AGFA-GEVAERT NV

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Transcript : Agfa-Gevaert NV, Q3 2022 Earnings Call, Nov 09, 2022

09/11/2022 | 11:00

Presentation Operator Message
Operator (Operator)

Hello, and welcome to the Agfa Q3 2022 Results Conference. My name is George, and I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions].

I'll now hand the call over to your host today, Mr. Pascal Juery, CEO, to begin this conference. Thank you.

Presenter Speech
Pascal Juery (Executives)

Thank you very much, operator, and good morning, and hello to everyone in the call. Welcome to this result session. I'm sitting in a room with Agfa's CFO, Dirk De Man, with Viviane Dictus, Head of Investor Relations; and the executive team that stands ready to answer your questions.

So let me first start by a word of context that I believe can describe and explain a bit the set of results we are presenting today. First, inflation is still at a peak in our P&L, although we are seeing some release in some of the markets from freight to chemicals or metals. We are still not seeing that in the P&L. And therefore, our pricing today is lagging versus the inflation that we are seeing and that shows very much in these results.

Second part, we have a specific impact from China. China represents globally for Agfa, a little bit over 20% of global sales. So it has -- it's one of our major markets and especially for Radiology. And we are impacted by the situation in China in terms of COVID lockdowns and economic slowdown. It's difficult to distinguish between the 2.

Just some statistics I'd like to share with you. It's not really publicized. But at the end of October, and it's still the case today, you've got approximately 250 million people in China still impacted by some constraints, restraints, COVID lockdowns, representing 25% of the GDP. So needless to say, it has a tremendous impact on some of our activities and not only Radiology, by the way DPC is also impacted. Third element of context, we start seeing some signs of demand weakness in some geographies and mainly in non-healthcare market. We are seeing that Offset is a good example for that. We have a negative volume quarter due to this demand. So that's a bit -- that's the 3 elements of context that I would like to stress before starting to discuss Agfa performance. So indeed, if we look at the total group, EBITDA is increasing versus last year. But as you've seen with very contrasted performance.

Let me start with HealthCare IT. I'm going to detail it of course later. But I would say here, all the indicators are green, strong organic growth, strong order intake, good profitability, good mix and preparing for Q4 that will be stronger than Q3. So here, I'm very pleased with the development of the strategy and the road map.

Digital Print & Chemicals, clearly a different story, a very disappointing set of results. I have to say, also contracted, as you know, DPC is a mixed bag of different activities. Some of them are really the engines of growth and that digital printing and Zirfon here, we see still very good momentum and we have, I would say, a good business development, even for the time being, of course, Zirfon does not contribute to the results. Actually, it contributes a lot more to the cost. We are spending a lot of money to develop industrially as I speak.

But overall, we've seen demand weakness in some activities in DPC. DPC is also quite impacted by China on some of the markets like electronics and PCBs are really centered in China, and we suffered also from the lockdown and DPC is also suffering, I would say, from a lag in implementing price increases. It doesn't mean that we are not implementing price increases. It means it takes a very long time to hit the P&L. Remember, it was a similar situation in Offset last year before we started to see the full impact.

Radiology. Well, clearly, the story is around COVID lockdown here. It's -- we thought that we were going to see a rebound in Q3, but the situation has not changed -- is there an issue with the sound? Yes, sorry, I didn't change the slide, indeed. So we have seen the impact of lockdowns in China. We thought it was going to be better in Q3. It was not -- it was a lot less publicized because it was not about big COVID lockdown in Shanghai that made the headlines. But as I shared with you the statistics, actually, it's pretty spread out in China and it continues. I'm not going to -- I'm going to say right now that for the time being we have no signs, of course, of policy change. And therefore, we are expecting COVID lockdowns to continue as they are during Q4. Even if Q4 for Radiology will be higher, but mainly for seasonality reasons and also the timing of some export contracts. But we are not saying that the situation will change.

Offset Solutions, a quarter that is also in the continuity of the previous quarters in terms of profitability, but with a different profile, actually, we have less volumes, and I would say, good margins. So it's price over volume strategy, it works. You can see it in the bottom line. But indeed, for the first time, we've seen the first impact of an economic slowdown mainly in Europe. So what are we doing? Actually, we are preparing some additional measures to address what we see today as challenges, specifically in DPC and in Radiology Solution. So we have a plan that actually is almost ready and will be presented pretty soon to our -- within the group in order to quickly get back to our level of ambition in these 2 divisions.

