Barco NV (BAR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to this conference call for Barco's first half results for 2024. My name is Willem Fransoo. I'm here in the room with our co-CEOs, Charles Beauduin and An Steegen and also with our CFO, Ann Desender. An Steegen and Ann Desender, it will take us through the presentation of the results this morning, and this presentation is also available on our investment corporate website. After the presentation, there will be time for questions. I would now like to give the word to An and Ann to take us through the slides.

All right. Thank you, Willem, and good morning, everybody. I'm going to start with summary of our first semester results. For sales, we landed at EUR 434.5 million, which is about 16.6% lower than last year. We do see sales significantly picking up already in the second quarter, especially in the Americas, where we actually see for the second quarter year-over-year sales growth. Order book is at record high, EUR 533 million, and that includes already orders for new product launches that are still gonna come in the second half of this year. Book-to-bill more than 1. And also eco-labelled, so revenue coming from eco-labelled products increased at 4 percentage points to 64% of the total revenue. EBITDA landed at EUR 35 million, which is 8.1% of sales and 4.4% lower than the first half of last year. Gross profit margin was pretty resilient. So we actually saw improvements in health care and entertainment, but that was offsetted with the decline in enterprise because of the lower ClickShare sales. OpEx is under control. R&D, we kept on investing to support, of course, the new product introductions for the second half of the year. Free cash flow landed about EUR 15 million. That is a step-up of more than EUR 38 million, since last year and the net income is at EUR 9 million. Now the outlook for the full year, so we expect to resume growth in the second half, although the visibility remains challenging, we expect growth for the second half over the second half of last year in sales. And we also expect a strong recovery of our EBITDA for the second half of the year, which is now expected to land for the full year between 11% and 13%. So we started the year slow. We had a slow first quarter, but we see significant improvements in orders and sales for the second quarter as I mentioned already, especially for the Americas, where we, for the first half are flat in sales compared to last year, and we see the growth in the second quarter. This growth is mainly driven by our Diagnostic Imaging business unit, where we see solid performance and also strong demand for premium portfolio. We see also, in the first quarter, we saw softer demand in entertainment, but that demand has been picking up in the second quarter. And also, order and sales for our Control Rooms driven, of course, by the geopolitics, but also by need for security and data insights has been growing year-over-year and quarter-over-quarter. EMEA remains weaker, so investment client, customers delaying actually their investments, also the decision-making from lead to order from order to sales is slower in EMEA. We also had, for our Meeting Experience higher-than-usual inventories in the channel and at the end or at beginning of '24. And of course, because the market is still in decline, and we're growing actually in line with the market, but it took us longer to destock that inventory in the channels. Cinema sales was also weaker in EMEA, that again, had to do with the Hollywood strikes and a limited movie slate, which we expect to pick up again towards the end of the year and especially also next year. And also for EMEA, we see growth in Control Rooms and also an increasing share of software in our portfolio there. APAC was down 13%. We also see pickup in orders for the second quarter in APAC. China remains flat, and we see actually stronger demand in Cinema already. Now we had also a very high comparison basis, especially for entertainment compared to last year. So that's also a reason why APAC sales is a little bit lower for the first semester. And also worth to mention is that with our strategic transformation in control rooms, we abandoned several countries, markets in APAC, including China, and that is also basically impacts -- a little bit our results for APAC. I'll hand it over to Ann now.

