Barco's (BCNAF) CEO Eric Van Zele on Q4 2015 Results - Earnings Call Transcript

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Barco NPV (OTCPK:BCNAF) Q4 2015 Earnings Conference Call February 11, 2016 3:00 AM ET


Carl Vanden Bussche – Vice President, Investor Relations

Eric Van Zele – Chief Executive Officer

Carl Peeters – Chief Financial Officer


Bart Jooris – Degroof Petercam

Guy Sips – KBC Securities

Emmanuel Carlier – ING

Marc Hesselink – ABN AMRO


Ladies and gentlemen, welcome to the conference call on the results of Barco. I’m pleased to introduce you to Mr. Eric Van Zele, CEO; Mr. Carl Peeters, CFO; and Mr. Carl Vanden Bussche, VP-IR.

For the first part of this call, let me remind you that all participants will be in listen-only mode. After, there will be a question-and-answer session. As a reminder, this conference call is being recorded. Gentlemen, please go ahead.

Carl Vanden Bussche

Good morning, and for some of you good night. Ladies and gentlemen, welcome to this earnings call of Barco and the results of full-year 2015. I’m Carl Vanden Bussche, VP-Investor Relations for Barco. As usual with me today are Mr. Eric Van Zele, CEO; Mr. Carl Peeters, our CFO. I hope you have all received the presentation because that’s going to be the framework of the first part of the meeting, which we are going to follow. And so, first, Mr. Van Zele is going to kick off on the details of the results.

So Eric, floor is yours.

Eric Van Zele

Okay, thank you very much, Carl, and welcome to the call everybody. I’m pleased to say that from our perspective, we had a strong finish of the, let’s call, 15 year and as a result of which we are happy to report double-digit growth a very solid cash generation in the company.

On Slide number 4, you can see that we in this presentation by pointing out that the year results are effective by a number of external and let’s say unusual vectors of change. And as we go through the presentation, we will try and make sure that there is enough clarity about the operational results, very competitive typical operational results of the company, and then some of the other changes that are taking place to make this a better company going forward also in terms of reporting format.

So these vectors of change are first of all, of course, early in the year we divested from our defense and avionics activities because that transaction on the January 31st. With a view on our future of focusing the company on three, four verticals, the entertainment vertical at large, the enterprise vertical that was being formed at the time, and the healthcare vertical; three commercial markets in which we have the ambition to be global leaders whereas in defense and avionics, as you know, that was not the case and was unlikely to become the case.

So that was the first noteworthy thing to be mentioned I think. Number two, we decided also early in the year to change our R&D capitalization methodology and to take all R&D expenses through the P&L rather than capitalizing and amortizing them over a period of time. That has a material impact on the way results have been reported and Carl will speak to that in a minute, another important vector of change I would say.

Third, we have decided to take some restructuring charges as we had indicated in our previous conversation in Control Rooms, where we needed to put the company under the activity division, under different footing and restore its competitiveness. And we have also taken impairments on some of the goodwill that was booked in the patient care segment, so that’s a non-recurring unusual event. Then a number of corporate programs were launched to make us a better company at large, including investing in one campus, bringing the two sites into one.

We’re very busily moving into the new campus as we speak; ongoing efforts in operational excellence, the ThinkSales program, which addresses the issue of sales efficiency and customer intimacy. And last but not least the one platform conversion of the company on to an SAP system that allows us to increase productivity and efficiency also in the underlying management reporting and managerial processes. We obviously also welcome our new stakeholders, new shareholders holders early in the year, has been going on throughout the year and new Board, new Chairman that certainly has also had an impact on the company this year.

And we did also and I think we announced it early in the year, we started that exercise last year, created a geographic front organization, where in the past Barco’s organization was more vertically aligned with the operating division, so each division had its own dedicated sales force that continues to be the case. But these sales people are now embedded in geographic frontend organizations for improved relationships or better relationships, customer intimacy as well as corporate governance.

And last but not least, we deployed a new strategy, best by our board, I would say an updated strategy whereby we decided to increase our focus on a number of growth initiatives, using some of the proceeds from the divestment of D&A to deploy those into some not just inorganic, but also organic growth initiatives to make sure that the growth of this company, which has been pretty remarkable over the last five, six years that is sustainable and that we can make sure that the company continues to be on a solid growth trajectory.

