Christian Reinaudo - President and Chief Executive Officer

Emmanuel Carlier - ING Guy Sips - KBC Securities

Welcome. Thank you all for standing by. At this time, all participants are in a listen-only mode. Questions will be taken after the presentation. [Operator Instruction] This call is being recorded. If you have any objections you may disconnect at this time. I will now hand the call over to Mr. Christian Reinaudo. Sir, you may begin.

Thank you, operator. Good morning, everybody. So we’re here to comment the results of our quarter three 2015. I would say as an introduction that this quarter was another quarter in line with our expectations. The top line has been growing, of course, with the support of favorable exchange rate and showing a positive evolution compared to the first-half of the year. The gross margin is improving by almost one point, in spite of the negative raw material effect. Operational expenses are well under control. As we see on the Slide 2, we are now back to 19% in the quarter, better than where we were after the first-half. The EBITDA improved by 1.1%, and the same result for the first-nine month, which means that we can reasonably reiterate our target for the year, which is to be close to 10% in terms of EBITDA. Finally, we see on the Slide 3, that the result below EBIT are also satisfactory. We have a rather low level of restructuring this quarter. And we have an operating result, which is slightly better than the year before. And I link that to the tax line, where you see that we have also a positive effect. This is due to the positive resolution of discussions that we had with the tax authorities in Germany, which has allowed us to release a reserve that we took some time ago. So this is a one-off, which has obviously a positive impact on the net result together with the other lines, and we deliver a strong net result of €33 million in the quarter, pushing to €61 million the net result in the first nine months of the year. On Slide 4, the debt shows a further reduction to €83 million, which is obviously on Slide 5 also linked to the good work that we have been doing on the working capital, see that our days of inventory in hand at 111 days are at a decent level, same for the trade receivables at 60 days and the trade payables at 47 days. So overall, the working capital on the 12 trading sales - 12-month trading sales is at 26%, which is a record number. On Slide 6, a few comments on the results, but I think I commented everything and I move immediately to the business group, Graphics. On Slide 8, the pie-chart is not showing a significant evolution compared to where it was a quarter ago. So the analog prepress business of 12% continues to decline at a strong pace. The inkjet, software and service business is growing, in particular, the inkjet business has been growing double-digit this quarter again, showing confirmation of the strategy we have taken to reinforce our new focus on the wide-format printing; in particular our two new machines, the Tauro and Mira, are doing pretty well. And the digital prepress is net 67% of the sales space, basically at the same level of two-third of the business - the turnover of this business group. On Slide 9, the numbers, as you see, they are very similar to the rest of the group. So what is it? First of all, a top line which is growing. And, of course, pushed by the currency exchange rates, because excluding this currency exchange rate we are still declining by 4%, but far less than we have been in the first-half of the year; and you see the nine-month minus 7 compared to minus 4 in this quarter. So it’s a positive trend that we start to observe, hopefully continuing in the next quarter. The gross profit is declining in the quarter, but here again and I think most of the LMEs [ph] that will capture that. The aluminum has a negative impact; the cost of aluminum has a negative impact, because of the time difference between the time we purchased and the time we recognized the numbers. SG&A is well under control at slightly below 19% and 20% on the first nine month. They are indeed is unanimous what we always said to keep it more or less constant. And recurring EBITDA is at 7.2% slightly improving compared to the Q3 of last year, still on the nine month, we have an EBITDA which is slightly below where it was a year-ago. So overall, for Graphics, I would say, a good quarter. The same elements as we have discussed previously are still there; so a good business of inkjet, which is progressing well. On Slide 10, the softness of the emerging market is obviously weighing on our performance in prepress, in particular, the digital prepress. The analog prepress obviously continues to decline, and that we have a negative adverse raw material effect. Obviously, going forward, we believe that if aluminum stays where it is today, that means on the LME price at about $1,500 per tonne, things should improve, in terms of raw material impact in the future. A few business highlights on Slide 10, still, as I was saying, the new Jeti platform is now completely in place. And the first machines we have released already a year-ago, now the Mira and Tauro are performing reasonably well, to the say the least. And the Anapurna new machines also are performing well. We are working, as I said already in the previous quarter, our new printing plates. The