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On May 12th, Agfa-Gevaert Group announced its consolidated financial results for the first quarter of 2020. These show that the Group’s top-line revenue and underlying earnings developed negatively during the first quarter. The total nominal sales revenue reached €501 million, compared with €524 million during Q1 2019, a decrease of -4.4% year-on-year. On a comparable basis, when excluding the impact of currency movements, sales revenue decreased by -5.0% relative to Q1 2019. Agfa reports its financial results by four operational segments: ‘Offset Solutions‘, ‘Radiology Solutions‘, ‘Healthcare IT‘ and ‘Digital Print & Chemicals’. The sales contraction during the first quarter was driven by a combination of lower sales revenue from Offset Solutions, Healthcare IT as well as the Digital Print & Chemicals segments, partially offset by higher revenues from the Radiology Solutions segment. The adjusted EBITDA margin deteriorated by -40bps from 8.2% during Q1 2019 to 7.8% for Q1 2020, resulting in €39 million EBITDA.
The Radiology Solutions segment
The radiology solutions segment encompasses the imaging activities of Agfa’s former healthcare business which includes its portfolio of direct radiography (DR) and computed radiography (CR) imaging solutions as well as it’s industry-leading proprietary image processing solution, MUSICA. It also encompasses a portfolio of diagnostic printing and film-based X-ray solutions or “hardcopy” solutions. During the first quarter revenue originating from the radiology solutions segment reached €118 million, compared with €117 million during Q1 2019, an increase of approximately +1.3% year-on-year. On a comparable basis, when excluding the impact of currency movements, sales revenue increased by +0.4%. This sales growth was driven by higher sales from DR solutions, partially offset by lower sales of CR, hardcopy and classical radiology solutions.
The sales growth from the direct radiography portfolio was strong, primarily driven by higher demand for mobile DR solutions as many hospitals accelerated their investments in response to the COVID-19 pandemic. The mobility of these devices enables high-quality imaging at the point-of-care within the emergency department and intensive care units. Although demand for DR solutions was higher, the top-line revenue from CR solutions continued to decline during the quarter. The company noted that this decline was “partly market-driven”, as the demand for CR solutions decline as they are progressively replaced by fully digitalised solutions, although portfolio sales were also negatively impacted by COVID-19. The company noted that it observed private practices across India and Latin America postponing their investments into CR equipment in response to the pandemic. That said, the previous period was also notably weaker for CR solutions within the Latin America region. Sales revenue originating from hardcopy solutions marginally declined during the quarter which as “entirely due to the impact of COVID-19 on the activities in China and India” due to non-COVID related exams using hardcopy being postponed. During the previous period, the growth from hardcopy solutions was notably strong from customers based in China, enabled by Agfa’s shift to a more direct sales and distribution model as the company has recruited its own sales team covering mainland China.
In terms of underlying profitability, the segments gross profit margin improved from 36.5% of revenue during Q1 2019, compared with 38.2% during Q1 2020. That said the adjusted EBITDA margin deteriorated from 14.7% of revenue during Q1 2019 to 13.9% of revenue during Q1 2020. This was driven mainly by adverse currency movements.
The Healthcare IT segment
The Healthcare IT segment performed well during the first quarter, with top-line sales revenue remaining stable and a significant improvement in underlying profitability with both gross margin and adjusted EBIT margin improvements. During May, the Group successfully completed the sale of part of its HealthCare’s IT business to the Dedalus Group at an enterprise value of 975 million Euro. This includes its hospital IT, integrated care as well as selected parts of the imaging IT business across the DACH region, France and Brazil. In terms of the retained healthcare IT business, Agfa is refocusing on specific markets with a higher IT maturity or with significant geographical expansion plans. This is alongside reprioritising its focus on specific customer segments. During the Q4 earnings call, Agfa commented on the likely performance of this retained business. The company indicated that it will not be targeting top-line sales growth and it will be more focused on improving profitability. Investors can expect stable to low-single-digit sales growth along with a mid-single-digit EBITDA margin. The profitability of the retained business is significantly lower than the divested business, although Agfa will be focused on improving this to a comparable level in the coming periods.
Nominal versus comparable revenue
The Agfa-Gevaert Group is exposed to exchange rate volatility, particularly involving the U.S. dollar and the Euro. In terms of absolute values, a weaker euro is generally favourable for its business and a stronger euro is in principle unfavourable.