Having said all that, the performance to the right on the slide can be summarized with a pretty good numbers, orders up year-on-year 20%, shipments up 13%, EBITDA at 7.2%, up 6.6% – up from 6.6% last year. A very healthy cash flow this year compared to last year and that again will come up a little bit later in the presentation has something to do also with good work done in terms of managing our working capital and then resulting also in a very, very healthy and strong net cash position of the company at the end of the year.

Net of any financial obligations of the company’s cash position stood at €265 million. Probably more noteworthy than anything else was the fact that in all of the three groups, in all of the three verticals, we had a solid second half of the year, even the Control Rooms people turned positive, and so all of the divisions delivered positive EBITDA contributions.

So, we are now at Slide number 6, whereby you can see it in a more detail, €1.44 billion in orders, I would call that robust; order book at €333 million, plus 10% versus last year; shipments at €1.29 billion, up to 13% year-on-year. You can see from the relationship, orders to shipments that we actually have a positive book-to-bill ratio. So it is not because we were pulling on the backlog that we were able to produce the results. We have actually quite solid momentum going into the 16 year.

Gross profit is at 35%, up 1.5 percentage points from last year, that’s noteworthy and has a lot to do with what later will be commented on the working capital, the gap between our gross margins and gross profits has narrowed. We’re doing a better job on bookings in between those two lines, particularly with respect to obsolescence write-offs and related items.

EBITDA at €74.1 million, up €14.4 million year-on-year then you can see the big gap with EBIT at €1.7 million that as you know has a lot to do with the reporting methodology, which Carl will comment on in just a minute. Net income at €17.4 million after restructuring and impairment of €29 million, but including an exceptional gain on the divestment of D&A of approximately €47 million. Remarkable also was that we were able to produce free cash to the tune of €110 million versus only €15 million a year ago in the same period.

A lot to do with working capital, but also with several contracts in which customers make some upfront payments. All in all, very, very solid cash generation, probably the best year we’ve had in the long time given that if you correct the results for defense, avionics, and the sale of Orthogon, this would have been certainly in terms of the top-line best year Barco ever had.

Entertainment to the right, EBITDA at 8.5%, enterprise at 3.7%. Let me just quickly remind you that enterprise has two legs. The leg of the corporate environment or the collaborative ClickShare environment, which is doing very, very well, exceptionally well I would say. And the troubled – somewhat troubled sector of the Control Rooms that second half of the business or actually two-thirds of the business roughly in Control Rooms, that business has turned positive in the second half of the year. This is the total year result, where in the first half of the year Control Rooms was still not delivering positive EBITDA results, but it did turn positive in the second.

I think that we have also added some more specific numbers on second half results in the addendum. I will not speak to those, but if there are questions later on, we’ll be glad to address them. And then, healthcare also very solid, very robust, 9% EBITDA contributions, perhaps worthwhile to take a quick look at the structure of the company now to the left, roughly half of the company is entertainment. The enterprise vertical, the combination of the two, corporate and ING now push us through the €300 million mark and in healthcare we are roughly at €216 million for a total of €1.29 billion.

I’m not going to dwell too much on the income statement because Carl is going to have another crack at this in just a minute. Let me just point out though the arrows to the left, capitalized development, €47.7 million last year, nothing this year, so no capitalizations this year. Impairments on goodwill of €20.8 million, second arrow to the left, which happened in Control Rooms and Patient Care arena. And then, net income of €47 million again, third arrow, which is related to the divestment of defense and avionics.

Okay, moving into the editorial comments, notice the robust growth numbers in the three verticals: plus 16% year-on-year in healthcare, plus 16% also year-on-year in enterprise, and plus 12% in the entertainment division, robust growth numbers. Obviously we have benefited from tailwinds on currency. Sometimes we get lucky, in 2014, we did not get so lucky. This time we did have considerable tailwind went from the Dollar, Euro, and other currency relationships, it’s a complex equation. But it undoubtedly has helped us to produce such numbers.

When we take a look at the geographic spread of the business you will see it a little bit more clearly where that has happened. In terms of the comments on the page order book at €333 million up 10%, shipments at €1,029million up 13% with the double digit growth in entertainment.

