Christian Reinaudo - Chief Executive Officer Stefaan Vanhooren - President of Agfa Graphics

Stefaan Genoe - Degroof Petercam Guy Sips - KBC Securities

Welcome, and thank you for standing by. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. May I introduce your speaker, CEO, Christian Reinaudo, please go ahead.

Thank you, operator, and good morning, everyone. So we are here today to discuss the Q2 2018 results. Maybe as an introduction, I would like to, as I read the comments this morning, and I would like to reiterate the fact that we need to read the numbers of Q2 with some perspective. First of all, we have decided in graphics to refocus our activities and to stop some activities, therefore, this has to be restated. Secondly, the currency impact is still terribly high in the first half. To some extent, the dollar currency exchange rate is stabilizing around $1.15, $1.16, so we'll see if it continues. But for the first half, we have suffered from that in a significant manner. And on top of that, we are transforming the company, and therefore, there are some impacts here and there on the efficiency of the business and on the costs. Having said so, and I know that it looks a little bit strange, but I read this morning that we have lost 10%, which is, in top line, absolutely true in active numbers. But if you restate everything and if you look at the first half of this year, restating from the portfolio change, restating from the currency exchange rates, you have, in fact, a 2% decline compared to last year. And it has to be compared to first year, first half last year, which was declining by 4%. So I keep continuing stating that this company is on a growth path on the medium term, and the target is to continue to limit the erosion of our top line this year during the transformation of this company. Having said so, there is one major impact on our top line this year, in this quarter, which is, obviously, the challenges we are facing in the graphics prepress industry. We are not the only one. We are facing it as well as our peers. And we have, we face several challenges, which are, obviously, the analog decline, we know that for long; the competitive pressure; and even if the price pressure has been clearly easing because we have all announced price increases, there is, on top of that, a regional mix effect where we see more and more the market moving to low-price countries, and therefore, this is also weighing on our gross margins. We have, of course, a market-driven volume decline, and we have an increasing aluminum price. So this a set of challenges that the group has to face. We are not the only one, but that's the fact. So moving now to the first slide, or the second slide of this presentation. On the numbers, I commented already the decline of our sales. And the gross profit erosion, as you can see, in particular, in Q2, is a lot due to this regional mix effect in graphics. So we can come back on that if you want, and we are currently trying to address this. The SG&A level is reasonably stable. Of course, as our top line is eroding and we face more and more difficulties to keep it on track, but we are taking new actions, by the way, and I will come back to that in the business group analysis. R&D, stable, and this is clearly a willingness decision on our side to not limit the efforts we are doing in R&D, even if, because of the erosion of our top line, this corresponds to an increase in terms of percentage of sales. But the money we spend here is the money we invest for the future and, to some extent, is better invested here than in lousy acquisitions. The result of all that is that our EBITDA in the second quarter is down 1 point compared to last year at 8.7%. If you look at the first half, we are 0.4% below last year. And if you [indiscernible] what I said, that means our EBITDA this year, we don't expect it to be better than the one of last year. Moving to the next slide. The numbers below EBIT. I don't think here we have a lot of surprises. Restructuring and nonrecurring is at €14 million in the first half, €9 million in the quarter. Of course, we start to have some nonrecurring costs, which are related to the transformation of the company. We have some fees for external consultants. We have some reorganization of our IT systems to split them, therefore, there are some elements of costing there. The non-operating results of minus €20 million is in line with last year for the first half, minus €10 million in the quarter. This is, obviously, the limited financial expenses and the pensions. The taxes are also in line with the guidance. And the net result, of course, suffers from this kind of things at €6 million in the quarter and €13 million in the first half. But at least, still deliver a positive net result in the company. The financial debt is slightly up. It's a seasonal effect. We know that there is, if you look at last year, last year, we moved from minus €37 million to plus €27 million, which was an increase of €64 million. This year, we moved up quarter-to-quarter by, let's say, €30 million, €35 million, roughly. This is a seasonal effect. We will comment in the next slide the working capital and, which is, of course, contributing to that. You'll see that we have this traditional seasonal effect of inventory, which is a bit higher than the number of days. And this is a point of attention of which we are concentrating our efforts. And this is due to the fact that some of our expectations in terms of sales were a bit higher, and therefore, we had buildup inventory. The other thing that you need to know is that after massive efforts on the working capital in the past years, we have decided this year to check the sensitivity of a bit of flexibility in the inventories to help the growth of our top line. And of course, in some domains, it's successful; in some domains, it is not. Therefore, we will adjust all these kinds of things in the quarters to come. At the end of the year, I assume that it will be in line with our target and in line with our normal practice. The DSOs are basically constant. Understand, the DSOs we had a change in our software in the U.S., which have disturbed a little bit. So we still have a gap of cash flow generation in the U.S., which will be recuperated in Q3. So if you exclude that, the DSOs would have been totally in line with last year, even a bit better maybe. And the payables are up 2 days, which is good news. Overall, 27% of our sales reflect the fact that our top line declines and we had to adjust the working capital in the meantime; the inventory delta, which is something we are