Agfa Q2 Results: Graphic Systems Posts Solid Volume Growth And Less Price Erosion
Press release from the issuing company
Mortsel (Belgium), August 18, 2005 – Agfa's second quarter sales and profit improved compared to the first three months of 2005, although some major markets remained challenging. Graphic Systems reported strong volume growth, while HealthCare's trading environment remained weaker than expected, especially in the US. Results were below expectations, primarily due to price erosion and to continuing high raw material costs. The company has initiated further cost reductions, which will yield savings of 40 million Euros by the end of the year.
Second quarter results
As a result of portfolio changes, particularly the divestiture of Consumer Imaging, comparisons with 2004 are more relevant for the business groups, Graphic Systems and HealthCare, than for the Agfa-Gevaert Group as a whole.
In the second quarter of 2005 Agfa reported sales of 849 million Euros, a decrease of 15.6 percent compared to the 2004 second quarter sales of 1,006 million Euros. Excluding the effects of currency fluctuations and of acquisitions and divestitures, sales increased by 0.6 percent. Sales in both business groups continued to be affected by decreasing prices, although Graphic Systems began to see the benefits from specific actions to counter price erosion.
Gross profit decreased from 414 million Euros in the second quarter of 2004 to 316 million Euros. The gross profit margin was 37.2 percent, compared to 41.2 percent, affected by increased raw material costs and higher than expected price erosion, especially in HealthCare.
Sales and general administration costs amounted to 211 million Euros, or 24.9 percent of sales, compared to 256 million Euros or 25.5 percent of sales in the second quarter of 2004. Agfa is increasing its efforts to lower these costs to 22 percent of sales.
R&D expenses were 48 million Euros and accounted for 5.7 percent of sales, compared to 4.9 percent in the second quarter of 2004.
Other operating income and expenses resulted in a net expense of 9 million Euros in the second quarter of 2005. In the same period of 2004 Agfa reported a net expense of 475 million Euros including a 430 million Euro loss on the divestiture of Consumer Imaging.
The operating result of the second quarter of 2005 amounted to 48 million Euros. The Group's return on sales was 5.7 percent, compared to 6.4 percent in the second quarter of 2004.
The non-operating result, which includes the financial charges, amounted to minus 14 million Euros compared to minus 11 million Euros in the second quarter of 2004.
Profit before taxes amounted to 34 million Euros, compared to minus 377 million Euros in the second quarter of 2004. The net result reached 22 million Euros or 17 Eurocents per share, compared to minus 255 million Euros and minus 203 Eurocents per share in the same period of 2004.
The gross operating cash flow of the second quarter amounted to 68 million Euros. The net operating cash flow, which also takes account of the seasonal build up of working capital, was 18 million Euros.
At the end of June 2005, total assets amounted to 4,051 million Euros, compared to 3,356 million Euros at the end of 2004. The increase is primarily due to the consolidation of GWI and Heartlab which Agfa acquired during the first half of 2005.
Inventories stood at 654 million Euros and days of inventories decreased from 124 in June 2004 to 118 in June 2005. Trade receivables stood at 866 million Euros or 92 days and trade payables at 421 million Euros or 76 days.
Net financial debt increased from 193 million Euros at the end of December 2004 to 808 million Euros at the end of the first half of 2005, mainly due the payment of 361 million Euros for the acquisitions of GWI, Heartlab and Med2Rad; the seasonal trend in working capital; the payment of the yearly dividend (76 million Euros); and the phase out of the securitization of receivables (61 million Euros).
Agfa is now fully focused on its two core business groups, Graphic Systems and HealthCare, each with a leading market position and a well-defined growth strategy. Both business groups are leveraging their strong positions in their respective markets to expand into new businesses: industrial inkjet and healthcare IT.
