manufacturing capabilities to ensure that we maintain our cost competitiveness on volume products for the global markets. We also continue with new product introductions that will allow us market share gains. And next year, we expect actually 2 new flagship products, one[indiscernible] [ mammography ] and the other one is actually a medical display for home reading radiology -- home reading. On top of that, we will launch next year also our first AI platform for Diagnostic Imaging. This will help the doctors to -- in their analysis and speeding up their analysis. And also, a 3D display, again, this will help doctors in analyzing the Anatomy, but also in providing better communication to patients for training purposes. So that's the other innovation that we'll get to the market next year. Also, and we mentioned that already before, we see also adjacent markets in pathology picking up with digitalization becomes more and more important. One of those is the digital pathology markets where we have already an FDA-approved display. And next year, we're launching more of those displays and also AI features to help pathologists in their analysis. At the other hand, for Surgical and Modality, where we provide surgical displays and network solutions for operating rooms and customized displays for modality, here, again, markets are softer. We still see the high inventory levels at the customer side. And of course, as mentioned before, we had the end of a very large contracts at the end of last year, where we're still basically building up the order book to compensate for that. That we see actually a solid funnel of new contracts and prospects that will start kicking in, in '24 and the years after. Also here, our Suzhou factory, R&D as well as manufacturing are key to remain cost competitive in our Surgical and Modality markets. From new product introductions also here, we will introduce a 3D surgical display and also smart displays, that's a display basically that is more interactive with the doctors and also has AI features in it. From our network portfolio, so our Nexxis family, we will launch next year next to our high-end Nexxis product solution, also a more basic version for the mid-segment and then you can think about day hospitals, smaller operating rooms where this portfolio will fit. When I walk you then through Enterprise. So Ann has mentioned already, when you look at the corporate video conferencing market today, it's getting weaker. That said, ClickShare, our ClickShare sales can still basically show a solid single-digit sales growth year-to-date. This means that we are winning market share in the agnostic space. Today, we are in more than 1.2 million meeting rooms. There are the weaker market conditions. The corporates also take this moment to retain how they're using the office space in the future. Now in the midterm, we believe this is in our advantage because hybrid meetings are here to stay, and the offices will be more and more used for meeting. And again, there are so many meeting rooms that need to be equipped with video conferencing devices, so that's where we see definitely the strength of growing and meeting experience continuing. From the ClickShare family perspective, we are also bringing out a new portfolio. Beginning of next year, that portfolio will be for the high-end new features to basically enhance further the meeting experience. We will also come up with a mid-end range new devices for mid-end meeting rooms, all next year. For our control rooms, the Large Video Walls. Yes, we still see continued project delays because of the macroeconomic conditions there, although we have a quite solid order book for the fourth quarter. The last month, we basically launched 2 new products there. One is our new software platform, Barco CTRL. That is really accommodating the new trends that we see in the control room market, where the operator desk will be central, where you need to feed more and different inputs, where you need to work in [ multi ] and more secure environment. So the Barco CTRL software platform is geared towards that. Meanwhile, we also launched actually our new LCD [indiscernible] , Unisee 2.0. And both products were actually very well received with our partners and customers. Barco CTRL is also the basis of our software platform, as we mentioned to you last July, we did a strategic review of our Large Video Walls business unit and taking into account the new trends that we see in this market, we will focus more and we are executing along those lines on software solutions and Barco CTRL, that platform is the basis to do that. And then last but not least, Entertainment. So again, strong performance in third quarter, continuing to build up on the strong performance we have seen for the last quarters. When you look at Cinema, it's all about the lamp-to-laser renewal wave. We have a very healthy order book there. Capture rate is more than 60%. And as you know, the only 25% to 30% of the cinema are already equipped with laser projectors. So in that sense, that is still a very healthy business in the years to come for Barco. Also, next year, a very important year for Cinema. We launched 2 new products. That is our brand-new media server platform that we launch early next year as well as our HDR laser Light Steering projector, which is our state-of-the-art top line new projector that we have developed that basically will deliver more contrast and better energy efficient even compared to laser projectors. Also, good to mention for Cinema is that we are nicely building up our Cinema-as-a-Service, which will, of course, continue to bring in recurring revenue for the years to come. Immersive Experience. Healthy market conditions in all our segments, live events, team entertainment and simulation. Growth there despite the fact that China remains weak. Again, there, the government investments are still lacking. Also here, a full new suite of new product introductions are coming in next year as well our high-end projectors, that's replacement products as well as a new projector portfolio for the mid-end markets, which allow us to go into more vertical adjacencies for Immersive Experience. Here, very important to mention is our focused factory approach. So our construction of our WuXi factory in China is on track. And that will, of course, also for Immersive Experience, create competitive momentum in the mid-end projection market. We also have image processing in Immersive Experience besides the projectors that we're offering. And here also, we expect 2 new flagship products next year. One is our high-end live event switcher. So there's [indiscernible] that is coming out middle of next year. And then the first AV-over-IP software-based switcher that we're also launching next year. So overall, while in the short term, we continue to focus on gaining market share, cost containment and making sure that we focus on the margins. We are preparing for the midterm with a new fleet of product introductions with our focused factory approach to be there to make sure that we're in pole positions for when the markets pick up again. And with that, I hand over...