going to address, therefore, you should see numbers which are better in Q3 and Q4. I commented this slide already, so I skip immediately to the business group analysis, starting with graphics, and therefore, Slide 8 now with the traditional pie chart. Pie chart, which is showing that nothing is really changing a lot. We see a little bit of digital prepress down and a little bit of inkjet and software and services up in the percentage of our sales, but in the business, which is overall declining by roughly 6%, if you exclude the portfolio changes and the currency exchange rates in the first half and by roughly 8% or 9%, 6.5% sorry in the quarter 2. The gross profit, I mentioned that, suffers from set of parameters, which are headwinds for this business, in particular, in prepress. SG&A is, as much as possible, under control in terms of percentage, well under control in terms of costs. I was saying in my introduction that we are taking actions to further reduce our SG&A, in particular, in Europe. We are going to reorganize, to some extent, the way we operate in Europe in our branches, and we are also reducing or costs in the U.S. As you can see, through the distribution of profit, net profit, the JV in China works well and so far again. And the EBITDA of the business [within] graphics suffers from all this kind of evolutions, down to 4% for the first half and 5%, roughly, for the second quarter. Comparing these numbers to our peers, you will see that we are resisting pretty well in this industry. Just on this Slide number 10, a comment on the business highlights. The introduction of 2 new software solutions, InkTune and PressTune, which are basically software aiming at reducing the total cost of operation of our customers, is part of our strategy for selling more value to our customers to resist on the price erosion that we see on our plate, digital plate. Basically, we try to help our customers to resist to the pressure they have to support, of course, on this market. And the introduction of the new Tauro 3.3 meter, the H3300 with LED system, it is, obviously, corresponding to the evolution of a market, which is in massive consolidation, therefore, asking for more and more high-capacity equipment. This is what we are, we have started to deliver, and I would say, there is a good traction on the market, but it's a bit early to be absolutely conclusive on that. The Tauro [indiscernible] is well accepted, in general terms, by the market, which is a machine, which is very robust, very reliable. And therefore, we expect this machine to be serving the high end of our product offering in the right way. Moving now to the Slide 12, the pie chart for HealthCare. We see now that in a very stable way, the IT business is half of our HealthCare business, roughly 49% after 2 quarters. We see also that the CR/Modality business, which is the radiography equipment, is registering well, with 20% of the total sales. So it means the DR evolution compensate for the CR decline. The hardcopy film, progressively, in particular, thanks to our efforts in China, continues to recover. It's 25% in the first half of the year in our total HealthCare business. And the classic radiology is continuing its decline at 6% of our sales. Slide 13, sales of HealthCare. So you see that on the first half, we've been slightly growing, 1.9%, slightly down in the second quarter. This is due to, I would say, variations quarter-after-quarter of different businesses. Overall, we see that we have a business which is roughly flattish in terms of sales evolution at this stage. The gross profit is under control, flat in the first half, slightly down in the second quarter, but it is due to the fact that in our IT business, our Imaging IT has been a bit weaker, in particular, after a strong first quarter, and therefore, we have a bit of softness in the margin of the IT business. SG&A is more than under control because this group is able to reduce the percentage of SG&A on sales. The R&D is constant because it's, again, a decision of this company to keep constantly on the expenses. And the EBITDA is flattish in the quarter at 12%, growing in the first half from 10% to 11% lately. Comments on the Slide 14. As I said, we have an improvement in our Chinese distribution channels. I think I can say now that we have solved all the difficulties of the transition from the previous model to the new model. And obviously and hopefully, we are going to recover in the next quarters, continue to recover in the next quarters the volume and the margins that we may have put in danger at a certain point in time with this transformation. But I repeat, again, that was a good transformation that we made in this business. The high point of satisfaction is the behavior of our hospital systems information solutions, HealthCare Information Solutions, which continues to have a strong top line, a strong order book evolution and a good profitability. Following the strong start of the year, the other division in IT, which is the Imaging IT, there is a little bit less in the quarter 2. We still have some taste of the massive success we had in order intake in the U.S., in particular, 2 years ago and last year. And we still continue to struggle a bit. So Luc Thijs has hired an external consultant to help us to improve in this domain. I will come back to that a bit later in the transformation project of this company. And we hope that with this kind of support and benchmarking, we are going to make even better progress in the quarters to come. The gross margin, as I said, is stable in the first half, slightly down in the quarter 2. The recurring EBIT is decent. A few highlights. In particular, we have made small acquisitions, a small acquisition of a company in France, in the north of France, Inovelan. We don't disclose the numbers. It's not a big acquisition, but it fits very well with the portfolio complementarity that we need in our Integrated Care development, in particular, in France, where we see the market now being clearly showing an evolution into this direction. So you see further behavior for hospital information systems through the investments we are doing here, but we are very committed to this market, which is now showing some signs of significant informatization, and we are performing well in France. So after Germany, France is clearly on track. We have also signed some important contracts in Enterprise Imaging, so the Imaging IT, mainly in Europe, I would say, than in the U.S. In the U.S., the focus is more on progressing on the implementation quality of our platform stability, convincing the customers, which