Graphic Systems' sales increased by 8.0 percent and amounted to 446 million Euros, compared to 413 million Euros in the second quarter of 2004. Excluding currency effects and acquisitions and divestitures, the business group's sales increased by 5.0 percent due to substantial volume growth and less price erosion.
Graphic Systems' EBITDA before restructuring and non-recurring items decreased 18.0 percent from 45.1 million Euros in the second quarter of 2004 to 37.0 million Euros in the second quarter of 2005. This represents a return on sales of 8.3 percent compared to 10.9 percent in the second quarter of 2004.
The operating result amounted to 13.2 million Euros compared to 19.8 million Euros in the second quarter of 2004 and the return on sales was 3.0 percent compared to 4.8 percent. Profitability was affected by higher raw material costs and price erosion, which were partially offset by a decrease in sales & general administration costs (SG&A). Graphic Systems continues to drive savings initiatives, which will result in additional decreases in operating expenses in the second half of 2005.
Agfa took important steps in the implementation of its strategy to become a leader in the industrial inkjet printing market, by introducing a series of industrial inkjet printing systems, using its in-house imaging, ink and printing expertise and building on joint development and manufacturing partnerships.
The M-Press, co-developed with Thieme, is the first hybrid UV inkjet press that is both fully automated and high-speed, combining the versatility of digital printing and the productivity of screen printing for applications such as banners, displays or decoration. Agfa also introduced the :Anapurna 100, a wide-format printer for high-quality, high-volume industrial inkjet operations on both flexible and rigid media, such as posters, billboards and signage. The :Grand Sherpa Universal AM, a large-format inkjet printer that prints signs and billboards using Agfa's new mild solvent inks, was also added to the inkjet printing portfolio.
In prepress systems, Agfa's chemistry-free printing plate system :Azura, introduced at the end of 2004, was adopted by an increasing number of commercial printers, particularly in the US and the UK, and the first system was installed in China. Agfa also improved its competitive position, signing a series of important new contracts for violet laser computer-to-plate systems with large newspaper publishers throughout the world.
HealthCare's sales remained almost stable compared to the second quarter of 2004, amounting to 359 million Euros (2004: 356 million Euros). Excluding currency effects and recent acquisitions, sales decreased by 6.7 percent. The main reasons for the decrease are the weaker than expected trading environment in the US and increased price erosion.
HealthCare's EBITDA before restructuring and non-recurring items was 54.7 million Euros, compared to 75.7 million Euros in the second quarter of 2004, a decrease of 27.7 percent. This represents a return on sales of 15.2 percent compared to 21.3 percent in the second quarter of 2004.
The operating result amounted to 34.0 million Euros, compared to 53.7 million Euros in the second quarter of 2004 and the return on sales was 9.5 percent compared to 15.1 percent. HealthCare's profitability was affected by lower than expected sales volumes (particularly in the US), price erosion and high raw material prices and also by the more pronounced seasonality of the recently acquired businesses.
Agfa is focusing on countering price erosion and on lowering operating costs for film and print. The Business Group is restructuring its North American operations, adjusting the size and competencies of the organization.
During the second quarter, the acquisition of Heartlab, a leading designer and supplier of image and information networks for cardiology, was concluded for an amount of 106.6 million Euros. Also in the second quarter, Agfa acquired the remaining shares of Med2Rad, the leading developer and supplier of Radiology Information Systems in Italy.
In enterprise-wide IT, Agfa reinforced its leading position by winning 25 hospitals in the German-speaking region for the ORBIS/IMPAX hospital-wide healthcare IT suite. Agfa is currently developing its new, international ORBIS/IMPAX platform for launch in France, Benelux and Italy during the second half of 2005.
During the quarter Agfa signed several contracts with healthcare organizations for its PACS (Picture Archiving and Communications System) and Clinical Information Systems in the US, Canada, Finland, Italy, Spain, Australia and the Middle East. The United States Air Force's Air Mobility Command granted Agfa the Top Security Clearance for its IMPAX PACS version 4.5.