Thank you. All these figures roll-up [ near ] to the group figures shortly, but on the figures as such so orders landing in the second quarter at EUR 243 million and sales, EUR 238.6 million, which is compared to the first quarter at 10% up on orders and sales was up 22%, second quarter versus the first quarter, so to speak that, call it the dip and the softness in the first quarter has picked up again and is largely in improved orders of both sales, which means that we have been able to build up our order book to the tune of EUR 38 million and above. Including in there also indeed preorders for new product launches, which will be shipped in the second semester. The visualization of our EBITDA versus last year. So last year it was at 12.5% EBITDA margin. First semester this year at 8.5%. Needless to say that the biggest impact is coming from lower volumes, lower sales. Gross profit margin has been quite resilient. The negative impact is linked to lower sales in enterprise and in particular, in ClickShare. We have the high margins. When you look to the gross profit margin in both Entertainment and in Healthcare, there we see an uptake, so all of the better product mix more and more software. Also the actions which we have done throughout the years with going to China, the Focus factories are really yielding results. We have containing our OpEx, if you compare the OpEx, first semester versus last year. This is down EUR 6 million. This is despite, or I would say, we did not cut on R&D investment with a clear eye on the new product introductions, which are upcoming. Where it is coming from, it's really a whole set of cost contained measures. For the Control Rooms reset last year clearly has its impact now, some and across now, I would say, attrition, which has done lot to our headcount actions, attrition, which has done been offset with organizational efficiencies. If we look to the total headcount mid of the year compared to the beginning of the year, then we are 170 people less direct, indirect and direct people, indirect people that's 20 people less. So landing with that at an 8.1% EBITDA margin. Taking you to net income on Slide 7. starting from the EBITDA of EUR 35 million depreciation or higher than last year, as expected, including in there also depreciations on Cinema as a Service deals which we are having. Restructuring costs, EUR 7.8 million, including the last phase of the strategic review and reset started last year on Control Rooms, including the closure of the Changping factory which was already at the beginning of the year. And then a numerous diverse actions, but also positive impact, including integration of Cinionic into our Barco activities, where we now have again 100%. Interest and taxes, interest positive taxes, 18% of last year, a lower number and a lower EBITDA figure of course, and then landing to a net income of EUR 9 million. Moving over to free cash flow, like An indicated in the summary, landed positive on the first half rounded to EUR 15 million, which is a considerable step-up compared to the first semester last year. And the main step-up is linked really to the lower working capital. Gross operating cash flow of EUR 30 million, which is EBITDA margin's restructuring costs. CapEx, we get at EUR 19 million, which is quite in line with last year where we had EUR 21 million, 2 bigger items included in Cinema as a Service contract, which is for EUR 6 million manufacturing footprint. We opened the Wuxi factory in China included in there, EUR 5.6 million and then more recurring CapEx included. The working capital has been reduced compared to beginning of the year, EUR 9 million compared to over a year ago EUR 37 million rounded. Though despite, in all honesty, quite still a lot of opportunities to further decrease that. And particularly into the inventories, we saw this declining or decreasing as of the second quarter, but it really remains a focus area to further go down with the improved top line in the second semester. ROCE landed at 11%. Net cash at EUR 173 million rounded, which is EUR 70 million rounded lower at the beginning of the year included in there, of course, the free cash flow and then the down, let's say, dividend, share buyback and then the buyout of the minority investor into Cinionic. Moving over to the sustainability KPIs and picking out 2 year first eco-labelled revenues, so 64% compared to 60% in the first semester last year. So a further progress over there. This being said, the measures and the definition becoming more stringent every year, now also including Software and Service revenues. So if we would restate or compare apples-to-apples, then actually, we're at 70%. But anyhow, it is what it is. And so the new definition is 64%, and we remain our target for next year to go to 75%, including this more stringent definition. Driven across [ BUs ] and across the different divisions uptake that we take out 2, which have a really positive impact than it's within Diagnostic Imaging and within Cinema, in particular. The new product introductions coming in the second semester, we also -- they are all eco-labelled, so in that sense, we'll do progress further. And looking to the Net Promoter Score of our customers where every year, we have a deep survey twice per year, with more and more implies it more and more, I would say, substance to it. We do a lot also with the results and any of the comments which we get to really work on any comments of detractors, we could say so. And it has actually quite pleased with the further progress on our results, landing to a Net Promoter Score this year's 4 points up versus a year before. The largest improvement, so we see it really across the regions, but the largest updates are in Meeting Experience and DI. Diagnostic Imaging, and it's also driven by better points on or even better points on after sales and service And with that, I hand it back over to you An with some more color on the different divisions.