China is now in the digital cinema arena very important for the continued aggressive [ph] successes book in digital cinema. The division that delivers healthy contributions and is also part of the considerable investments growth investments that we already made reference to with all of you know about the state formats that rescreen format that we are deploying and certain large screen theatres would be one of the growth initiatives. Also laser conversion from AMPs to laser is one of the important growth initiatives of company.

So despite these investments considerable investments in future business, all of the divisions are delivering very solid profit configurations.

Famous through an enterprise turnaround and control rooms not just in terms of profitability but also coming to grips with the working capital issues that were residing in that division. The second half of the year improvements in working capital are most noteworthy where it knows most noteworthy in the control rooms division. And then what can I say about ClickShare, the product continues to meet with very good success in the marketplace. We continue to drive also introduction of new capabilities bring lower cost solutions to the meeting rooms to the smaller meeting rooms in the corporate environment. All of that is allowing us to produce very solid growth and very solid profitability contributions from that division.

And in healthcare combination of things as you know, we did make an acquisition in the United States, West Coast of the United States, Advan. Advan was immediately accretive helped the healthcare division with contributions that are in line with the rest of division. So immediately contributing to successes of – in health care but also the introduction of the 12 million pixel unity displays and the continued success in digital operating rooms have contributed considerably to the growth in healthcare.

On page number nine, I think I’ve already referenced the gross margin issue and our improvement and then also by the way gross margin, it’s really gross profit. So it’s the gap between margins and profits that has narrowed. Total operating expenses at 30% maybe that justifies a quick comment from our perspective, when we look at our base businesses than OpEx of 30% is still a little bit on the high side. But you should understand that we have decided to invest in the future of these businesses and some of the growth initiatives in fact, all of the growth initiatives, organic ones that we are working on our embedded in that OpEx number. So that explains a little bit why we are meant to be at that level.

EBITDA at €74 million includes – that’s compared to last year numbers of €60 million which included an exceptional gain of €6.7 million related to the sale of Orthogon and already mentioned all divisions [indiscernible].

On Page 10, you – some of that currency effects weighing in on the year-on-year changes by geography. Europe, of course is a euro-for-euro region, and shows 4% growth, represents now 33%. So think it’s the first time in a long time that America’s, North and South is the largest division now in size. But also in growth because of the strengthening dollar translating into more euros to a substantial – have a substantial impact on the change percentages reported.

Asia-Pacific also, but there – it is a combined effect of not just strong currency translations. But also strong growth and marked by continued success particularly in entertainment in China. China is about two-thirds of Asia-Pacific.

Okay. EBITDA improved 2000 versus 2015, an improvement of €14.4 million, but this as I already indicated is a combination of many different factors and to speak to that and to guide you through all these steps, I’m going to switch to Carl.

Carl Peeters

Yes. Thank you, Eric. [indiscernible] 2015 marks the number of its specific events in terms of financial reporting. If you allow me to go to Slide 12, I think [indiscernible] let’s see, spelling it out, let’s say step-by-step and I think we mentioned them on the top part of the page, so the change in accounting treatment due to structuring or cleaning up in our control of the activities of Patient Care including also restructuring cost and goodwill impairments.

And then we have also the sale of Defense & Aerospace. So what does it mean in terms of P&L, what it show us. First of all, of course sales. They remind mind, the 908 to the €1.30 billion, that [indiscernible] improvement that is really in the continuing operating.

So this, let’s say apples-to-apples, it’s excluding the Defense and Aerospace activities. And as Eric already said, a nice improvement year-over-year. Now on the EBITDA performance, we improved €14 million to €74 million improvement or performance in 2015, up 7.2% compared to 6.6% last year and [indiscernible] I mean the €60 million includes that, let’s say gain in [indiscernible] sales. So a really a strong growth in terms of EBITDA improvement.

Now from there on, I think we have number of let’s say point that we need to clarify, first of all, as you know we stopped capitalizing development. So obviously in 2014, we still €47.6 million capitalizing development expense that we booked on our balance sheets. This is what’s not happening anymore in fiscal year 2015.

