Barco NV (BAR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the earnings call for Barco's Full Year Results 2024. My name is Willem Fransoo and I'm the Head of Investor Relations. And today, we are publishing our results under the heading, Strong Cash Generation in a Challenging Year. The results will be presented by our CEO, An Steegen and the CFO, Ann Desender. This will take about 15 to 20 minutes. And after the presentation, we will open for questions. And I will now give the word to An Steegen, who will kick out the presentation.

Thank you, Willem, and good morning, everybody. So let me start with the summary of the group's results for '24. So after a very difficult start of the year, we saw the situation actually improve throughout the second half, where we ended up almost flat compared to the year before. We saw quite some divisional and regional differences where we saw very strong performance in the Americas and weaker and softer market conditions in EMEA and APAC. We started the year with a very strong order book, around EUR 564 million. That was definitely with a significant growth in the entertainment business, also a very healthy book-to-bill larger than 1. And we also stepped up our revenue from Eco-labeled products to 68% from the total revenue. For EBITDA margin, for EBITDA, we landed at EUR 121 million, which is 12.8% from sales with a significant step-up in the second half. So gross profit percentage was, of course, supported by the introduction of new products, also more software in the mix, but it was also offset with the weak sales in our meeting experience ClickShare. Now in the second half, we also basically controlled OpEx, but in a way that we did not jeopardize, of course, our investments in our developments, and we ended up with an EBITDA margin of 16.7% for the second half. Net income came in at EUR 63 million, and we generated a strong free cash flow at EUR 110 million. That was driven by improved working capital. Our CapEx expenditure was mainly going to EUR 43 million and was mainly going in Cinema as a Service and our focused factories investments. And for net cash, we ended at a position of about EUR 260 million. When we look at the differences in the divisions and also in the regions, then we can say that our Healthcare division was the most stable and resilient throughout the year, where we saw year-over-year minus 4% sales. That was fueled by the Americas and new product introductions. In Enterprise, we saw minus 16% year-over-year, mainly driven by the weak sales in ClickShare, stable sales in Control Rooms and entertainment, minus 9%, slow start of the year for cinema, but that definitely covered in the second half with a stronger movie slate and overall weaker market conditions, especially in EMEA for immersive experience. So when you look at the regions, we did grow in the Americas across all divisions, 6% over the year. And also here, the new product introductions did help and also the large deals that we closed in cinema in the second half of the year. In EMEA, we saw the strongest drop, minus 27%. Overall, actually difficult market conditions in many of our business units, but especially in ClickShare and Immersive Experience. And in APAC, a modest reduction of minus 8%. We did see a modest improvement in China, but that was then offset it with other regions in APAC. Also to note here that we stopped actually our control business as part of our transformation last year in certain countries in APAC, and that was reflected in the numbers in APAC also for '24. And now I hand it over to Ann for more details on the numbers.