And with that I conclude before we go into Q&A to the outlook of 2023 and beyond. Yes, I see that we are facing on the shorter term, difficult or more difficult market conditions. With that, we expect the sales for this year to be in line with last year. And at the top line in level, we're expecting an EBITDA margin around 14% for the full year. This is an ambitious though realistic target, which we are [indiscernible] ourselves and which we go for. The extra EBITDA margin is a combination of better gross margins, which we have seen evolving and being penciled in over [indiscernible] of this year in combination, with a set of cost containment actions which we decided upon and also really acting on as of when there was more pressure on the top line growth. We are preparing as well for the plan for next year and years after. For next year, the top line growth will depend always the case, that's more a little bit more, I would say, to be seen on the evolution of the general market conditions and then the market gets indeed to pick up, as said by An and also by Charles, it's really -- we will be ready for this new product launches and we fully continue on the investments to be ready there when the markets pick up again, meanwhile defending our market shares. With that, we reconfirm our long-term guidance to return back to the high single-digit growth and the EBITDA margins for the next years between 14% and 18%.

Thank you, Charles, An and Ann for this presentation. We are now ready to move into Q&A. [Operator Instructions] So Matthias, I will allow you to unmute and yes, you can now unmute yourself and ask the first question. Matthias?

Yes. And welcome back, Charles. Maybe 2 questions from my end to start. Cinema-as-a-Service, it's clearly -- sales are picking up. Could you maybe elaborate a little bit on what kind of tailwind this represents on a full year basis for 2023 and 2024 in terms of EBITDA margin? Because I believe the costs are below the EBITDA line. So that would be my first question. And then maybe on the cost containment measures. Could you maybe elaborate a little bit more on what exactly this entails? What kind of yes, I would say, tailwind for 2023, but also next year, we can expect from this. And then I had one final question, if you allow me. There was a licensing deal announced with Crestron. Could you maybe elaborate a little bit on the economics of that deal? And also if there would be like an upfront payment that we sometimes see in licensing, yes. That would be my 3 questions.

I'll start on the [Technical Difficulty] and see how it goes. On Cinema-as-a-Service deal, we indeed nicely picking up, having an impact as the first revenue this year, which has done good news [Technical Difficulty]. For this year, this will have an impact of about 30% plus actually. So if you have been able to -- it would have [ sold it under CapEx ] new kind of, then it would be 30% higher. But this means for the next years that the deal on its own already, Cinema starts not at 0 , but at more than [ EUR 20 million. ] So that's [ in concrete. ] As to the gross margins and EBITDA, the average gross margin is on par with other deals though this is done including [Technical Difficulty] of course, we have 3 sets of services [ included ] into their warranty -- and of course, the interest component.

Just Ann, if I may, because for me it's not really clear. So this [ EUR 30-plus million but ] that would be as a CapEx sales, but what would be the sales tailwind or the sales this year booked as OpEx deal and these gross margins? I assume you're speaking about the overall deal, it's similar. But more specifically, if you book it in your top line, I assume it's almost incrementally to the EBITDA line because your costs are below EBITDA. Is that correct?