Of course, we still have to position – of capitalizing development which we need to amortize over, let’s say the planned period. So as a consequence of that fiscal year 2015 still has €49 million of amortization of capitalized R&A in which immediately, of course raising to the EBITDA as you see of price to low.

I can tell you that, the position at the end of the year still has about [indiscernible] of €23 million of capitalized development. So that will be consumed or amortized over the 2016 fiscal year period.

Next to that, we have some increase in depreciations as you see on the next Slide. That bring us to the EBIT before restructuring and goodwill impairments that went from – to €1 million last year to €1.7 million. Of course like for Mike and as you can understand if we correct for the capitalized development this year would have been 44.8% up from 3.4% last year. This is explained in the lines ago.

Now going from EBIT to net income, down there is a number of other elements that we need to report here and explain. So first of all, as Eric indicated we had a close look to the operations of Control Rooms in our Patient Care activities, leading to let’s say on the one hand, impairment on goodwill related to these activities and that adds up to €20.8 million. Next also we have restructuring charge also to decrease operating expenses in the activities mainly relate to Control Rooms, which is another €8.3 million.

On the interest and taxes line you see a swing from a negative figure to positive figure this year, this is a combination on the one hand that we have more interest income, let’s say in 2015 compared to last year on the other hand also taxes were alternative – tax credits due to the negative results.

Then we have the net income from discontinued operations so obviously this is a gain on the sale of D&A division, €47 million a swing of €41 million because last year we had the again a lot become and now we have the $47 million of Defense & Aerospace.

And then the last slide is a high number, its €10 million, and that is mainly related to the minority share in the JV, with China Film Group, as we heard, just a minute ago from Eric. Our activities in China in Digital Cinema are very successful. As you know, we are doing this activity in cooperation with local partner, China Film Group in which it’s actually, we have let’s say is 60% shares. So here you see let’s say the correction for the non-controlling interest in that JV, adding up to €10 million. It’s a high number than last year, indicating also at the same time, the improvement or the strong performance that we are realizing in China.

And that brings us to let’s say the net income last line €23 million to €17 million. I hope with going through let’s say, the first column, the 2015 figures, here we have really explained the absolute numbers for 2015 impacting the P&L. If you look to the last column you have change column, if express that as an let’s say, a wonderful kind of chart.

And you see in the slide, Slide 13, that’s same, it changes from year-to-year. Obviously the most of the elements I’ve been describing so I don’t have to go again in detail through it. So very quickly from left to right, from net income €23 million to €17 million in 2015. And we have EBITDA improvements, we have the change in accounting treatment the €47 million that was mentioned. Amortization depreciation, we have swing, a positive swing. We have low amortization partly offset by high in depreciation. And we have the gain, this is double of course a €40 million coming the defense aerospace division, so the $47 million, it’s an increase of €41 million compared to last year.

And we have then the restructuring and goodwill impairments again here the data compared to 2014 €25 million. Higher interest income and higher tax income on the next two columns. And to conclude, we have our higher let’s say, correction I would say on the minority interest in the JV with China Film Group in China of €6.2 million.

So that is actually your column change of Slide number 12 explains in a waterfall on Slide Number 13. And I hope that’s kind of frequent size the difference one-off or specific events and reporting specifics that were happening in 2015.

I think that explanation of P&L if you allow me, I like to give some comments also on the cash and balance sheet performance of the company. We ended the year with €256 million net cash position, obviously a very strong increase compared to last year. Obviously and as you all have expected of course, we have here the proceeds from the sale of Defense & Aerospace. Next up also, we have very strong and good free cash flow generation in 2015. And obviously that net cash position is net after the payments of dividends and also after the acquisition of Advan all being paid for in the last fiscal year.

As I said, gross operating cash flows, improved of course here if you compare the numbers, you see it also in the next slide maybe you have the free cash flow chart. The numbers have to be corrected with the expenditure on product development. And also here you have year-on-year improvement in gross operating cash flow.

As I indicated the free cash flow performance is definitely helped with a very strong improvement in working capital. 2015 is marked by let’s say an increased and attention from management on the saying improving on the different elements of the working capital. So we are improving on receivables, payables and inventory, let’s call it the classic working capital definition. Making that we have now in the net working capital position of 20% compared to last year 27%. So definitely we are driving the engine with less oil, with less – consuming less energy in this – in our activities.