are a little bit, which have been a bit disappointed at the beginning, that we are very solid; building some reference sites to make sure that we can convince other new customers for the future. And finally, we have got the clearance of the FDA for the DR 800, which is our own dynamic DR that is dedicated to, amongst other things, to fluoroscopy, so it's a dynamic image. And this is, I would say, the ultimate achievement today in DR. So that's a good comment if you want a bit later. Specialty products, as always, I will be short because the business continues to deliver on the right track. You see that all the lines are positive, even excluding, including currency exchange rates, we had a positive evolution of the top line both in Q2 and in the first half. The profit margin is okay. The costs are under control, and the EBITDA is progressing compared to last year in a significant manner, higher than the average of the group. This is due to good behavior of most of our growth engines. Just a bit of a comment on, compared to the previous quarters, the electronic industry seems to give some signs of a little bit of [rehabilitation]. We don't think it's a long-term issue, but thanks, God, we have a lot of other growth engines which have performed pretty well. And the recurring EBIT at €5.9 million is fine. Business highlights. We have signed an agreement with De Nora about the development of a solution for hydrogen and oxygen production based on the new membranes. So this is linked to the hydrogen programs. This is a small business. It's a small development issue, but it shows that we continue to focus on future growth markets. Before we move to questions and answers, I just would like to take 2 minutes to clarify a bit, because I read this morning that on the transformation project of this company, we have been a little bit imprecise. So I would like to clarify to make sure that we have a good understanding on what we are doing. First of all, this transformation project goes well. So we have announced last year in August that we're going to make a study, and we started to execute in October. I can tell you that the structural, the technical transformation, that means the split in terms of legal units, in terms of information systems, in terms of affectation of people, the split between the ITCo, the future IT company and the rest of the business that we call MainCo in our internal vocabulary will be finished by the end of the year. So we have been successful on the milestones, which were the ways of transformation of different countries have been mapped to the day, the last one was the 1st of July; the next one will be probably at the beginning of November. And everything, including Agfa care and everything we have to do will be finished by the end of the year. So the year 2019 will be operated in the new structure full year, number one. Number two, this is, obviously, a part of the job that we have to do, but we have to do more than that. We need to create what I'd call the strategic plan of the 2 future companies. And this is today operate through a set of subprojects, which are either aiming at clarifying the strategy for the different businesses. I was talking about what Luc Thijs is doing on his IT business, but we are also doing the equivalent things in terms of the prepress business, the inkjet business, the radiology business. So this is being prepared to have a decent substrategy, including the target to have, to participate actively in the consolidation of the industries, which are today in disarray, in particular, the graphics prepress business and, to some extent, some elements of the HealthCare traditional businesses. Second thing I would like, so the business, the subprojects are dealing with this strategic issue but also dealing with elements of processes, organization, simplification of operations and, of course, an element of cost simplification and cost-cutting. The second thing I wanted to say, and I said that the technical split is, for sure, going to be finished by the end of the year. It means that all our budget operation, which is starting now, and our strategic planning is based on taking into account that next year, we will operate in this new structure. And finally, in terms of timing, because I don't want to give the feeling that we are floating and that takes long. If I look at what the transformation that some of our peers have done, it takes long time to do this kind of stuff. So in November, I will give you a bit of, a bit more color on some of these subpackages. And the latest in March, when we report the Q4 result, you will have the full picture. So that's what I had to tell you about the Q2 results. So to summarize, we stick to our targets, which are medium-term targets. Medium term means after we have done this transformation, which are, obviously, to, come to a growth path for the, both businesses and secondly, to deliver a 10% EBITDA in average in the years to come. For this year, as I said, the EBITDA this year, I don't expect it to be better than last year. And for the top line, I still hope that we'll be able to show some slight improvement compared to the decline rate of the years before. This is, of course, depending on the way the overall market evolution will be in the second half of the year. I'm ready now to answer questions, maybe from the room first. And if there are questions from outside, we will see if people have questions to raise. So first question in the room? Q - Stefaan Genoe: Yes. Stefaan Genoe, Degroof Petercam. Perhaps, two questions, one on HealthCare. Could you indicate what's the renewed growth you've seen in hardcopy? And with the new model, what margin compared to, let's say, 2 year ago, this hardcopy is running? And if we exclude the growth from hardcopy, the current press release, I think you mentioned volume growth, but I don't think you mentioned sales growth. Has there also been renewed sales growth? And if so, a bit more color, perhaps, on, it's only 1 quarter, I know, but a bit this lower quarter of the other businesses. And then secondly, in graphics, I think unless I did not read the previous press release, it's the first time you mentioned explicitly to participate in the consolidation in graphics. Could you indicate which kind of companies you would be looking at, given that also in this press release, you indicate you have discontinued some of reselling activities? I think they came from a past acquisition in the U.S. Now some of those reselling, has that given you some, I would say, indications on better not acquire distribution or reselling businesses?