And also addressing, of course, the fact that Offset will soon not be part of the perimeter of the group, and I take the opportunity to repeat that we are expecting to close the Offset transaction. I've read in an analyst report this morning that there might be a question mark. There is no question mark. Actually, the buyer is very keen to do the closing as soon as possible, but we have a technical point that we need to solve in North America related to IT systems. That is really in the critical path to the closing. But I repeat, there is no back close. There is no uncertainty. And if anything, the buyer is keen to close on a timely basis.

So let me now quickly comment the numbers. So if you look at Q3, modest growth in terms of top line, but very contrasted. Growth in DPC, growth in HealthCare IT, double-digit growth in HealthCare IT, by the way, correct it from currency. But in fact, decreasing top line for Offsets and decreasing top line for Radiology. When you look at the overall equation of the group in terms of margin, you say well, basically, it's about stable margin at EBITDA level, at least compared to last year.

But here, that's where we have a strong contract with Offset and HealthCare IT doing better than last year and DPC and Radiology doing less well than last year. So very, very contrasted set of results, and I'm going to come back to that. Below EBIT, you still see the cost of the transformation of the group. As you know, we are in full swing in terms of IT transition as well as the creation of our global business service organization. So this is reflecting in, I would say, below the EBIT in the nonrecurring and restructuring line. So contrasted indeed, very different situation business by business. We are still going in DPC and HealthCare IT, but DPC for the time being doesn't translate in the bottom line, Radiology, well I said it, we were impacted by the loans in China. It has an impact on the consumption of film of about 20% for us. And China is our first market. So it has a tremendous impact on the overall film activity.

And HealthCare IT, I'm going to come back to that in detail to you a bit more and disclose to you a bit more numbers regarding especially the forward-looking indicators like order intake. Our gross margin increased at the group level, no issue, but again, a very contrasted situation. We are -- we have a situation where price increases have been done and completed totally in that, where it's still a lot of work in progress, both in Radiology and in DPC.

We are committed to do it, and we are putting more actions, but it's fair to say that the difficulty for us is to keep up with the pace of inflation. And now the inflation that we are seeing is more about salary inflation and especially the Belgium situation with the indexation that makes it quickly to the P&L and makes it a bit difficult for us to reflect this in our prices on a timely basis.

So if I now turn to the cash performance. I will leave it to our CFO, Dirk to comment these numbers.

Presenter Speech
Dirk De Man (Executives)

Yes. Thank you, Pascal. So for Q3, as you can see, the adjusted free cash flow was positive at EUR 20 million, sufficient to cover the pensions, but there is also a heavy restructuring and nonrecurring quarter. So with a free cash flow netting to minus EUR 11 million. Now if you look at the trade working capital, although you will see that working capital still increased in Q3 in a later slide, but there was no net cash impact, actually slightly positive.

The CapEx was maybe a bit higher than what we would normally see, and that's basically driven by the fact that we were doing some from spending buying CO2 certificates. But actually we'll be covering the year 2023. And so accounting wise, these are capitalized and then consumed as we are using the CO2 certificates. And then maybe the last comment to make, restructuring and nonrecurring, quite a heavy quarter, which is really demonstrating the fact that some of our transformation projects are ongoing in full swing, and particularly the ICS transformation and the finance transformation, which basically means a lot of costs are also related to, let's say, the knowledge transfer, the shadowing in order to transfer the internal activities to the outsourced teams.

Now another note I would like to make in the quarter, and we do not have a separate slide for that. But in Q3, we managed to further derisk the U.K. pension plan, and that's with most of the remaining liabilities and that was done through another buy-in transaction, and we were able to do that without any cash contribution. So this is actually similar to the operation we did some time ago. And this time, we saw a market opportunity with all conditions being pointing in the right direction. We took advantage of it. And actually, it was a good thing because that window of opportunity closed very fast when the U.K. financial markets went into turmoil. So we're really happy to have been able to perform this transaction. And this means that almost all of the U.K. pension plan is now fully derisked.

If we move to the next slide, just the year-to-date. And obviously, the key comment there is that our trade working capital is still quite heavily weighing on the cash flow of the year. And this is a big increase. We were hoping to see already some improvement in Q3, but that trend hasn't turned yet, but we do predict that there will be a working capital reduction in the fourth quarter, although not fully to last year's level, and now we'll get back to that on working capital.