Thank you, An, and good morning to all of you also from my end. Looking into a little bit more of the figures and we are presenting first half, second half combined indeed on the full year. The first half indeed softened in particular with respect to the lower sales, which we picked up in the second semester as we got through the absorption, so to speak, effect of inventories at our customers. And as, for instance, the investment climate in cinema did pick up again as of the second quarter actually already, but further into landing orders and sales into the second half. So second semester, we laid down EUR 512 million of sales, which is minus 3% compared to the year before and combined on a full year, it gets to EUR 947 million of sales, minus 10% year-over-year. Gross profit came down to 40.7%, 1 percentage point lower than last year, which is primarily the impact of lower ClickShare sales in the end as well as within entertainment, lower performance of immersive experience, but there has been some delay on new products, which will be launched this year and which come with a better margin as relating to image processing products. We did contain our OpEx well over both semesters and that landed our OpEx minus 5%, could contain half of the decline, so to speak, of that in our top line. And then landing at an EBITDA of 12.8% in there, there is a good included into the other operating income of EUR 10 million, which has an impact, which is relating to a sale and leaseback of a building in the U.S., which we concluded a building which we are not fully utilizing. And in that sense, looking for more flexibility going forward. So that has an impact on the full year results of EUR 10 million in EBITDA. Excluding this one, we get to a full year EBITDA of 11.8%. Same figures, but then in our usual presentation of the bridge EBITDA full year -- so in that sense, yes, the more down, of course, is relating to lower sales and then 1 percentage point lower gross profit margin, offset in part with OpEx containment, so minus 5.4% lower OpEx, offsetting indeed inflation. R&D, we maintained and this really because to really go full force on our product road map and new product introductions, of which we had many in the year and also still more than a few to come in this year. So that's nice. Sales and marketing included the positive impact from the [ cinematic ] company, so our cinema sales company, which we integrated and which we have again 100% of share into that. And then also the positive impact of the control rooms strategy, which we revisited and decisive measures which we took on cost actually, which were helpful. And then there is a good part, so to speak, on other income included in there the 2 bigger items or the higher results into our China joint venture, which is a recurring thing. And then nonrecurring is the gain, EUR 10 million relating to the sale and leaseback of our -- of a U.S. facility. So with that, landing at 12.8% EBITDA margin. Going further down into the P&L to our net income, starting from EBITDA which we explained. Depreciations are higher than last year as expected and has to do with the high depreciation on our cinema as a Service business. Restructuring came down, which is all including layoff costs is EUR 11 million, so actually in line with the year before. Then interest and taxes, interest or higher taxes or lower effective tax rate is the same, 18% as in previous years, then landing at a net income of EUR 63 million or EUR 0.7 earnings per share. Moving over to the free cash flow. So a strong free cash flow, which we're able to generate and yes, with continued focus and work done on our working capital, we could also get the positive impact in our results of that one. So free cash flow ending at EUR 110 million, up EUR 72 million versus the year before. Our net operating cash flow landed at EUR 161 million, including EUR [ 60 ] million coming from lower working capital. Our net working capital is now ending at 11.8% of sales, which is an improvement of 4.8 percentage points versus the year before. The average days sales outstanding 63 in line with the year before, improvement on average payables, 61, further opportunity there to get the equation that [ DSO ] is lower than [indiscernible]. So that's further work at hand for this year. We worked on customer advances as well into that and could have a considerable higher amount of that one as well, helping on net working capital. And we've been able to build down our inventories with EUR 25 million. If we look to inventory turns, then they are still only at 2.1, which is stable year-over-year. So further opportunities ahead there to do better and continue better also in this. We further did steady capital expenditures investments to the tune of EUR 43 million rounded here, which is according to our strategy, continued investments in manufacturing in our factories, into automation of our factories as well as into cinema as a service included for EUR 15 million in [ 43 ] million. Then the net proceeds of the sale and leaseback impact on the free cash flow has an impact -- a positive impact in nonrecurring of EUR 12 million. And so with that landing at a net cash of around EUR 260 million, up EUR 18 million year-over-year. That's after dividends of EUR 43 million, EUR 25 million share buyback and then EUR 20 million relating to the buyout of our minority shareholder in Cinionic. When we look to the nonfinancial KPIs, I'm actually glad to see that we made progress and nice progress actually on the different ones, many more to read KPIs into our integrated report, which we also published today. But taking out here 3. So sales from Eco-labeled products stepped up to 68%. So when we look also to the introduction of new products, then we are already at 86% of new products or Eco-labeled. So further stepping up towards our -- yearly step up towards our target, which we have to get to 80% in 2027. We are on the path to get there. Employee engagement score improved with 1 percentage point to 73, so that's also, yes, nice work done across actually the different regions and divisions to keep it up at that level, further working on continuous improvement also there to get to 75 within 2027. In total, we are with 3,135 FTE at year-end, which is down versus the year before. You saw the restructuring costs in the P&L. Here, a couple of main actions which are some -- which is the closing of the factory in China in Changping [indiscernible] automated actually in factory in Wuxi control rooms announcing integration or 3 bigger items. Very happy with the customer Net Promoter Score, which had an uptake of 6 points last year and landed at 54. So also when we look into a more deep dive the aftersales service scores, which we get there on our product quality and reliability of our products, yes, which we stand for, of course, very nice scores. And with that, I give the word to An to give some color on the -- yes. I will check whether you are...