No. Clearly, on this one, I will very quickly. Agfa is not good at just reselling things. Agfa is an integrator. It's a solution seller. It's a solution developer. So we may have to integrate third-party's equipment or third-party's components or third-party's software. But at the end of the day, we are integrators, so we are not a reseller. If we have to resell, and we have done that with the acquisition of Pitman, which was 10 -- 8 years ago. It was after the crisis of 2008 and '09, it was a way to protect our business in the U.S. and to become bigger, in particular, in front of some of our competitors. But the aim of our strategy is clearly not to be a reseller of materials or whatever. So I will not disclose anything on the consolidation and what we are actually doing because this is, obviously, for sure, confidential. But what we are convinced of is that there are too many players in this industry. Because on top of the 3 classical big ones, there are still 4 smaller players, which are local, local trying to be global, but there is 1 U.S. player, 1 Brazilian player, 1 Indian player and 1 Spanish player. So this is an element. And thirdly, there are million of Chinese players today, which are transforming or which are finishing to transform their old analog factories into digital factories. The market in China is growing. And therefore, there are -- there is a sort of stabilization to achieve in this market. So having said so, as you know, we have to navigate in the waters of antitrust issues, et cetera, so we are absolutely taking all that into account. But we are actively participating into actions and to reflections, which are aiming at finding a solution to this consolidation of this industry. You cannot have a market, which is declining, whatever, 5%, 6%, 7%, and everybody is very happy in this press release of the quarter saying that on the tiny part of this business, which is growing, we are doing very well, okay? This is the case of some of our peers. This is our case when we say that in this domain, we are growing. Overall, the business is, first of all, moving to the local countries, number one. And number two, it's declining. So we need to find a way to restructure this industry, I would say, again, doing legal things and things which are absolutely following the regulation in terms of regulatory rules, but this is just not sustainable. That's it. Now back to the hardcopy, I will not quote any numbers on that. You understand why. But the aim of what we are doing, as you understand, is to take control of our distribution in China, in particular. We have done it to some extent in Latin America also, and to make sure that through this, we will have 2 things: one, a better understanding of the market evolution, the real sellout to the market and the management of our supply chain and inventories; and number two, improve a little bit our gross margin by avoiding to have too many layers of distribution, which, by the way, is something that the government, in particular, in China, encourages because they don't want to have too many layers of distribution where there are risks of misbehavior, number one; and number two, leaks of margin. And at the end, the public hospitals, because everything is public in China almost, and the patients are paying that, okay? So we are taking all this kind of evolutions into account. And I will say that after 2 difficult years that you have been tracking with us, 2015 and '17, we are now out of the woods, and we see progressively a recuperation of, first of all, the volumes that we have lost, to some extent, in some disputes with some of our distributors; and number two, an improvement which is going to follow in terms of our gross margins. I said already a lot.