On the next slide, you can see the net cash position. So there is again a slight decrease and maybe also a reminder that in the previous quarter in Q2, we also completed the transaction regarding income. And then moving to the working capital. So it remains at a high level also in Q3 and that's driven basically by all the factors we already discussed in previous quarters impacting the inventories. So this includes inflation, foreign exchange, supply chain and logistics issues. And as Pascal mentioned, before, added to that, we also started seeing economic demand slowdowns in certain markets, but especially in China and in Europe, which basically means that demand was a bit less than predicted and therefore, inventory stayed at a high level.

On the other hand, we made good progress on trade receivables. Trade payables are remaining at a good level. So overall, the impact is limited. But obviously, our expectation was to see that coming down already in Q3. Now we do think inventory levels will -- and we know inventory levels will go down in Q4, but we do not expect net working capital to be at the same level as previous year. And the 2 key reasons for that already are higher exchange rates, which obviously creates a higher cost from the balance sheet, but also the Inca acquisition, which in Q3 was around EUR 20 million of extra working capital that we've added already in June, but is still there. And as a part of the comparison versus last year.

Now I hand back to Pascal to discuss a little bit more.

Presenter Speech
Pascal Juery (Executives)

Thank you. Thank you very much, Dirk and indeed, strong inflow of working capital to be expected, but certainly not to the level of last year for the reasons you explained.

Okay. Let me turn first to Healthcare. So Healthcare, as you see, very pleased by the results. Good organic growth. I told you at the beginning, I told you that for this year, our objective was to have a positive organic growth for the business. I can say that it's going to happen and Q4 will be will also a strong quarter and even stronger in terms of bottom line. The mix of what we are doing is quite good overall. And overall, I think the team is executing quite well the strategic road map. We have now, I would say, strengthened the team in North America. If you remember a year ago, this business was mainly run from Europe. Today, it is run from North America. And I would say half of the leadership team is now based in North America and in the U.S., where the main opportunity is.

If I want to give you more color regarding the results, I'm going to more discuss, in fact, the forward-looking indicator, which is order intake. We are following the order intake based on the last 12 months basis. And the order intake of the last 12 months has increased by 16% versus the previous period, which shows you already that this is a forward-looking indicator that we will be growing actually this business. It stands at a level of EUR 122 million today. That's quite a high number and gives us visibility for the next period. But it's not only the increase.

It's also the quality of the order intake. And in fact, when I look at the quality of the order intake, we are looking at our high value streams. And the high-value stream is basically our own IP software as well as managed services. And when I look at the quality of this, it represented a year ago, less than 30% of the total order intake in '22, at least the last 12 months, actually, it does represent almost 40%. So it's not only the volume of order intake that is increasing. This is a quality of order intake also that is increasing. So it gives us confidence going forward regarding the evolution of the business. So overall, for Q4, we are expecting actually our best quarter of the year. We are in the middle of the quarter. And for the time being, the execution is okay and on track. So that's a pretty positive message.

Radiology Solutions is a different message. Actually, it's rather an issue for us. You see corrected from currency, our sales are below last year. This is strongly influenced by the film business and within the film business, really, the performance in China has already discussed. And we are also challenged in terms of margins. We have no possibility to increase price of film in China. Let me be clear about that. And this is what reflects also here. We are doing price increase in all other geographies, but I think we have more to do, and we will continue to do price increase during the course of '23 to restore our margins. On this being said, we had quite an okay quarter for DR. We retrieved top line growth, double digit, in fact, in a market that is still a bit volatile.

So overall, clearly, for us, the key is China and pricing in this activity. DPC is complex. As I said, and we try to give you more details about what businesses within DPC, we thought was really the growth businesses, mainly everything that relates to environmental condition among which Zirfon, but also some key chemicals going to, I would say, electronics and/or electric vehicles, as well as digital printing. But overall, we have still in DPC, a number of more mature businesses related to nonmedical films. So very contrasted performance of these businesses. It's still growing top line. We are still growing this business top line, but the issue is we have some other activities, which have suffered from a slowdown. And we are also lagging in terms of price increase implementation, and that reflects very strongly in the margin.

