On Wednesday, Agfa-Gevaert announced that its Board of Directors has completed its strategic review of the company and decided that it is in the best interest of the Group, the customers, the shareholders and the employees to split into three independent, listed companies—representing the activities of Agfa Graphics, Agfa HealthCare and Agfa Materials—by the end of 2007. Later the same day, the company announcedits 4th Quarter 2006 results. Excluding currency effects, Group sales increased 3.9 percent, and Marc Olivié, Agfa's President and CEO, stated: "All our business groups are on track with the implementation of their growth strategies, but high raw material costs continued to have a major impact on our results. Graphics was able to improve its profitability thanks to its successful pricing strategy and the shift to more profitable digital prepress solutions.”
WhatTheyThink spoke with Tom Saggiomo, President of Agfa Graphics North America, to get his perspective on the Agfa split-up and any potential impacts on the North American market.
WTT: Tom, thanks for taking the time to speak with us in what must be, I know, a very busy time. Can you remind our readers how the company was structured? How involved was the holding company in day-to-day operations and/or strategic vision or direction? Will this restructuring really make any difference to the business?
TS: Agfa-Gevaert in Mortsel is indeed the parent company or holding company for the three businesses—Graphics, HealthCare and Materials. In terms of oversight, direction and strategy, today Agfa-Gevaert has a Board of Directors that oversees all three businesses. In the future, each business will have its own Board, Executive Committee and leadership team, and each of those boards will be looking out for the best interests of that particular business. The Board decided that it is in the best interests of our shareholders, customers and employees to have these three businesses operate discretely. Today, there is in fact oversight and involvement on the part of the parent company Board. In the future, we will have three distinct businesses.
The fact is there are differences, and these differences require different levels of investment, different strategies, and different focus on different customers. So we think separate is better.
WTT: What synergies or interdependencies were there between Agfa Graphics and the other two units, most specifically, Materials, I would assume?
TS: To the extent that the HealthCare business is an imaging business, there are some synergies, but the fact is that the HealthCare business is morphing into a healthcare IT business. The fact is there are differences, and these differences require different levels of investment, different strategies, and different focus on different customers. So we think separate is better. In terms of the Materials group, that is fundamentally the film business, though it includes other smaller businesses; but film is the primary revenue source. That is where there is still interdependency, and both HealthCare and Graphics will continue to be customers of the Materials group.
WTT: Does the Materials group have other customers than Graphics and HealthCare?
TS: Today they have customers other than Agfa, but the two key customers are Agfa Graphics and HealthCare; they constitute the bulk of the turnover. We don't expect that to change for that business; they will continue to be the key supplier of film products for the other two Agfa companies. The film business, of course, has been affected by the digital world, but there is still a fair amount of film in the marketplace, including graphic arts, aerial photography, printed circuit boards, motion picture film, nondestructive testing, and other areas. Agfa is the leader in the film area, and we believe there is a future for film beyond just the next few years. This arrangement will allow the Materials group to structure its business so it can continue to be a good provider for several industries. New applications in film outside of the graphics and healthcare industries do offer the Materials group the potential for growth.
WTT: What impact overall will this have on North America?
TS: When you and I first started discussing the Agfa business a couple years ago, we talked about the Agfa Transformation Project (ATP). This is just the next logical step in ATP. We believe that we have already made the digital transformation. Unlike some of the other companies struggling to make the leap from analog to digital, fundamentally, we have made that conversion. This change will increase each business' focus on their specific customers' needs. Aside from this, we don't expect any dramatic impact in North America. We have been working toward the process of having an individual graphic arts business and don't see any changes of significance in terms of the ongoing Graphics business. Over the course of the past year with ATP, we have changed our space, separated out people, and already begun to operate as different entities.
The film business, of course, has been affected by the digital world, but there is still a fair amount of film in the marketplace, including graphic arts, aerial photography, printed circuit boards, motion picture film, nondestructive testing, and other areas. Agfa is the leader in the film area, and we believe there is a future for film beyond just the next few years.
WTT: How was Agfa Graphics performing, compared to HealthCare?
TS: Looking at the top line, if you take out currency and so on, the Graphics business in 2006 grew about 2.1%; Healthcare grew about 2.8%. From an EBIT perspective, despite the cost issues with raw materials pricing, and the fact that we have been investing heavily in inkjet, Graphics had, on a recurring basis, an EBIT of 4.2%. HealthCare had about 11.1% EBIT. Those were fairly consistent with the previous year. In Graphics, one of our big challenges continues to be the elevated cost of aluminum and silver raw materials.
WTT: Did this impending decision have anything to do with the restructuring of the dealer channel? Did the fact that Kodak divested itself of HealthCare have any bearing at all?
TS: No. The channel issue was a U.S. issue, and it was a local initiative. That is proceeding as scheduled. So I would say there is no connection between our channel initiative and this event. And likewise, the Kodak initiative with the divestiture of its Healthcare business is their issue. We had already been on this path of ATP for about two years, so we have had this vision in place for some time. The three businesses are different, their customers are different, and we want to make sure each business can invest and function as it sees fit for its individual customer base.
WTT: What projections might you make for the future in terms of Agfa's market position?
TS: There have been a lot of different interpretations about why we have undergone our transformation in the way we did. But the fact of the matter is we have, in fact, transformed our businesses over the past couple of years. We have three businesses that are global leaders in their respective spaces, and we want to make sure each is independent and can do what is most important for customers, employees and shareholders. We are in one out of every two printers in the world, and two out of three newspapers. There are similar statistics in HealthCare and Materials. But they are very different businesses with different dynamics. It is interesting to have all three in leadership positions. Meanwhile, you read a lot about companies transitioning and some of the difficulties they are having. We are done. We took a lot of knocks for doing it early. But we are through that transition, which is a nice place to be.
At the end of the day as we look at this latest announcement, it is a natural progression for us. It certainly is news, but there is not a lot that will change. It is simply the next logical step in the Agfa Transformation Project.
WTT: Explain what you mean by taking “a lot of knocks.”
TS: Early on, we were seen as exiting the consumer film business and leaving the market to others, and we took some criticism for that. In 2006, we exited the analog newspaper plate business in North America. It was a sizable business for us, but we looked at where we wanted to spend our time and focus, and it wasn't in the analog newspaper plate business. We left behind many millions of dollars when we exited. Customers' first reaction was, “What are you doing?” But once you talked to them, they understood that we could do a better job of taking them into the future, including CTP, by exiting that business.
We have had to be very bold in leaving behind analog products. We were the first of the majors to do so. We tend to be ahead of the market, and that is a bold place to be. You take some arrows, but watching the pain some of our competitors are going through today trying to deal with their changing analog businesses, I believe we are in a better place. We still have a lot of analog customers, and we love them and are happy they are here, but our business is appropriately balanced between analog and digital.
WTT: Tom, as always, thanks for sharing your perspective. Is there anything else you would like to add before we close?
TS: At the end of the day as we look at this latest announcement, it is a natural progression for us. It certainly is news, but there is not a lot that will change. It is simply the next logical step in the Agfa Transformation Project. The most important result is that independence will help us to remain focused on serving the graphic communications market and further tuning our business to serve our customers.