Yes. Okay. Let's start with health care. So in Healthcare, Orders and Sales declined 12% and 11%, respectively. We did see, of course, an improvement already in the second quarter in order and sales. Gross profit margin really did improve about 3 percentage points, and that was due to a better product mix, but also due to the fact of cost efficiencies now that we actually could transfer all our medical plans -- medical displays as planned to our Suzhou factory. EBITDA Dropped from 10% last year, first half of last year to 8.8% last semester, and that was mainly due to a decreased top line. So when you go to Diagnostic Imaging, very healthy market dynamics in Diagnostic Imaging, resulting actually in a robust business performance, especially in the Americas, again, where we saw in second quarter year-over-year growth, and there is definitely also there is the strong demand for our premium solutions. As I mentioned, and it's definitely also valid for Diagnostic Imaging, the ramp-up of our product factories in Suzhou are really yielding now these gross profit gains, and we see the effect actually in Diagnostic Imaging. We also, in June, launched our home-reading radiology portfolio of displays. This is basically a brand-new set of home-reading radiology displays. They have multimedia. They have also secured actually connectivity with the infrastructure of the hospital to guarantee the same quality at home as well in the hospital. They are also adapted for the ergonomics of the radiologists at home. So this was a highly anticipated new product with already quite some preorders, and it's doing well actually in order intake at this moment. In the entire portfolio of DI, we see also more and more software entering in our portfolio, also basically including AI assist features that help actually the doctors in their diagnosis. And also the momentum in Digital pathology continues to grow and also throughout the rest of the year and next year, we will bring additional displays for pathology on the market but also software platforms, workflows that make the life of the pathologists and actually the lab assistants, preparing the samples and pathology towards the pathologists actually make it more easy. So that is also a software platform that we are launching in the next year. For Surgical & Modality, there we see actually the first indications from our customers that they are getting back to normal inventories. We did suffer from that actually last year and also the first semester. We also see that software is being actually in the portfolio mix of Surgical & Modality. Also here, of course, the ramp-up in Suzhou is definitely benefiting also our Modality business. We are more cost effective and cost competitive with ramping the products there. And also towards, for instance, our Japanese customers that, at this moment, do benefit from a weak Yen, this is actually, for us, a very, very good step up in being cost competitive in Modality. Also for Surgical & Modality, we continue to investing in -- invest in the software-enabled visualization that goes along with new Nexxis platform that we're rolling out now, but also Smart Displays and these Smart Displays, you have to see, they include all the senses from voice, eye tracking, touch, just to make the life of the surgeon in the operating room more easy. And there, we basically are launching a new flagship Smart Display product portfolio in the first half of next year, which is called Brilliant Assistant. When we go to Enterprise, so in Enterprise, we saw a decline in orders and sales of about 22%. We did see sales grow at about 33% in the second quarter there. Gross profit was affected with 6.4%, EBITDA with 11.5% in compared EBITDA margin compared to last year, and that is mainly due to the lower mix of ClickShare in the sales portfolio. So when we go a little bit deeper into Meeting Experience, Meeting Experience and the video conferencing market remains slow. It's at a single-digit decline, Barco sales or sell-out is actually in line with that single-digit decline. We suffered in the first half of this year with an unusual high stock that was taken at the end of last year to our distributors. That had to do with changing channel programs and partner programs that we introduced in January of this year. And we see also some increased competition in EMEA from more price-sensitive sometimes also Chinese competitors. The ClickShare Bar, this is basically a video conferencing bar where we included ClickShare. It's very compact. It's a plug and play. It's actually designed for low and mid sized meeting rules. We have launched that actually in the first half, and it's doing very well in the market and it's really successfully introduced and is selling well. And last but not least, our R&D teams are now preparing our next-generation AI-enabled platform which will be compatible and will