Agfa will also launch world wide a new PACS platform and a new generation Computed Radiography as well as an expanded cardiovascular imaging and information systems portfolio in Europe in the second half of the year.
Agfa will play a major role in the Chinese mammography project One Million Women, equipping a majority of the 160 screening centers with its digital imaging solutions.
Specialty Products mainly comprises motion picture film, microfilm and film for non-destructive testing. Specialty Products' sales of the second quarter of 2005 amounted to 44 million Euros and its operating result was 1.3 million Euros.
Half Year Results
Due to the divestitures of Consumer Imaging and the Monotype Corporation in November 2004, Agfa's sales decreased 14.7 percent in the first half of 2005 compared to the same period of 2004, amounting to 1,598 million Euros. Excluding divestitures and acquisitions and exchange rate effects, the decrease was 1.0 percent.
Graphic Systems' sales increased 5.9 percent and amounted to 846 million Euros. This positive trend was mainly driven by strong volume growth in digital printing plates and by efforts to reduce price erosion.
HealthCare's sales increased 2.5 percent to 664 million Euros, as a result of the recent acquisitions. Excluding the effects of these portfolio changes and of the strengthening of the Euro, sales decreased by 6.0 percent due to high price pressure and the weaker than expected trading environment, mainly in the US.
The Group's gross profit decreased 23.3 percent from 782 million Euros in the first half of 2004, to 600 million Euros. The gross profit margin was 37.5 percent, compared to 41.7 percent in 2004. It was mainly affected by increased raw material costs and higher than expected price erosion.
Sales and general administration costs (SG&A) amounted to 408 million Euros, or 25.5 percent of sales compared to 498 million Euros or 26.6 percent of sales in the first half of 2004. R&D expenses decreased by 5 percent. They now account for 5.9 percent of sales, compared to 5.3 percent in the first half of 2004.
Other operating income and expenses resulted in a net expense of 7 million Euros in the first half of 2005.
Agfa thus posted an operating result of 90 million Euros or 5.6 percent of sales.
Graphic Systems' operating result decreased from 40.7 million Euros to 29.3 million Euros. The return on sales amounted to 3.5 percent, compared to 5.1 percent in the first half of 2004.
HealthCare's operating result amounted to 60.2 million Euros, compared to 90.1 million Euros in the first half of 2004. Return on sales was 9.1 percent compared to 13.9 percent in the same period of 2004.
The Group's non-operating result, which includes the financial charges, amounted to plus 6 million Euros (minus 26 million Euros in the first half of 2004). This is due to an exceptional non-operating income in the first quarter of 2005 related to the capital reduction of the Group's US subsidiary.
Profit before taxes amounted to 96 million Euros, compared to minus 346 million Euros in the first half of 2004. The net result was 51 million Euros or 40 Eurocents per share, compared to a net loss of 235 million Euros or minus 187 Eurocents per share in the same period of 2004.
2005 is a transition year for both Graphic Systems and HealthCare. The Group is focusing on diminishing price erosion, reducing costs and integrating the acquisitions. The first effects of industrial inkjet printing, the new growth platform for Graphic Systems, will be visible in 2006. HealthCare's recent acquisitions are already yielding their first synergies and will contribute to operating profit as of 2006.
Consistent with the trend of the past years, Agfa expects stronger sales in the next six months and a particularly strong last quarter in HealthCare. 2005 sales are thus expected to grow year over year in both business groups but second half profits will not offset the shortfall of the first half of 2005.
Marc Olivié, Agfa's President and CEO, stated: "The transition from analog to digital is not a smooth process. But we are confident that Graphic Systems and HealthCare have the strategies to successfully address this challenge and to deliver solid growth and profits. We have also decided to pull forward to the beginning of 2006 the program to make the business groups operationally independent. This will give them the necessary independence to focus fully on their customers, to run the business in a more cost effective way and enable us to pursue all options for growth."
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