Guy Sips, KBC Securities. I have 2 question. One, of the impact of the raw mats. I was calculating in the second quarter something like €5.7 million where silver was a little bit positive and aluminum was quite negative. The recent aluminum decline will be positive for you, of course, going forward. But what is the impact, and you, in Many, you announced the price increases for after the aluminum spike, how did the customers react on the recent decline in aluminum? And the second question is related to the graphics. And we saw an acceleration of the decline in the second quarter related to what you are doing in the U.S. Will there be a spillover effect in the third quarter? Or will it even accelerate in the third quarter? That's it.

Yes. So on the aluminum and these kinds of things, the model we guide, which is 6 to 9 months' time difference, in rough terms, it works. From a quarter-to-quarter, you may have either that we have, for example, we see the last year or 2 years ago, we have these some contracts where we sell net of aluminum that is we recuperate the aluminum, so of course, this distorts a little bit your model to, for some part of our business. But overall, the numbers, the guidance we have given works. On the quarter, you must have, you may have an issue. The number you quote is a bit high in terms of, in fact, the effect is a bit lower than that. But in the silver, you're right. So that's basically where we are at this stage. The price increase is, by the way, not only to the fact that the raw materials, in particular, aluminum is increasing, okay? Obviously, part of it is due to that. But it's also due to the fact that the prices have been eroding a lot in the last years. And there is less and less a tendency of some of our customers to recognize the value we sell, okay? We are not a seller of raw materials. We are a seller of a complete solution for prepress. And this is typically what we try to do. That means the customers, which are willing to use the capabilities that we offer to reduce their costs and to better use the capability of Agfa as an integrator, they have to pay a bit more. And they, in exchange of that, they have some ex-con possibilities. There are software and this kind of stuff. The ones which are willing to buy almost on the website plates per kilo, they buy plates per kilo. We are, by the way, reorganizing part of our go-to-market to make sure we can also address this customer the right way. But these people, they cannot get the benefit of all the value that Agfa can deliver. They cannot have salespeople, which are just writing for them to be called and to come. They cannot expect to have a software, which is helping them to save even more than the cost they spend with our plates and this kind of things. So that typically is what we are trying to do. And this was announced last year when I said the growth program is based on 4 pillars of which one is the dedication of our people, the cultural change in our access to the market. This is part of it. So we have made a massive plan to train our people, the salespeople in all the business groups to make sure that these people understand that they deliver value to customers and the customers have to pay the value they buy from Agfa, not only kilos of raw materials or square meters of film or whatever. So that's the strategic answer to your question.