be certified with the Microsoft standards. And that is due on the market by mid next year. Control Rooms, in general, the market is really being boosted by this need for more security and need for more data analytics. We see in our Control Rooms business after the transformation that we introduced last year, actually, growth in both orders and sales, for the first semester and also a positive contribution to our EBITDA. The momentum around our platform, our software platform, our new platform, which is called Barco CTRL is really building up and we did a major release like 2 weeks ago, with a major set of traditional features, and we expect actually orders to continue to grow actually throughout the second half of the year. For the future, Barco CTRL is actually our software platform where we will start adding applications specific customized workflows, collaborations, applications for our verticals. And this is basically a very nice way also to increase the software offerings from our Control Room business. Yes. And then on Entertainment, so in general, entertainment orders 10% down, sales 16% down. But again, sales picking up in the second quarter, especially for Cinema and especially in the Americas. Gross profit did was pretty much flat, but we also basically had a good product mix there. EBITDA was down from 12% to 9.9%, again due to a lower top line. For Cinemas, we saw demand delays, investment delays from the exhibitors in the first semester, do you do a limited movie slate. That movie slate again, it's picking up towards the end of the year and definitely towards next year. We see then the orders and the sales recovering in the second quarter as I mentioned already. Also, Cinema as a Service continues to grow and actually it's part of our revenue. But as you know, it is, of course, growing revenue, which is good, but it's also spread out over multiple years. We officially launched now our new HDR Lightsteering projector. This is very well received by the market. And towards the fourth quarter, we are launching an official commercial pilot program with a selected set of exhibitors in the U.S. For Immersive Experience, order intake really improved towards the second quarter, anticipating, of course, multiple new product introductions in the second half of the year. We also basically started production in our Wuxi plant in China on time. This is today geared towards the mid-end projection will also help us actually in cost efficiency for our mid-end projection portfolio. And again, here in light of also Japanese competitors that we have in the IX market, this will give us advantage or at least help us position us -- generate a competitive position for us against our Japanese competitors to benefit from the weak Yen at this moment. So multiple new product introductions in the IX I600, that is our mid-end projector, very compact projector actually geared towards all our fixed installed vertical markets. High performer, but also very energy efficient and also cost-efficient was launched now actually at Intercom in May and is also doing well, picking up orders. Then we have 2 more to come for IX. One is our flagship 3DLP QDX projector. So that is for the event base. And then our highly anticipated event master, so this picture, the image processing tool. This is a follow-up from our market leader Encore 2. And this one basically is getting to the market at the beginning of Q4. So then for the outlook. As I mentioned before, we although visibility remains challenging, but we expect a decline in the second half to grow compared to the second half of last year. We expect a significant step-up in EBITDA. And for the full year, we expect the EBITDA to land between 11% and 13%. And to summarize, I would like to basically get back to actually our plans, our plan that we've rolled out like 3 years ago, the fundamentals, how we see sustainable growth for Barco. We have been executing due diligently on each of these pillars. And it takes time to introduce new products into market. It takes time to ramp up [ fabs ] and transfer portfolios to new [ fabs ], but we are steadily improving, and this basically gives us confidence that we have the right ingredients for future growth. New product introductions that coming more next year, even we basically transferred our products to Suzhou. We opened a new factory in Wuxi. NPS, like I mentioned, we basically focus on the customer and the customer satisfaction has been gradually improving, thanks to all the actions that we have put in place. And of course, we have hardwood sustainability. We were even recognized by Times [ Now ] Magazine in the Top 500 most sustainable companies in the world and that was out of a selection of 5,000. So we're committed to continue to execute on this strategy, and that will -- and we are confident that, that will basically help us for our future road.