Don't look too much at gross profit and SG&A. Actually, the Inca integration, sorry, has messed up a bit the numbers in -- between gross profit and SG&A. So SG&A is overstated and gross profit is also understated, therefore. But the main point that we are working on in DPC is to put together stronger price increases as we see in patients hitting us quite significantly. This being said, there are also good things happening in DPC. We are -- we have actually signed the first contract for Inca machines. We have a couple of contracts that are already signed. We are on track also in the development of the next machine, which is a single pass packaging printer, but that's not going to be impacting before a couple of years, but we are fully on track with the industrial development, as I speak.

So overall, I would say the Inca acquisition proceeds as planned. We are confirming the potential we've seen at the time of the acquisition, and probably have even a slightly improved view, especially on the existing printing range of Inca. This being said, there is also -- is passing us a bit shorter because we have decided actually to take over the sale of the machines from Fuji a bit early, which is costing us a bit short term because we are not able to -- because there is a lag between order taking and revenue recognition. But at the same time, we have chosen to do that because we are going to be able to plug our inks in these machines. And that's also another good news. We have now an ink set that is improved and therefore, we are on track to deliver the plan as I discussed.

Zirfon is also very dynamic. Of course, we have -- we are proud to have won an Innovation Award by the Essenscia Association in Belgium for our latest technology. It's a good external recognition, but more important than that, we have a lot of customers trusting us. And I can confirm that this is a business that in '23 will be multiple times what it is in '22. But here again, we are in a situation where we spend a lot of cash actually developing this production on this product as I speak. So for the time being, the contribution is very negative to the results in '22 and hopefully will turn positive next year, actually.

We are seeing the impact of the weaker economic environment. Europe and Asia. Some of our businesses for electronics in DPC is really in Asia and we are not immune to the economic environment and also the COVID lockdown. So I would say, even within DPC quite contrasted, the -- we are taking action, not only price action, but we are also looking at refocusing some of our key activities within DPC. And I expect that we are going to turn the ship pretty soon, might be too soon for Q4, but all the actions we are preparing to definitely impact Q3 -- '23, sorry.

Offset Solutions, slide. The same story as the previous quarter. Now you see that level of pricing is established. However, you see that the bottom -- the top line has turned negative, excluding currency. We have a positive impact in price and we have a negative impact in volume. It's partly, of course, our own willingness to drive volumes, which are not profitable, but there is an element also of the economic slowdown that we are seeing in China and in Europe. That's pretty clear. So you see the impact of the price increase. We gained 4 points of gross margin. We have SG&A under control and adjusted EBITDA, therefore, a lot stronger than in previous quarters. We don't see any change in trend for the fourth quarter. I think we are going to continue in this area.

So in a nutshell, how do we look at the next quarter on the outlook. 2 businesses will do better. Healthcare IT, strongest quarter of the year is expected. Radiology also will do better than in Q3. However, I stress again, situation of the COVID lockdown is still not resolved. So it's more a seasonal effect than an export complex, but the underlying trend of the consumption in China is not changing for the time being. So that's the 2 businesses that are expected to do better sequentially quarter-on-quarter. I insist on that. Offset will continue its course and DPC should -- DPC will remain complex in Q4, even if we are going to be sequentially hopefully improving the results. So that's what I want to stress.

Just 1 word on sustainability. I think it's important. I think it's important as well -- for the time being, we are on track with most of our objectives for sustainability in terms of personal safety. We are on track for a reduction year-on-year. We are not fully on track in the hiring of women, where we have -- are we still lagging behind our ambition level. Maybe we have 2 ambitions given the mix of industries we work with. But indeed, that's probably something that we need to look at. We have started a DEI policy, actually, diversity, equality, inclusion policy. It has been kicked off in the group through employee issuance group approach.

In terms of CO2 projects, we are implementing CO2 reduction projects this year, and I believe we are on track to reach our objective, which is an absolute reduction according to the Paris agreement. And I would say, we have restarted our EcoVadis assessment. We did it for the first time last year. We had a Bronze Medal.

We have specific improvements in this year. The idea is to improve year-on-year, but have not set any specific goal at that time for the company. So we have a sustainability road map. It's extremely important for us as well to be positioned in the right way for all our stakeholders, and we are very active in this.

I'm going to stop here, time for questions, and we'll be happy with the team to answer any questions you might have.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] First question today is coming from Alexander Craeymeersch, calling from Kepler Cheuvreux.

Question
Alexander Craeymeersch (Analysts)

So I have a couple of questions. First, you mentioned that customers are postponing their investment in industrial inkjets and decor printers. Could you just give us a feel on how long you expect them to postpone these and how long this was in previous cycles?