You can read for yourself the improvements in receivables, inventory turns remarkably I think at 3.6, from 2.9 last year. So I think we are now back into a territory which is let’s say more acceptable inventory efficiency and we will have an eye on keeping the same momentum in this performance.

Even if you would include the pre-payments of the customer, because we have terms and conditions to our customers, in which we ask down payments. And if you add up to this position and we have a networking capital position of minus €23 million. So ironically, we are running the engine even with oil which is paid by customers or payables.

So that is, I think the improvement on networking capital, all in all, realizing them as a result €110 million free cash flow in 2015, compared to €15 million in 2014, obviously an improvement.

As I mentioned before and I think it’s important specifically this year to mention that the capitalized development position on the balance sheet at the end of the year is still €23 million, down of course from €71 million, because we have the amortizing and of capitalizing. And this €23 million, I think for your modeling, people at the phone here, will be positive of amortize at over 2016.

Excuse me, then we end here by mentioning the CapEx of €43 million, which includes of course this year an important piece of the One Campus.

Free cash flow chart on Slide number 15, I think, I mentioned most of the relevant information on it, gross operating free cash flow at direct line is indicating you have to correct with your expenditure on product developments, that’s an improvement. The net working capital and here you see the change in net working capital last column €102 million or a swing of €102 million over one year is a strong performance. I think we have to say.

Then of course speaks for itself, here we have in cash terms, let’s say higher tax payments income taxes as you see €15 million, compared to €3 million last year, influenced by a number of things. We have let’s say some more tax credits and repayments last year, when compared to this year.

And then the last part, down on the chart, obviously we have the expenditure on product development €47 million in 2014 and a zero position in the 2015, adding up to the last line €110 million free cash flow on continued basis, compared to €50 million, last year.

I think that explains the cash performance Eric. I would say back to you.

Eric Van Zele

Thank you very much, so I’ll be going with some comments in the line of business and divisionals. Let me perhaps begin by saying that whereas in the beginning of transformation of Barco period, much of the profit generation and growth in the company was driven by the Digital Cinema, Vertical and also healthcare displays. Largely those two engines we can now safely state that we have successfully added a third growth engine which is this whole sector in the corporate arena, with ClickShare and collaborative solutions for the professional world. That world has pushed through the €100 million mark over a period of 40 years from no position to more than €100 million is quite remarkable. And gives us good hopes that we have at least a third a very solid growth engine working for us.

When you go to Page Number 17, looking at the numbers for entertainment, give you some comments there. Orders, incoming orders grow 24% year-on-year. As I already indicated Latin America but most noteworthily also China have contributed very strongly to this result. Barco is clearly continuing to be the global leader in that Digital segment. But as I indicated in the comments there on the business update, we have gradually moved our focus from just the premium large format screens, very large screens to watch the mid-segment of the market, the smaller screens, where there is obviously many more smaller screens in the emerging markets, China and India in particular, but also other countries.

And so therefore, we continue to be very successful in that Digital Cinema arena. Introduction of laser and laser-phosphor solutions has also worked really well for us. Again we are leading the pack there. We are ahead of competition. And are capturing the lead position also in terms of the new businesses.

Barco Escape is in the early stages. It is a considerable investment, because we must spend money not only on our own resources, but also helping to fund some of the transformation costs in the large theaters and also make sure that some content is being produced in the Escape format. So it is an important growth initiative, we’ll have to see this year, I think, how that tends out and whether that becomes a new important vertical growth engine for this vertical.

We have made, also in the Entertainment division, we’ve seen good progress in terms of the events market. You probably will remember that last year, we were not so bullish on our ability to grow in the events businesses. It was a rather flat given, but this year we see some momentum there. Also in the market for virtual and augmented reality, simulation market with high resolution projectors and a dedicated sales force, we’ve taken very close look at the market and have deployed some specialists back into getting those customers to choose for Barco, we’re seeing good growth.

Also in the – as we have announced, I think in previous conversations, where we had lost our position for competitive, conventional LED solutions, we do see an increased interest in our high-resolution LED solutions for the event market and also for the fixed installs. So it is not just about Digital Cinema, although clearly Digital Cinema is the center crown jewel of the entertainment today.