first one has been released to the market, which is a chemistry-free plate for newspapers, the N95-VCF. And we continue to deliver on our R&D and evolution of our plates to stay at the top level in terms of technology. Moving to Slide 12 in HealthCare, the pie-chart you see shows roughly the same pattern as previously, which has an increase of the hardcopy film, which has strongly performed in Q3. I will not say abnormally performed, but it has strongly performed. So we could expect that on the full-year things will normalize. The healthcare IT business, 40% of the business is performing well, in particular on the HCIS that means everything which is related to the hospital information systems, namely ORBIS. And the imaging IT solutions, in terms of revenue recognition, I think I explained that with our evolution to the enterprise, imaging, we have all those which are significantly bigger than they used to be. And of course, there is a time lag in terms of revenue recognition. So the imaging IT solutions are performing reasonably well, but we expect, looking at the order book, that things will be okay in the next few quarters. And the CR/Modalities stay constant at 20%. We still have an internal competition between the decline of CR and the growth of our DR business, which is performing well. So in terms of sales on Page 13, we see that the group has delivered a positive evolution, not only taking into account the currency, but also excluding currency accelerate of 1.1% and 0.3% on the first nine month, which is I believe well in line with what we have always explained in terms of the pattern of the different elements in different segments of the group activity. The gross profit continues to show strong improvement of about 3 points in the quarter and 2.5 points in the first nine months. And this is obviously due to the performance of our efficiency programs. And here there is no impact, no negative impact of the cost of raw materials at high level. SG&A 19.6%, I would say, back on track, because there was a shift of SG&A cost in the first-half of the year, above 20%. But we are now at 19.6% in the quarter. The R&D efforts continue to be significant and I think it’s developing our strategy to move a bit more into the IT world of healthcare, in particular, in this world of Enterprise Imaging. And finally, the recurring EBITDA at 12.3% shows an improvement of 2.2 points in the quarter and slightly above 2.5 points in the first nine months, so a good evolution of the EBITDA. So the top line is evolving profitably in this business group. If I move to Slide 14, the next slide to comment a few drivers behind the figures. First of all, as I said, the DR business and the hardcopy products have performed well in the quarter. So it means our imaging segment, what we call Imaging, has performed well. In the IT segment, as I said, we have a little bit of a different behavior. The HealthCare Information Solutions posted a good revenue growth, while the Imaging IT is more on the order of book building and will deliver obviously in the next quarters. The gross profit improvement, as we’ve mentioned, is well in track. To be noted, in the business highlights, a few big digital radiography contracts in the U.S., in the UK, in Saudi Arabia, in Jordan to give a few countries. The business is developing well. The same for Enterprise Imaging, I was talking about the building of the order book. I commented several times in the past two years about the reaction that we needed to take to the U.S. market. And I think that we register a certain number of goodwills in the U.S., which are showing that this strategy of Enterprise Imaging at Agfa radiology has been the right one. And finally, we have finally become a supplier for the Healthcare CIS Framework in the UK, which is good for supporting the strategy of developing in the UK. Moving to Specialty Products on Slide 16, we see the same evolution of the top line as the previous quarters. That means a decline of the top line which is moderate in the range of 4%, but which is a bit bigger if we exclude the currency exchange rates of minus 6.5% in the quarter compared to minus 8% on the nine month. There is also an improvement, but the business would be still reporting a decline of the top line. In spite of that, the gross profit as well as the G&A percentage on sales and the EBITDA are performing well within the EBITDA which is improving still in the quarter of 0.5%, and in the first nine month of about 4%. So the business would perform well in line with what we expect. And if I move to Slide 17, you see that it’s always coming from what I call internally the growth engines of this business group that means the future-oriented businesses, which are mainly our synthetic paper and the electronic materials, in particular, Orgacon, as well as the PCB business which performs - continues to perform pretty well. So, overall, the good performance of this Specialty Products group, in spite of a moderate decline on the top line. So that’s the highlights of the quarter for the group and I’m now ready to take your questions. Operator, we can really open the lines for the questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] One moment, please, as we wait for the questions to queue up. We have three questions on queue. Let’s start from the line of Emmanuel. Please go ahead.