Okay. So let me give some more color on the different divisions, starting with Healthcare. As I mentioned already, very resilient robust business in '24, definitely driven by a good performance in the Americas and also new product introductions. So that resulted in an order uptake of 6.5% over last year, sales minus 4%. Also thanks to the product mix, more software, more new products, we saw a step-up in gross profit that also reflected in the EBITDA with an increase of 2.8 percentage points on EBITDA margin. When we look at Diagnostic Imaging, full year growth, definitely a pickup in the second half with the new products that we introduced, very strong growth and demand in the Americas with double-digit sales growth there. A little bit softer conditions also here in EMEA and APAC, slower tender procedures, longer sales cycles and also, of course, softer macroeconomic conditions in EMEA and APAC. Now we had very successful launches of 2 new products in Diagnostic Imaging. One was this 8MP home reading. That's a full portfolio now, but also our flagship mammography medical screen, the 32 megapixel, it's called OneLook had a very, very successful launch in the second half of the year. Now we see towards the future that besides, of course, the new disruptive products and hardware that we introduce in the market that more and more of our differentiation will come actually from new software features, more AI use cases and, of course, also stepping up our performance in other verticals like digital pathology. Now when we look at Surgical and Modality, there, we saw growth returning in the fourth quarter. It took our customers throughout the first half to basically bring down their inventories. We are glad to see that we are at normal levels now, and that also basically caused that we saw an uptick of orders in the fourth quarter and the second half and the fourth quarter, especially actually in the Americas and especially also on our Nexxis network portfolio for operating rooms. Now that is, of course, also good for the portfolio because that has -- is a high-margin product, and that is good to have in the product mix. That was offset with more competition, more cost-driven competition in our modality displays, which we, of course, address by our global footprint and of course, local production, local sourcing in China. That's our way to address actually the competitiveness, our competitive position in modality. When we go to Enterprise, again, we saw 17% decline in orders, 16% in sales, mainly driven by weak ClickShare performance, stable business in Control Rooms. We also turned our control room business into a profitable business with a very healthy EBITDA margin, and that resulted for the division in a drop in EBITDA of 6%. Now when we look at meeting experience, we started '24 with high inventory in the channel. It took us longer than foreseen to build up that excess of inventory. It actually rippled through almost the whole year, but especially in the first 3 quarters of the year. And on top of that, we see in EMEA also competition, competition not only from Chinese competitors, but also from the proprietary room systems. Now that said, we could maintain our market share in the agnostic space with our ClickShare solution, being agnostic, being flexible, very secure and, of course, have an augmented user experience. And that was then reflected in growth actually for our ClickShare business in the second half in the Americas. Now for this year, we are developing our next platform on the ClickShare family portfolio. That is an Android-based platform. It's a completely new architecture based on this MDEP platform. This is in very strong collaboration with Microsoft. And this allows us to next to our BYOM ClickShare agnostic system also to bring a room system on the market. And overall, this will increase actually our reach in the video conferencing market. And we plan to launch this product in the second half of this year. When we look at control rooms, then we basically saw growth in the Americas, a little bit slowdown in EMEA and APAC, longer sales cycles there. Of course, our control software platform, the one that we launched already the year before, is definitely basically getting a lot of traction in the market. It is very secure, very scalable, very flexible, and those are actually the benefits that our customers start seeing in all our markets in control rooms. Today, that contributed for 30% of the total sales came from our new platform, and we're stepping that up to 40% in '25. Besides our software platform, we also have a very up-to-date hardware portfolio with our LED, LCD and RPC technologies, and those are also -- were also part of the mix in '24. When we go to entertainment, so a slow start of the year for cinema. Overall softer market conditions for immersive experience resulted in a 6% decline in orders, about 9% decline in sales and EBITDA was a slight improvement, 0.4 percentage points there. So cinema, slow start of the year, again, a limited movie slate still a consequence of the strikes that we saw the year before. That movie slate improved drastically towards the second half, and that also basically made that our business rebounded in the second half of the year with large deals, especially in the Americas. We also had a launch of our HDR light steering projector for premium cinema theaters. So we basically launched a pilot program in the U.S. and in the U.K. last year, which was also very successfully accepted by actually our exhibitors, our customers, but also by the audience. And of course, this year is the year where we also start ramping this product in production and into the market. For immersive experience, overall weaker market conditions there. Also customers awaiting new product releases. That said, we launched 3 very important new products in immersive experience in '24, I600 more towards the beginning of the year, that is our mid-segment projector. And then towards the second half of the year, we had QDX, our high-end projector and F-400 is our simulation projector. There is one product in image processing, the Encore 3 that was delayed towards this first half, where we actually see -- overall, we see actually in immersive experience, a good order book, including those new products. So when we look then at the outlook for '25, we do believe that we start the year in a better position than we started '24. The reason for that is that our customers basically did build down their inventory levels, and they're back to normal levels. We also can benefit from a full year effect of our new product introductions. We are seeing more and more software in our product mix, which helps us also for our margins. And of course, we opened our Wuxi factory last year on time, within budget. And also there, we basically invest in automation, and that will also reflect in our gross profit margins throughout '25. Now with these things and we -- and assuming that the geopolitical and macroeconomic conditions do not strongly deteriorate. We expect the -- we expect top line growth for the full year with an increase in the EBITDA margin. Also, our Board of Directors will propose to the general assembly to distribute a gross dividend of EUR 0.51 per share -- EUR 0.51 per share, which is up EUR 0.03 versus last year's dividend. And we want to say that we are and remain committed to exploring acquisition opportunities to strategically strengthen the group as well to optimize our capital allocation and delivering long-term value to our shareholders. But backed by robust free cash flow generation and a strong balance sheet, the Board of Directors has decided to initiate a share buyback program, and we're planning to purchase Barco shares for an amount up to EUR 60 million over the next 12 months. The Board of Directors will carefully assess and determine the optimal use of the repurchased shares at a later stage. And now I hand it back to Willem.