Thank you very much. An and Ann for this presentation. I think we are ready now to move to Q&A. [Operator Instructions]. Matthias, so you can unmute yourself and ask question. I will move over to Marc first, maybe, and then we'll come back to you, Matthias. Is that okay? Marc Hesselink from ING. Can you ask your question?

So first question is actually on your guidance range for the EBITDA between 11% and 13%. And it's quite a big range given for the second half of the year. And I can imagine that especially ClickShare is really important for where you end up in that range. One, is that true? If the ClickShare, indeed, you see it successfully in the second half of the year, you might end up towards the higher end of that range. if it continues to be a bit slow, you could end up at the lower end of the range. Is that the right way to think about it?

It's a combination, ClickShare and the mix for sure, has a bigger impact. But overall, also the rate of growth of last year anyhow makes a difference. So in that sense, growing versus the second semester of last year requires EUR 100 million more sales compared to the first semester for which we have reviewed the order book, the funnel, et cetera, to underpin this gross all divisions, needless to say that the margin of ClickShare or the rate of ClickShare also has impact. For ClickShare on its own. We have the destocking effect now behind us. So that's why we also saw the pickup in sales, second quarter versus first quarter. The markets we gradually, while the sellout was still below last year, so single-digit lower, we do see a gradual improvement there. But in how fast this will further improve, that -- there is variability.

Yes.

But I guess it's fair to say that your visibility on the other categories is quite good given that it's predominantly a backlog business. And for ClickShare, it's by nature, a little bit less visible, right?

In nature because it's another book I'm telling...

Okay. Great. And then the second, you don't -- you've refrained a little bit from giving you full year revenue guidance, but you did say it's going to grow in the second half of the year. Maybe, what kind of magnitude. Can you give a bit more idea and also previously always said that all the categories will be relatively similar. All of them more or less flat year-over-year. So on which of those 3 categories did it change?

It's too early to say and that's based on the visibility indeed to say how big the growth will be. And in that sense, that's indeed why we can say we frame from a full year guidance on the top line and otherwise, it would be a range where we do see growth year over year, in particular, the Entertainment and in Healthcare. The down which we had in Enterprise, we do not have the visibility. But today, say that, that will be fully compensated in the second semester.

Matthias, can you try again, unmute yourself, please.

Apologies if I ask the same question, but maybe just on the guidance and on ClickShare. I see you guide also for growth in Meeting Experience. Could you elaborate a little bit on what's going to drive that growth in H2 with the market that is down, I would say, is still single digit. What gives you the confidence you can grow in H2 in enterprise or a meeting experience?

The guidance for growth in enterprise in the second semester. So in that sense, that we will see and it's primarily into entertainment year-over-year. It will be an important takeup for purchase...

If that is if you don't look is that we have destocking in the first half.

And that is now behind us, that destocking. So now again, growing in line with the market. Market is expected from the market reports to pick up in the second half. But we have also, of course, short-term actions on our sales force, our go-to-market to sharpen actually our sales in the second half of the year on ClickShare.

Okay. Just to clarify because the release speaks about growth and Meeting Experience, that's sequential growth. That's not necessarily year-over-year.

Yes, that is [ second ] semester.

Okay. Second question then is on capital allocation. I believe you have been always in the market for targets and certain of these processes were running. Could you maybe give us an update if how these processes are evolving. And also given the share price of capital returns to the form of buyback are maybe on the agenda.

So yes, our --we always manage our capital expenses there. So we have basically our capital investment in the factories we have. So our Cinema as a Service program. But yes, indeed, we are actively looking at eventual targets that remains the same as what we've mentioned before. We continue to talk. It always takes two to tango and view our exercise very diligently to make sure that we choose the right target, which is really a strategic for Barco. And yes, at this moment, there is no new update around that comment.

And share buyback, is that any way on the agenda or...

We continue to be extremely disciplined in capital allocation, and we see through the market that we don't try to write down, we will proceed to return it to the shareholders.