Then the second question would be -- so you mentioned that the first question -- contracts for Inca machines are entering. When are these expected to deliver revenue for Agfa because you mentioned the year. But if I remember for the Agfa machines, it's a little bit less normally. So -- and also in that extent, what type of margins do you expect on these? And then if you could just remind us on how much your wages are of the cost and how much and when these wages are going to be indexed forward? And then maybe a final question just on the Offset Solutions segment. If there is no uncertainty on the divestments, I'm just wondering why you did not close Offset Solutions under the IFRS 5?

Answer
Pascal Juery (Executives)

Okay. Very good. All right. So thanks very much, Alexander, for your question. Customers for decor printing, I would turn to Viviane to answer the question.

Answer
Viviane Dictus (Executives)

Sure. Thank you, Pascal. So on that question, I think it's different region by region. We clearly see that Europe, which is an important market where currently, and you see the decor printers themselves or the construction companies themselves are seeing a slowdown there in demand and people spending -- when people spend now in construction, it is about insulating. It is about making energy transition and solar panels and so on and for the moment, not in decor.

So for Europe, clearly, we see a slowdown. Difficult to say how long this is going to take. But personally, I don't expect that thing for Europe to be much better in 2023. That being said, outside of Europe, we still see good traction, and I'm pretty confident that there, the demand will continue. It will not be not impacted by a recession, but there is actually continuing demand there. So I think for decor printing, it's also for you to understand, very different situation versus for instance, the other Inca machines that are addressing an existing market.

And there, indeed, coming to your second question on the onset machines, we have our first contracts which are now coming in and which should hit the P&L in Q1, maybe even, but we want to be prudent on that, maybe even because it's with logistics and where we already are in the year. There could be already some hitting end of this year, but it will be as of Q1 next year.

Answer
Pascal Juery (Executives)

Margins on onset, you want to....

Answer
Viviane Dictus (Executives)

Yes. I don't think we have, I would say, a habit of disclosing specific margins on specific equipment. All I can say is that on the onset, the margin is higher than what we have on our existing or previous portfolio, let's say.

Answer
Pascal Juery (Executives)

Yes. And absolutely, I think that's a good answer. It's a higher margin that we have on our portfolio. And also remember that our business model is to make our money through service on Inca, which actually will kick in with these sales.

Yes. And indeed, on decor, be careful because it's a new market. It's a market entry and people are switching to digital. And basically, they are telling us right now in the current market context, it's not that urgent for me to switch and to do that. And I'm sure you're reading the press, and you've seen that Unilin has decided to shut down their plant actually in Belgium for a few weeks for lack of demand, actually. So that's the kind of environment in which we operate, unfortunately. However, on the solution itself, I mean, it's recognized by the market and I think we have extremely good prospects actually when the market will reopen.

Answer
Viviane Dictus (Executives)

Correct. I think fair to say there as well, and we launched our European machine there, let's say, just before the summer at the moment that actually the recession slowdown was starting. We had actually very good response indeed from our customers who have been testing the solution who are very happy with the quality. And I'm pretty sure that this is going to come back with the vengeance when indeed the demand starts. The products have actually already been proposed also in the shops to final customers. So digital printing has in terms of road map already been adopted now by our customers. But very clearly for the moment, the demand is down. So it is very different versus maybe 2 or 3 years ago when people were thinking of going there, now they have made that switch, but they don't want to invest now because of the economic situation.

Answer
Pascal Juery (Executives)

Good. On offset indeed, but you're talking about an IFRS technical point. And actually, to make a long story short, we don't need the conditions to do that yet because we have this point that we need to resolve in the U.S. related to the IT system. So...

Answer
Dirk De Man (Executives)

Yes. And so maybe just to reiterate, IFRS 5 is applicable when the business is ready for sale in its current condition. And so at this point in time, we're not meeting those conditions. There is the carve-out in North America, which is mainly an IT-driven project that we need to finalize. There is also the structure under the offset company, no entrepreneur company, is not yet completed. So that means the subsidiaries still need to be moved sometimes from 1 legal entity to another. It's not a big deal, but it still needs to happen on certain entities.

And then finally, we also have in this whole carve-out, which is quite complex, a lot of transfer of personnel that actually is going into 2 directions. So that also needs to be completed over the next weeks and months. And so I do think we may be meeting those conditions by year-end. But yes, we need to confirm that, that all the conditions are met also to have the accounting treatment accordingly. And of course, we do this in close consultation with our auditor KPMG to make sure that we follow all the right roles.