Yes. Hi, good morning. Three questions from my side. The first one on the sales guidance, so 2015 will be around €2.6 billion, €2.7 billion guidance of €3 billion, I understand that you include some acquisitions in that number. Could you maybe provide some guidance on the kind of organic growth rate you expect for the coming years? The second question is on profitability. I believe that there is a big difference between profitability of the businesses that are structurally declining versus the businesses that are in growth modes. Could you maybe provide some color on the difference in profitability levels? And of course, I know that in the growth businesses you are investing on that and that is weighing on the profitability. So, maybe it’s interesting also to hear the profitability levels excluding growth investments for that segment. And then the third question is a bit under third quarter Re-EBIT. I’m a bit surprised by the very strong Re-EBIT growth, taken into account the adverse raw material impact. So, I’m just wondering if you could clarify that maybe little bit by maybe giving some guidance on what is really coming from efficiency gains and what is maybe coming from favorable FX impacts? Thank you.

Good morning, Emmanuel, and thank you for your questions. So, on the sales guidance and it should be in long term - medium term, sorry. I don’t want to comment more that - more than what I have done in the past. So basically, the same story repeats again. You should look at the pie-charts of the business groups and the pattern of the growth of the different business groups that we comment several times. And you get to something which is showing a macro view at this stage for Graphics, which is a moderate decline of the top line. Normally, if you look at the evolution of the prepress which is two-third of the business, and the evolution of the Analog Prepress which is 12%, and the remaining 21% in particular, the inkjet part of it which is growing; so we should still see, I would say, excluding other effects like currency or whatever, a moderate decline of the Graphics business, as long as the inkjet business in not sizeable enough to build the growth. On the HealthCare side, I said several times that normally we are beyond this point. That means the size of the IT business, Agfa IT and DR is big enough to normally compensate for the drop of Analog business, as long as the hardcopy-machines [ph] exists pretty well and the market shows no signs of major change of pattern. So, I will not comment more than that, I mean, you make your model. Acquisitions, as I said, it will be, I would say, what I call clever acquisitions. We are not going to invest huge amount of money just for the sake of making acquisitions. The acquisitions will be in the range of helping our top line to grow in the domains where the strategic view of the company is going, definitely the IT, HealthCare. It might be inkjet business [ph] or these kinds of things. But it could be also provided that there are some opportunities to make sure we further consolidate the position in our acquisition [ph] businesses. I would not comment differently at this stage. I may comment differently in the next quarters, so when files that we have under discussion start to materialize. In terms of profitability, it’s clear that the businesses which are today, our so called growth engines, in which as you said, we are interested, in particular, investing in R&D. Interesting also to build service organizations in the world, our less profitable nontraditional businesses, that we tend to call cash-cows, I would say, that as I said several times on the long-term when these businesses start to mature I see no reason why the gross margin level will be different from the businesses we have today. So, I am still working on the assumption that when this business start to materialize in terms of size, they should be at decent margin level compared to the business we have today. And first of all, the Re-EBIT of the quarter is strong. Yes, I know, I mean, if I look at the EBITDA of the quarter, we are improving by 1% roughly the EBITDA of last year basically, which is in line with what we have done so far. And I would say that we have a negative impact of the raw materials which is you can calculate. And again, the model that you should have, based on our indication should give you the right ballpark of what it is. On the other side, our efficiency programs are continuing to perform. When you see that - in the healthcare domain, for example, where there is basically no significant raw material effect, we deliver 2.5% or 3% improvement of our efficiency. But basically, now talking to profitability in terms of currency effects of these kinds of things, this is something I don’t want to do. As you know, our cost base is well balanced in the different countries where we have operations. Of course, there are some negative impacts. For example, we pay over raw materials in dollars, and the dollar is pretty high compared to euro. On the other side, we have positive effect of the business, because the euro being weak, we have better position on the bucket in terms of competitiveness. And the overall, result of the different parameters is that our EBITDA is improving of about 1% compared to where it was a year ago.

Yes, maybe one follow-up on that. If we would exclude the raw material impact, then I think it’s fair to say that the improvement that we see in Q3 was stronger than in previous quarters. Is that driven by hardcopy, because you made a comment that hardcopy was very strong in Q3?

At the hardcopy business there could be ups and downs. And so, Q3, as I said, was in my opinion a bit abnormally high. So you may derive that we had some impact on the efficiency of the profitability. Q4 could be lower. But overall, I believe that, don’t track the business quarter-by-quarter, track the business on the medium-term. And I think that overall, we’ve got to be in line with what we said, that means the EBITDA should be close to 10%. And hopefully, obviously, as I announced in 2011, we target to have an EBITDA at 10% next year, I’d say so, that basically where we stand. So, please, Emmanuel, don’t track quarter after quarter the different elements, because you could have first of all in these businesses some distributors could have stocks. They sell the stocks, then they order less, they order more. So at the end of the day we must be very careful not to evaluate too precisely quarter after quarter the different business-release [ph].

Okay. And thanks a lot.

Welcome.

Thank you. We have two more questions on queue. And the next one comes from the line of Guy. Your line is now open.

Yes, good morning. Guy Sips, KBC Securities. Congratulations with the good results. And I have only one follow-up question on Emmanuel’s question and it’s related to Slide 10, where you highlighted in the graphics business competitive special effects, is that different from other quarters. And, yes, can you elaborate a little bit on that one?

No, I mean, it’s exactly the same comment as we’ve done, that means unfortunately we see no evolution of these kind of thing. So the market - the prepress market traditionally was growing in terms of volume, because of the emerging markets. When the emerging markets start to buy less, we have more pressure on the volumes. And to the competition between the three big players, first, on the Chinese continent I would say, is not reduced. So if you read correctly the announcement of our competitors, you’ll see that it is still in the strategy of all of them to continue to try to grab market share in this prepress business, because this is a core business for the three big players. And therefore, you cannot expect I would say an evolution at short-term on this kind of situation. On top of that, everybody knows the aluminum is going - trending in the right direction. So that’s nice, I would say, but nothing more, nothing less.