[Operator Instructions] So I'm going to start with the first one. Matthias Maenhaut from Kepler Cheuvreux.

That's a good start. Maybe 2 from my end to start with. So you guide for sales growth and improvement in margins. Could you maybe elaborate a little bit on how you see that from a divisional perspective, more specifically enterprise, what should we expect there? And then a second question I had was on the capital allocation. So you announced a EUR 60 million share buyback, I would say, why EUR 60 million? And I note the comment of the Board of Directors that will decide at a later stage. Can you maybe elaborate, are there presently any ongoing M&A discussions still ongoing? And is it actually the goal to effectively destroy the shares? -- my first -- my 2 questions.

So I'll start...

You start, that's fine...

So on growth actually, so indeed, going in actually with, call it, a more broader statement or outlook you could say on growth year-over and without, so to say, precise figures. So we'll see as we get smarter and into the year actually on how we can fine-tune those actually. Also the positive, there are quite some headwinds which we had last year with respect to higher inventories at customers with the situation around the movie slate and cinema, which we don't have anymore. Then we have quite a lot of new product introductions over the course of last year launched, which are into effect as of the start of this year. So these are the main dynamics actually to the positive to back actually our sales growth. Now we see that actually without giving precise, I would say, guidance so far on the divisional outlooks in that respect, so talking on a group level actually. But this -- what I just named, cover the 3 divisions, so to speak. So that's more, I would say, general answer. As to whether actually [ from 2.0 ] or who can call it might have an impact on some hesitance on investments, et cetera. That's a little too early to tell. We are very cautious there and closely monitoring as what we can do with our focused factories, we do have the ability to deliver out of Europe or out of China. Of course, we don't know what in the end it will be. So preparing on that one. So in that sense, that's why we indicated on the -- yes, do not further deteriorate into our outlook statement. So that's a little bit in general, where we go for. I have sympathy that you would like to have it more precise, I would say. But we also learned that it's better to first have proof points and then fine-tune as we move.

For capital allocation, so again, we generated a very strong free cash flow position. So that's why the Supervisory Board and the Board of Directors actually also decided to increase the dividend and also basically start a share buyback program. So that is definitely -- share price is low at this moment. So it's a good moment to invest. So in that sense, -- now what are the other ways that we will allocate our capital? Of course, that is our regular business, our cinema as a service, our CapEx investments in the manufacturing sites. Besides that, we continue to look at M&A. The 2 particular targets that we had last year did not work out. But that does not mean that we continue to screen the landscape and see where there are good fits for Barco that will strengthen actually the group. And I think at this moment, the Board of Directors wanted to keep the option open how to allocate actually the capital that comes through the share buyback. As to the amount, so yes, it's calculated as -- with the dividend, which will be an effect of about EUR 45 million. And then on top 60 million, that combines 110 million on the cash.