In the Enterprise world, you can see the overall results, we’re combining the Control Rooms and the corporate fees of ClickShare 12% growth in orders, 15% growth in shipments, EBITDA improvement of 27.6% that is not only driven by the very profitable growth in ClickShare, but by the significant turn around, I would say in Control Rooms.

I don’t if I need to add much to this, again this is a market where we continue to invest in new capabilities around ClickShare or of the systems approach in the educational market and a corporate meeting room of tomorrow, where we are pushing forward with our growth initiatives, but also in Control Rooms with the introduction of more software-centric solutions for the operator and his or her interaction with the big video walls adding value to the company. So again, staying ahead of competition and bringing new solutions to the market is very central to this strategy, particularly in this enterprise world which is changing very rapidly.

Healthcare is little bit more stable, nevertheless very robust growth up 22%, shipments up 50.7% EBITDA up 88.4% really indicated that through the introduction or the acquisition of ADVAN. This world is very heavily influenced by the strategic relationships with some of our very large customers. Now the big names in the digital operating room world, which we can add to our portfolio and with the acquisition of Advan also very strong relationship with a Company called Stryker leading in North America, leading prior in North America.

Next is the digital operating room solution, is meeting with very solid demand now it took a while before that solution found acceptance in that market, which is a conservative, very cautious market, a lot of testing needed to show the reliability and the performance of the system. But now we see very good demand challenges for this division in my view going forward to our still in the emerging markets of China and India, where we needed to push for more market share and where we want to again fund some growth initiatives to solidify our position in these emerging market.

So as a result of all this on page 24, we – our board is or will propose generally at the end of April a dividend payment of €1.75, which in line with our policy. It is also in line with the growth, that we have reported this year compared to the payment of €1.60 for last year.

And then moving on perhaps to towards 2016 of what will be the focus, where is Barco growing, going and growing. We want to use these situation, we are in which is obviously, a cash rich situation to invest in technology and to maintain and I would say strengthen our leadership position in the core. I have mentioned a number of growth related initiatives laser, laser phosphor, imaging processing, which is the often forgotten but very, very critical capability, core competence of Barco, future LCD capabilities, and future LED capabilities.

And of course next to the tradition of visualization, in investments initiatives in the company that continued to push to add connectivity into activity of remotes clouds systems and solutions and applications to the visualization core with ClickShare as a good example. To what that can lead and how big and fast and solid this can be – those are the two vectors of investment in our core technology capabilities.

China and India, if you make it abstraction for the success that Barco has had to with its partnership with China Film Group in China for Digital Cinema. I would say that the company is still under developed in China and India and these other large markets and we continue to see that as an important growth opportunity, were strengthening the leadership there also bring new capabilities in place and pushing hard to the global leaders in all verticals, not just in the entertainment.

Launch new value creation models, we have also and we’ll shortly announce or introducing two new Senior Vice President leader for the corporate segment, have of course established leadership in entertainment and in healthcare. We’re introducing new leadership for the enterprise vertical. And the challenge there I think for us is to capitalize or learning to work with IT integration channels rather than just selling to direct sales to big OEMs and/or selling boxes through distributors.

So new value creation models have a lot to do with that. We also will accelerate our focus on the retail and advertising opportunity as we have indicated to you before we believe that is – that world is digitizing very rapidly, as very large and we’re aiming at capturing share of that by early in 2016.

And then ongoing operational excellence, I think good companies are not only good in sales and marketing and customer intimacy and technology, but also in execution. And this year is a good example of how important that can be, when you look at the free cash flow generation a lot of that has to do with improvements in working capital management. So operational excellence initiatives around number of activities control rooms in particular, but also our sales organization one platform continue to efforts in value engineering to squeeze cost out of products through clever designs and engineering and so on.

Those are the vectors going forward, which allows us to say that we’re looking into 2016 with caution, we’re all experiencing rather than certain macro environment and big fluctuations also in terms of currencies. So it’s hard for us to predict how the environment will affect us, but we hope to produce similar mid-single digit range results growth in 2016. But we also take the liberty to continue to invest in growth. And the profitability that we have produced this year 7% plus mark is also what we’re expecting to produce next year.