Answer
Pascal Juery (Executives)

But again, it does not mean that the deal will not go through. These are technicalities that indeed that we cannot do that for the time being. But as I said, the deal is going through and we are working in -- we'd say, in good collaboration with the buyer.

Question
Alexander Craeymeersch (Analysts)

And on wages, if you can?

Answer
Pascal Juery (Executives)

Wage. No, I have not forgot the wage. So it's a bit difficult to -- how can I say, it's a bit difficult to answer your question globally because it's pretty much. It depends business by business. If you take...

Question
Alexander Craeymeersch (Analysts)

If you take the Belgium alone then.

Answer
Pascal Juery (Executives)

Sorry?

Question
Alexander Craeymeersch (Analysts)

For Belgium alone then.

Answer
Pascal Juery (Executives)

For Belgium alone. Let me answer in a different way. If you follow me, a typical year of salary inflation for Agfa would be EUR 12 million to EUR 14 million a year more or less, globally, okay? Salary inflation. This year, it's going to be north of EUR 20 million, actually. With Belgium making the most of the difference, actually.

So this is what we are seeing because Belgium is the first country for us in terms of employment. So that's what I can tell you. Now the share of wages is very different business to business in HealthCare IT, all our costs are wages almost. The vast majority, we are talking about people. And then it's business by business. We have different needs. I would say the businesses that are using a lot of SG&A -- people, SG&A are typically DPC more than the film business, for instance. But at least you have a global view on the impact of indexation of Belgium, which is faster and which is extremely difficult to reflect as fast in our selling prices. We're going to get there again, but it's going to take a bit of time.

Question and Answer Operator Message
Operator (Operator)

We'll now go to Mr. Guy Argus Sips calling from KBC Securities.

Question
Guy Sips (Analysts)

I have a few questions. First 1 is on the nonrecurring costs. Can you give us some more clarification on the amounts and the timing of them? The second 1, yes, sir?

Answer
Dirk De Man (Executives)

Yes. I think, Guy, the line is very bad, but I think you're asking about the nonrecurring and restructuring costs for the year. So I think our previous guidance was around EUR 62 million, EUR 65 million I think our new guidance would probably be in the north of EUR 70 million, let's say, EUR 70 million to EUR 75 million and that will be mainly driven by the fact that we probably need to do some more actions regarding the divisions that Pascal was mentioning before.

Question
Guy Sips (Analysts)

Okay. Second question is on -- so to clarify that also in the fourth quarter and the full year 2022, you will not report Offset Solutions as business to sell, it will be reported as it is today.

Answer
Dirk De Man (Executives)

No. My expectation is that we will in Q4.

Answer
Viviane Dictus (Executives)

But to be confirmed. To be confirmed.

Answer
Dirk De Man (Executives)

To be confirmed.

Question
Guy Sips (Analysts)

Okay. And can you also give some more clarification on the impact of Offset. So the Offset deal on the working capital. So the working capital or the total will come down. But as a percentage of sales will go up. Can you give us some more granularity on that?

Answer
Dirk De Man (Executives)

Not on the top of my head, no. So we may need to do some follow-up on that.

Answer
Pascal Juery (Executives)

We can do some follow-up. We can do some follow-up with Viviane on that, of course, but I can tell you that in Q3, actually offset inventory increase due to 2 factors. We were -- we've seen a volume decrease that was higher than was projected. And also, we were preparing for -- with balance shutdown. So Offset was a negative performer in terms of inventory development during Q3. We expect to get it back under control in Q4 and for the numbers Viviane will tell you.

Answer
Dirk De Man (Executives)

If we need to give a rough number, it will be around EUR 200 million.

Question
Guy Sips (Analysts)

Okay. And 2 other question from my side, if I may. What is on the dynamics in hardcopy film in China? Is it because of postponement of health treatments? Or is it that inventory is going down in the pipeline? And because it's more difficult for you to enter the country? Or is the combination of both? Or how is it -- what are the dynamics?

Answer
Pascal Juery (Executives)

No, it's purely people cannot go to hospitals. We are not seeing changes in the demand pattern for film. And by the way, not only in China, but in any of our major markets, we are not seeing any change of pattern of the usage of hardcopy film. But in China, it's purely because people cannot go to get treatment, cannot go to hospital. Pretty mechanical impact.