Costs are not below EBITDA. Cost are taken as a cost into the cost.

Yes. So I think on cost containment, of course, what we make sure is that we -- first of all, the cost savings, so we managed to basically get our OpEx for the second semester below the OpEx for the first semester. So cost savings is the first measure, but also where we don't jeopardize our midterm growth perspective cost containment actions to basically improve on efficiencies in the organization. So those are the cost containment actions that we're working on. Of course, we also continue our investments in book factories as well as in R&D because that is for our midterm growth, but that is also going to help there.

So on the question [ yield ], you're correct. There was an upfront payment made. Why did we go into this customizing? Because we believe that picture has the opportunity to become the platform for further product development. And so we see this as not only a vindication of IP, but also as the possibility to build on with further products.

Could you maybe give an indication of the magnitude of the upfront payment, please?

We don't give details sorry.

But it is not [indiscernible] and a royalty, of course, with all the sales that they do.

But I assume it's material the upfront payment.

And it strengthens, of course, also the whole [ BYOM ] concept because that's also the concept that they are putting in the market. But again, yes, the corporate video conferencing market is weaker, and that affects, of course, also our [indiscernible] set in that sense.

Thank you, Matthias, for your questions. Stefano, I will ask you for the second question, Stefano Toffano from ABN AMRO.

And welcome back, Mr. Beauduin. Three questions from my side. So the first question is on the Large Video Walls. There have been obviously lots of dynamics there. I think maybe you can be a little bit more specific on the impact of -- on the earnings. I believe that there was some guidance or comments before that you were targeting Large Video Walls to be EBITDA breakeven by the end of this year. So maybe if you can tell us a little bit more about that. Then I have a second question which relates to my colleague Matthias, what he has been saying for us, again, if you can help me out a little bit to understand the margin improvements based on the -- your self-help potential in 2024? I know you cannot be very, very specific. But at least if you can quantify a little bit what that impact on the margin might be? And then I have a last question for you Mr. Beauduin. If I may be so free to ask what can be -- you obviously it's good news that you are back, and you are slowly and steadily picking up your activities. What can be -- what can we expect from this going forward?

It's very difficult to hear, sorry.

[Technical Difficulty] the third question, which is for you, Charles. [indiscernible] of course, like everyone is very happy to see you resuming [indiscernible] that actually picking up again. What can we expect from this in the future [Technical Difficulty].

[indiscernible] I can assure you that [indiscernible] and I prefer [indiscernible] and the Healthcare side. So I'm glad to be back and I will take up duty, again, in the beginning [indiscernible] at least halftime [indiscernible]. And I'm very glad to be welcome backed by the team.

Same for us. And yes, we align all the time. So that we didn't change there. And then maybe on your question on LVX. So we still target to be breakeven on our Large Video Walls business by the end of the year. So also there, a good order book was still a strong quarter that we expect for fourth quarter as well as cost savings, cost containment actions there that will get us to that point.

On your question with respect to next 3 years onwards on the EBITDA accretion [ where it has to come from ]. It is a combination of further keeping on with higher gross margins and gross margins improvements. One aspect, which is underpinning this is the leveraging on the focused [ factories ] on the roof of further, in particular, Healthcare to [indiscernible] China, which is ongoing, which is also very much on schedule and not very much on schedule, and the diverse moves we are doing there. Likewise, also operating leverage on that top line. So keeping our cost and cost increase very well [ in control ], which also, again, this year, we can practice on quite a bit. But the teams are going through [indiscernible] for that.

Thank you, Stefano. Next is Guy Sips.

Yes. Thank you. Two questions from my side. First is on the orders in Healthcare. Is there some cyclicality in there because we saw these orders going down quite sharply compared to the previous quarter, but we saw a kind of same difference between orders and sales in the third quarter 2022? And is that mainly in Diagnostic Imaging or is it more in Surgical and Modalities where you see these weaknesses? And the second question is on your track to M&A. At half year numbers, you were indicating that you were let's say, digging into a bigger file, how are you today? And what was the status compared to the end of the first half?

[Technical Difficulty].