We’re hoping or we’re asking our base businesses, traditional businesses to target internal targets closer to the 10% EBITDA range, but we also are investing as I indicated some of the proceeds of defense, avionics and the considerable cash that we have in additional growth initiatives to make sure that this company has a sustainable competitive advantage in those three verticals and then continue to lead globally which is our stated ambition.

So with having said all that, I go back to Carl.

Carl Peeters

Thank you, Eric.

Eric Van Zele

The other Carl.

Carl Vanden Bussche

The other Carl?

Eric Van Zele


Carl Vanden Bussche

Thank you, Eric. I think we can now move to Q&A session. We have about 35 minutes less for that. We’d like to stick to the principle of having maximum two questions per person. So if you have more questions, please queue again in the conference call system.

Question-and-Answer Session


Ladies and gentlemen, we will now begin the Q&A session. [Operator Instructions] The first question comes from Bart Jooris, Degroof Petercam. Your line is now open.

Bart Jooris

Yes, good morning. Thank you for taking my questions. Two types of questions, first on Control Rooms, restructuring has already taking this result it’s coming back profitable. Maybe you think it will be back to acceptable margins and you need to take additional restructuring charges for this in 2016.

And then the second question the more regarding the outlook you say that you’re going to invest more in growth initiatives and that makes the EBITDA come in stable. How many did you already spent on the growth strategies in 2015, and do you expect this figure to increase? Thank you.

Carl Vanden Bussche

The first on Control Rooms?

Bart Jooris


Carl Vanden Bussche

Eric, will you take that question.

Eric Van Zele

Yes, so I have to weigh my words because I cannot necessarily always anticipate the future. But given where I sit today, I would say the restructuring part of Control Rooms is behind us has actually been implemented also not just accrued for in accounting. So baring any unexpected developments we are well positioned there to go forward. When will the full profitability be restored that is a slightly more difficult question because to win in the large videowall world. We have to not only convert away from rear-projection cubes to LCD solutions.

But we also must find ways to offer LCD walls that are better and let’s say value-added towards our competitors that typical commodity volume players. And that’s one of the growth initiatives. We are working diligently towards that capability some of our competitors are doing the same. We think we have some nifty solutions on the horizon. But I do not expect these to fully impact 2016, because I think we have a ways to go to bring those two market and even if we target to bring them to market this year before they didn’t have a material impact on our results probably look at 2017.

So let me be cautious the restructuring, yes behind us. So, but – and profitable contributions from that division, yes, can we expect Control Rooms to reach the 10% or so EBITDA market in 2016, probably not yet.

Bart Jooris

Okay, thank you, Eric. On the second question – on the guidance and the growth plan initiatives.

Carl Vanden Bussche

Eric, I’m actually to spend really on the…

Eric Van Zele

We are a little bit cautious on not giving too much information about our growth initiatives because that is also fairly strategic competitive intelligence. So let me duct a question a little bit by seeing that. We believe that our base businesses are capable of producing 10% EBITDA. We didn’t quite do that this year, but we say including Control Rooms that we were north of the 9% mark. We continue to push for 10%. We don’t know always get it. We live in certain worlds and not always get one Olympic performance.

But the difference then between 9% to 10% base business and 7%, 7.5% target that we giving – are giving guidance on for the total company that is roughly related to the investments in the growth initiatives. Combined and I’m really making reference here to initiatives, investments in more corporate technology, but also in the divisions like Escape like what we just discussed in Control Rooms and a couple of other ones, which I – get into too much detail, because we will talk about those when we are ready to have some bragging rights. Now, there are still investments.

Bart Jooris

Okay. So those should also contribute from 2017 on the unlocking Control Rooms?

Eric Van Zele

For Control Rooms we have that ambition, yes, to bring them back to normal, I’d say traditional levels of contribution. I don’t know, are we showing the results from the second half.

Carl Peeters

Yes. They are in the agendum of the slide deck.

Bart Jooris

Yes. Okay.

Carl Peeters

Where we see also the improvements on enterprise level in the second half.