Okay. And one last question, is that you have - will we still miss some real clear - yes, let’s say guidance for 2016, although you already noted 2016 will be a very good year, related to the raw-mats and especially aluminum. Do you have internally discussed when to give the market a clearer short-term outlook instead of this broader picture that you all are giving for several quarters now?

I think you know very well the process - the internal process, so we are currently finalizing our budget for next year. So there will be a discussion with the board in December on this budget. Then we have in January the more - three, four, five years evolution of the company, which is under scrutiny. And that will lead me to give you some guidance as I did last year and the year before, and the year before, probably when we announce the results of Q4 in March.

Okay. Thank you.

You’re welcome.

Thank you, Guy. The last question on queue is from Ben. Your line is now open.

Hi, good morning. Thank you for taking my question. Well, two questions which are pretty much related. First one, in August you said that the panic in China was merely that really a panic that wasn’t really showing any significant impact on your business yet. Is that something you would repeat now, because there has been some signs that maybe there’s something more going on? And secondly, could you comment a bit on situation in Brazil. You’ve spoken a bit of softness in emerging markets. If I’m not mistaken, Brazil is an important market for you. So could you comment on that, please? Thank you.

Good morning, Ben. First of all, on China, maybe it’s an opportunity to correct a little bit what the press has said, because you said that, I was saying that it was a storm in a glass of water. What I meant and was clearly during the press conference was that the sudden kind of noise around the Chinese economy evolution which was in the press at that time, not by me, but by you guys, for me it was not new. And then, the fact that they had need - there was a need for adjustments of the currencies, the fact that suddenly it seems that people realized that the growth in China was not at the level it was before. It was not new for an investment company like us. And I think other colleagues - CEOs of other companies have said basically the same. So, we knew already that there was a discrepancy between the information that we were reading to some extent in some newspaper or magazine, and the reality of what we were observing. And it means that the officialization, I would say, of a growth rate in China of 6%, 7% compared to 10% was not new to us, because we pursue that already in particular, thanks to the Graphics business, which is a good sensor of the real consumption in the market. We pursue that a few quarters ago, I would say almost 18 months ago now. So, nothing new for that and I would not comment more, because I think I said everything. So the Chinese market is softer than it was. Nevertheless, it’s still a growth market, of course, because even if it is, whatever, a 5%, 6%, 7% growth, it’s still more than the 1% of Western Europe. And our businesses, in particular, the traditional businesses are sensitive to the growth of the GDP. Brazil is a different story. Brazil, it’s not a country which is growing. It’s a country which is in recession, okay? And Brazil, on top of that has a major issue is the currency. So, that’s obviously a country which is roughly ballpark half of Latin America in terms of business, because of the size of the country, and it is not going well, that’s clear. So, this is weighing, of course, on the businesses by the way both on the HealthCare and the Graphics business, not to talk about the Specialty group. So, Brazil, it’s a business which is declining clearly. And China, it’s a business which is growing less than it was.

Okay, thanks. That’s very clear, and sorry about the misunderstanding on our part.

No problem.

Maybe one last thing, if you still have time. Well, X-ray is well on course for its first revenue growth in three years, for which congratulations. But as you pointed out, it’s helped by favorable currency. Could you comment a bit on when the turnarounds could be there on an operational level or is that something under what to be expecting in a long-term?

Yes. I think I commented a little bit in the - when I reply to the question of Emmanuel Carlier, but maybe to continue to inform you, certainly, if you look at the evolution of the markets in the current circumstances, the HealthCare business should be on the growth path in terms of operation. So it’s a moderate growth, but as I said, we have 50% of the business, which is clearly now on the growing segment of business. And for Graphics it’s a bit different. So, overall you could not expect yet the business without the support of currency as we have this year to be able to deliver a top line growth. That’s why I said, because we know that we’ve been living - I think, I believe that we’ve been living in the past five years with a ratio of currency which is not in favor of Europe. It has now become a little bit different. I believe it will continue for at least the next year to come, and therefore, that should help our top line to grow. But to be more clear on these kind of things and as I replied to Guy Sips, when we have finished with our budget, I will be a little bit more clear on the trends and evolution of the top line.

Okay. Thank you very much.

Thank you, Ben. At this time, there are no questions on queue. [Operator Instructions] At this time, there are no further questions on queue. I would now like to hand the call back to the speakers.

Thank you. So, I will just thank you all for attending this call. Just as a conclusion, I think to make sure that everybody gets the key messages. So we deliver I think on all the lines, [during the pivotal lines and the varasit lines] [ph], what we promised. And we maintain our guidance for this year that means the EBITDA should land close to 10% at the end of the year. And that should be - it continues to be in the right direction. Thank you. See you in March now. Bye-bye.

That concludes today’s conference call. Thank you all for joining. You may now disconnect.