And then third question is related to the cost below the EBIT line. So out of the €9 million, you indicated that some costs were related to consultants, so that will be also related to the split-off. Can we expect same number in the second quarter? Or will it be higher or somewhat lower?

In the first half -- I think we can be clear. In the first half, we had spent rather high single-digit cost in this domain. In the second half, we should spend maybe a little bit more. But it should not be a massive increase compared to what we have seen in the second quarter. There are costs, which are not consultative costs, by the way. It's also cost of splitting our information systems, clarifying the purchase of licenses and this kind of things, okay? But I will be clear in November on that. I think in November, we'll be able to tell you the amount of costs that in 2018, the project of transformation will be impacting the numbers. Just back to your question about -- you had a question also on the evolution of the cost. What was that? The impact -- your first set of questions, I don't remember. You were saying?

The impact of [indiscernible].

So the impact of using -- yes, yes, yes. I think we are now at the flat level in the Q2. Stefaan, am I right?

Yes, yes, correct.

First quarter was just a part of it. Q2 is with impact. So Q3, Q4, you

Q3, Q4, it will [indiscernible]

You will see the same impact. And I said, typically, it would be [indiscernible] in the year. So that's it.

Yes, we are selling out, so according to plan.

Yes. I think at this stage, we are below the 50% of the €60 million, and it will be a €60 million at the end of the year, with normally no impact.

On cash.

On the cash and EBITDA in 2018 and hopefully, the simplification and the recovery the years after.

Question on the debt. So to be clear, the impact full year has been more than €30 million in the first half.

As I said, it was a bit less than half. That means less than €30 million. And it will be a bit more than half, a bit more than €30 million in the second half. Totally, to be €60 million.

Yes. You also mentioned you're looking at reorganization -- reorganize the way you work in the European factories.

No. The -- in graphics, we are adjusting our model of distribution to streamline the structure, number one, because the market is declining; and also, part of this ready-selling program, we try to adapt more than we have done in the past, the structure our of contracts with the customers to their needs. And in fact, when you look at the prepress business as such, in fact, you have different segmentations, which are very different. The newspaper customers are not the same as the commercial printers. And the commercial printers, you have people which have different, I would say, hand applications, which could be packaging, which could be something different. So we try to reorganize at the European level, so taking the benefit of the structure of Europe, at the mass of the business in Europe to make sure that we serve better to different segments. So do we have any questions outside of the room, operator?

[Operator Instructions] We show no questions over the phone. [Operator Instructions]

Okay. I think if we have no question outside, that's normal because most of the people who are authorized to raise questions are in the room here. So I think that we have, at least we have a last-minute question in the room. We can close the call for this quarter. So thank you, everyone, and we'll meet you again or talk to you again in coming November, something like the 7th of November or something like that for the Q3 results. Thank you. Bye-bye.

That concludes today's conference. Thank you for participating. You may now disconnect.