Question
Guy Sips (Analysts)

And do you expect some catch-up later on? Or is it just...

Answer
Pascal Juery (Executives)

No. What is lost is lost. I don't think people -- no, no. I have to be realistic, what is lost is lost. That you might have some pent-up demand maybe, but I'm not counting on it. Frankly speaking, people will not -- so what is lost as exam is lost and will not come back.

Question
Guy Sips (Analysts)

Okay. And last question is can you comment on the recent M&A activity in HealthCare IT in the U.S. So we saw United Healthcare acquiring Change Healthcare. What are the impacts for Agfa in industrial?

Answer
Pascal Juery (Executives)

What is the impact for Agfa, the United/Change Healthcare merger? None. Absolutely no change. In fact, Change indeed is a business operating in the same space, but United did not, so there is no Change in the competitive landscape, so to speak. The only thing that I can comment is there are -- Change is now publishing their numbers for medical IT business, which is useful for us as a benchmark, of course. But apart from that, there is no Change.

Question
Guy Sips (Analysts)

But you stick to your ambition of high teen EBITDA margins in HealthCare IT in a few years time.

Answer
Pascal Juery (Executives)

Yes. Probably. We are still confident about it. No. No. Frankly speaking, we told you this year, it's a consolidation year. I don't expect a huge EBITDA increase, but we wanted to turn the tide on really the top line growth and we did the management transition. As you know, that was quite important, and we wanted to find back the momentum in the market. And I think this is being delivered. Actually, the level of EBITDA will be quite similar, if not, probably not identical but similar to the 1 of last year. We are going to -- we have turned the tide on the top line. The order intake is well oriented. And the management team is in place. And so no, no.

We have achieved everything that we wanted to achieve. And indeed, I confirm that we will continue our profitable growth strategy. And what gives me confidence is the fact that where we continue to make progress in implementing our Enterprise Imaging Solution. We are solving, I would say, more and more the issues we might have at the beginning of the development of the product. We are getting better at implementing. So no, very, very bullish in a way.

Question and Answer Operator Message
Operator (Operator)

Now will take questions from Maxime Stranart calling from ING Bank.

Question
Maxime Stranart (Analysts)

I hope you can hear me well? A couple of questions on my side as well. To start with on Agfa HealthCare. So looking at the consensus standing at EUR 20 million, you're at EUR 10 million over the first 9 months of the year. You expect a strong quarter in the fourth quarter, but I would like to hear a bit more about how you feel about this consensus and if it's reachable over the like -- well, last 3 months of the year? That would be my first one.

Answer
Pascal Juery (Executives)

We feel good.

Question
Maxime Stranart (Analysts)

Okay. Perfect. Pretty clear on that one. Secondly, you mentioned that the incapability of Agfa to increase prices in China. You share a bit more what would be the impact compared to, let's say, the traditional year pre-COVID, let's say, 2019 for like the sake of comparison. How does this translate in terms of margin and sales, if possible?

Answer
Pascal Juery (Executives)

So I want to make sure I understood your question. You want to understand the impact on -- to quantify the impact on China?

Question
Maxime Stranart (Analysts)

Yes. Exactly.

Answer
Pascal Juery (Executives)

Good. That's a good question, of course. But if you ask me to go back to 2019, I cannot do that from the top of my head. I would have to look at it over the past 3 years. But the impact on China, China is about 40% of our sales in hardcopy film. So actually, just to give you the impact of this year, I mean, if we have -- the film is decreasing. The volume of the film is globally decreasing by 10%, meaning, in fact, it decreases by 20% in China. Well, you can look at the impact by looking at the margins that we have on this product. If I lose 10% of myself, I'm losing 35% of this 10% in terms of profit, and that's a volume impact.

And on top of that, you have a price impact in China that's coming from 2 elements. First, the provinces that have gone through the DVB-T are now operating at a lower price than the average of the market. And that probably represents today about 20% of our volumes. And you have the impact that the fact that the cost to make film has increased tremendously. We cannot increase price in China. And therefore, we've seen margin compression in this area that was a bit eased by the strength of the renminbi. So overall, extremely complex, Maxime. But to make a long story short, I would say that the vast majority of the impact on the EBITDA of Radiology indeed comes from China.