Next question is for Kris Kippers from the Degroof Petercam.

Two questions also from my side. First one, very strong, I think, cost control. If you look at all lines, R&D, sales and marketing, admin. So it's still stable, the absolute numbers were even down. Given that we still see some certainty, of course, here in Belgium, but also in some other countries, some inflationary impact. When your sales go up, to what extent should we see an inflationary impact? Or are these levels just manageable going forward? Or are there any still some things you can improve right there? Second question, free cash flow, quite strong in '24, of course, but this was partially driven by, you could say, some one-offs to a certain extent. So the build down of inventories, EUR 25 million. You've had the sale of the buildings. Also CapEx seemed to have dropped somewhat. So going forward, what should we anticipate here? Or what is the recurring level of free cash flow given the guidance you've given us?

Do you want to take the first?

Yes. So on cost control, this is something that we always do diligently. And we also need to basically compensate for inflation, which means with top line growth. We aim, of course, the mission is to grow. If not, cost control is definitely one of the measures that we take. We do that in a very focused way so that we don't jeopardize actually our future revenue generators and that we basically look in where else we can optimize our costs. So this is actually practice, good practice that we have throughout the years, and we will apply that also for '25. But again, the main goal here is, of course, to go for full year growth.

But indeed, as to your models, if I can say so, for '25, we're also looking in how we can offset the impact of inflation with efficiencies. As to the free cash flow, so the -- a couple of things. So indeed, working capital nicely worked down, including -- so in total, EUR [ 16 ] million, including EUR 25 million on inventories. There are further opportunities in there. Of course, not to the tune directly to expect nominal as the down which we did last year, so to speak. But yes, getting now at 11.8% of our working capital as a percentage of sales we do want to have some further improvements on that one and working on those in '25. And the main thing around this is actually further improving our inventory journey.

And there, we constantly focus on it, but also, we still had quite some stock from post-COVID like end-of-life components that we have basically put in, but gradually, as we go, of course, we start consuming those. So this is definitely also something that will happen.

So further improvement there. The EUR 12 million upside on sale and leaseback indeed is a nonrecurring. With respect to the capital expenditures included for EUR 43 million towards this year '25, actually, yes, we keep it at that level. So that's the assumption to include in there. In that sense that cinema as a service does continue. We further invest into automation, into factories, actually factory revamp included as well here in Kortrijk. So in that sense, that's to take into account. With respect to the other items, it's more stable like effective tax rate and those things. So in that sense, for a healthy free cash flow again this year, some areas where we certainly can further improve, starting, of course, with a better operational result or EBITDA, some further improvement on working capital. And with that, yes, keeping it also strong. But yes, likewise, as you mentioned, Kris, some extra have been realized in 2024.

And just coming back on the working capital percentage of sales, given your mix and product mix and also the fact that you're distributing differently, sometimes direct to consumer now with the bar, for example, or things like that. To what extent does this hinder your further decline? Or would you say that 10%, 11% of sales is an achievable number in a normal recurring way of looking?

Towards 11%, we want to move. That's actually the concrete target that spelled out. There are indeed a couple of things, which is product portfolio also margins coming from longer underway on the sea, so to speak, that has also an impact in there. New product launches and the start-up of those also has some impact. But anyhow, these are things to be managed. So in that sense, yes, further improvement, but not to the tune of what we did nominal-wise in '24.

Next in line is Stefano Toffano from ABN AMRO.

I have 7 questions, but I would just ask a few. Just for my understanding, so the full year adjusted EBITDA margin, 12.8%. It included a 1 percentage point impact of the sale leaseback facility. The guidance is that over this 12.8%, so including this impact. So that's the first question.

The answer is yes.

Okay. The second question is, again, on the gross margin improvement. So I mean, obviously, I imagine there is continuous gains to be achieved on further gross margins as you continue to utilize your footprint? And also utilization rates of your facilities go up. But can you be a little bit more specific, if possible, on any potential improvements over this year? And then my last question is, if I may, just a very general one. We talked a lot about more software within the mix. Can you quantify that, please, a little bit more? What kind of steps are we seeing from, let's say, '24 to '25?