Question
Maxime Stranart (Analysts)

Perfect. Very clear. And finally, looking at Offsets, still a strong quarter. But if we compare with the second quarter of 2022 identic sales, but margin at EBIT level dropping by roughly 80 basis points. Are you -- how do you see that evolving, let's say, for the first -- the fourth quarter of 2022 and 2023 as well, waiting for the closing of the deal. It would be all for me.

Answer
Pascal Juery (Executives)

Okay. '22, I think, will be online with Q3. Maybe, Luc, you want to add -- so you expect a Q4 that is similar to Q3, right?

Answer
Luc Delagaye (Executives)

Q4 will be similar with Q3. You know that we are taking some actions to reduce working capital, but that's the only impact -- additional impact. So quite aligned. And for 2023, we are still in the whole exercise of this. So it's too early.

Answer
Pascal Juery (Executives)

We are finalizing, I would say, or so-called budget discussions. Although '23 is probably not going to be full year. That's for sure. But it's a bit too soon to share that with you at this point. But Q4, similar.

Question and Answer Operator Message
Operator (Operator)

The next question is coming from Kris Kippers from DP.

Question
Kris Kippers (Analysts)

A couple of questions still from my side. Firstly, if you look at the comments you've made, logically regarding indeed, the cost impacts you're suffering from. To what extent the extra measures you are taking? To what extent can they be rolled out rapidly and what would be the implied cost effect of that going forward? I think it will be certainly only visible as from, let's say, Q2 next year or something. And that's my first question. I'll put the other ones afterwards.

Answer
Pascal Juery (Executives)

No, no. Good question, Kris. But obviously, I have not announced anything internally, but just a principle that we were working on it and give an early warning, I would say that we needed to make some adjustments. So it's a bit difficult right now to share any impact with you. But you're right. I mean if we do things, we will -- it will be gradual. It will be starting from very early, actually, from the beginning of the year. But some of the actions will only kick in probably in July. So the ramp-up of all the impact will be -- will take 1 semester, so to speak.

This being said, in terms of impact and improvement that we want to see in our businesses. And I'm not talking about the social impact. I think you're talking order of magnitude of tens of million euros between low tens. I'm not saying it's -- but that's what we are looking at here. That's what we are looking at in terms of actions.

Question
Kris Kippers (Analysts)

Okay. Very clear. And then, of course, just a quick question on Zirfon also on the cost base to be sure because it's a ramp-up business, of course, but just to have an idea, what is the amount of money you're putting in, in the numbers currently? And how much does it weigh on the segment in itself? Or is it just minimal as a total?

Answer
Pascal Juery (Executives)

When you say how much money do we put -- you mean how much do we spend to make it -- to ramp it up?

Question
Kris Kippers (Analysts)

Yes.

Answer
Pascal Juery (Executives)

To be fair, it's -- we are spending more than the sales actually today in terms of technical resources and CapEx. We are spending OpEx and CapEx right now. We are spending CapEx in order to strengthen, I would say, the industrial capability of the existing line. And this is already a few millions. So -- and we are spending OpEx because, of course, we are revisiting and we are still spending R&D development, engineers time in order to further improve and scale up our process.

So when I look at the total, we are spending in Zirfon, it's quite high. Next year, it's going to be different. I think we will continue spending, but it's probably going to be more to build the next unit, in fact. And also the level of business of Zirfon next year will be very different. We are talking -- we are seeing today, at least as a business multiplied by 4 or 5 in '23 compared to '24. So I would expect Zirfon to start making a contribution, I would say that we will still spend a lot of money to develop Zirfon.

Question
Kris Kippers (Analysts)

Okay. Very clear. And then just a housekeeping question from my side, also checking on the segments. You feel quite comfortable on both Radiology and HealthCare for Q4. Does it imply that we could land for both divisions combined, for example, not too far off from the Q4 level we witnessed last year, which was about EUR 20 million for both? Or is that too aggressive?

Answer
Pascal Juery (Executives)

No, no, no. It's -- what you say is not out of reach.

Question and Answer Operator Message
Operator (Operator)

As we have no further questions at this time, I'd like to turn the call back over to Mr. Pascal Juery for any additional or closing remarks. Thank you.

Answer
Pascal Juery (Executives)

Thanks a lot, everyone. Thanks a lot. I appreciate your presence with us today, and talk to you soon. Bye-bye.

Question and Answer Operator Message
Operator (Operator)

Thank you very much, sir. Ladies and gentlemen, that will conclude today's call. Thank you for your attendance. Have a good day.

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