I'll take the software one. You want to take the...

I'll go with the gross profit margin one. So gross profit margin, further improvements over there with the mix, new products, also more software gradually coming, global footprint. These are actually the 3 main ones where there is -- where we have seen continued improvements and are yielding into results actually, what we've done that we see across actually different businesses in '24 already. There was then one more down and 1 percentage point, which we lost compared to the year before, which has to do with lower sales and ClickShare, which primarily was impacted by the inventory resets at our channels. And then second, a negative product mix and immersive experience where yes, they landed on the orders with respect to the image processing product, but where the shipments and the launch is only coming as of this year. So these actually are the main levers to quantify as such, yes, we do want to get back to the percentage which we had in the previous year or in '23. So at least get that 1 percentage point back. And that's actually what we are working at.

And regarding software, so I would say in '24, probably 1/4, 25% of our sales is software. What we consider software today is, of course, all our software platforms like ClickShare, like Control, like Nexxis in operating rooms. And for those, you've seen the numbers, we're already more than 30% actually of the sales of that business unit is then related to software. Now towards the future, we see more coming in. So we also see, first of all, more software features. So you increase actually and you differentiate with more software features on those platforms. But we see ourselves also stepping more and more into software applications and AI use cases, which is, of course, developments that we're working on right now that will, over time, also get us into more recurring revenue. And that is something that we're definitely focused on and will increase actually also our software share in the coming years. But overall, it's definitely an area where we focus on. And of course, it's good for the mix for our portfolio mix.

One business where we decided we have chosen towards indeed more software and control rooms. And so in that sense, this year or in '24, they were at about more than 30% of software sales in the total equation. And then for the [indiscernible]...

That was Control, yes.

That's only one example.

Next in line is Guy Sips from KBC Securities.

First of all, congratulations with a nice set of second half results. And how many months were the successful launches in health care of the 2 products that you mentioned, so the [ HMP ] and OneLook, how many months were they included in the second half? And are they responsible for the nice half year-on-half year pickup of the EBITDA margin in health care? And the second question is on ClickShare. You mentioned that you're not only seeing competition from Chinese players, but also from proprietary room players. Can you elaborate a little bit more on that? And do you see that only in Asia? And do you expect that also to come in the U.S. and EMEA? And how do you react on these Chinese players who are more focused on price? What is your, let's say, yes, what's your plan going forward?

Yes. Okay. No. Good. So for the new products in Diagnostic Imaging, so the 8MP, so the home-reading, we almost had a full year in '24. No, no, yes, April, second quarter. Okay, second quarter. The OneLook was October 1. So that was a very successful launch. We actually sold about 1,000 or a little bit more than 1,000 actually for the last month of the year. So that definitely helped us with the numbers that you see in health care. But overall, I think we saw quite robust and resilient markets overall, also the inventory build down at the customer side, which also created nice orders on Nexxis for surgical. But yes, of course, the new products in diagnostics definitely contributed to the good results in Healthcare. Regarding ClickShare and competition, yes, we mentioned already Chinese competition. That is mainly in EMEA. So we don't see Chinese competition in the U.S. How do we fight that? Well, of course, with our patents, our intellectual property portfolio, this is something that we're launching actions actually against these companies in Europe. So that's one way. The competition that we see from room systems is in general. So the room system market is picking up. Sorry, I lost my voice. It's picking up. We will also do so in '25. Our answer to that is our new platform, where besides the ClickShare wireless offering, we will also offer now a room system based on an Android platform.

As of the middle of the year, which we will launch...

Excuse me. Yes...

Yes. Okay. I hope you could...

Next in line is Marc Hesselink from ING.

First question also coming back on ClickShare. Given quite some moving parts with the inventory levels at your clients, so a very big negative impact in the first quarter and I think a very difficult comparable base now in the fourth quarter. But if you try to strip that out and look a little bit at the underlying trends, how is that going over the 4 quarters of the year? And also, if you compare it to your, maybe, let's say, the pre-COVID level, how far are you off from what maybe what you could approach?