Eric Van Zele

Yes. I think, we don’t give it specifically for Control Rooms…

Carl Peeters

Did you see the…

Eric Van Zele

Yes, let me say that in the second half of this year, they were already half way to have it.

Bart Jooris

Okay. Thank you very much.

Eric Van Zele

We are ready for the next question.


The next question is from Guy Sips of KBC Securities. Your line is now open.

Guy Sips

Yes, good morning. I will concentrate on digital cinema. I want to try to get a feeling of what percentage of entertainment is coming from DC. And yes, can you give us more flavor on the number of units and what our new sales device replacement sales, as well as, you had a number of laser projectors and the evolution of their average selling prices. And then, also related to the DC whether you are indicating that quite a lot of the prepayments in – is related to the China sales of digital cinemas, yes, can you give us more specific amount, how much of the prepayments are related to that? Thank you.

Eric Van Zele

Okay. Guy, I’m all happy to take that question. So cinema and the overall entertainment division was – about 63% of the revenue, so as a relative position within the division that equal with the year before. And so, in that contribution we had a delivery of between 7,000 to 8,000 projectors in 2015. And so, it’s really indicated already close to half of the revenue in cinema is coming out of China. That’s been particularly true for the projector sales. Do not forget in cinema revenue, that’s also service revenue. So the maintenance revenue which is recurrent one is also becoming more and more important. So in 2015 that was already good for 15% of the cinema revenue contribution. So that’s a good – that’s providing already a good percentage.

And then on the other question on the lasers, so on the Barco branded flagship laser installation. We deliver around 60 pieces in – delivered 60 pieces in 2015. Therefore installation bringing the number of installation north of 70. And on top of that, we also have done IMAX synergy, also – which brings us well beyond 100 pieces of laser engines. And, you’re probably well aware of the cost price and the selling price of those laser units. So also, if you move beyond 100 pieces a year, that’s already a nice contribution there.

Carl Peeters

Right, clearly, clearly leading our – clearly leading that conversion.

Carl Vanden Bussche

So as of 2016, which is now added to the full in the cinema value proposition, is besides laser and also laser phosphor. This will be instrumental to upgrade in the installed base language projectors through solid state illuminated equipment. So that’s something to look forward to in 2016 definitely. That’s a bit of a situational only. And maybe on, a bit one last part of the question, so on the real pure retail fit, so where we replace projectors which we sold in 2008 and 2009 and replaced them, that’s still pretty much in the same order of magnitude as the year before, so four, five business years. We did not see so far the huge – that amount.

Carl Vanden Bussche

Does that answer your question…

Guy Sips

Thanks for the detail, thank you. And on the prepayments for China in the total prepayments.

Carl Peeters

Well, let me state, again that in terms of conditions for down payments is actually valid for all the divisions. So any stuff like an exclusive – at that payment, they are not DC or China I think. However it’s true that we have proportionally more, let’s say, down payments in China. If you make the arithmetic as Carl was saying and Eric also, 60% of entertainment is cinema. So roughly on the group level, it’s 30% obviously. So China is half of that. So if you calculate and it’s proportionally a little bit more than the 50% on group level in terms of down payments. But, I cannot give you or don’t want to give you a precise number, but it’s proportionally a little bit higher than the 50%.

Guy Sips

Okay. Thank you.

Carl Vanden Bussche

Let’s open for the next question.


The next question is from Emmanuel Carlier of ING. Your line is now open.

Emmanuel Carlier

Yes. Hi, good morning. Two questions from my side. First of all, on the working capital, I’m just wondering how sustainable that is because if you look historically and you compare the number with today, yes, it looks pretty low, also lower than what you have guided for I think at the Market Day last year. So is there maybe some factoring incumbent that or any other items that we should know about?

And then secondly on digital cinema, could you get us the digital conversion rate at the end of 2015? And maybe provide some outlook for the next three years. How you expect that market to evolve? Thank you.

Eric Van Zele

Yes. So, Carl will take your first question on working capital.

Carl Peeters

Yes, Emmanuel, good question about sustainability [indiscernible] as a team for our working capital teams and people this year. But I think the question is rightly asked. We are careful and it’s a promising unit, let’s say, improvement on a same level. I think if you remember on the Capital Markets Day, I explained that negative net working capital position are over 20% on [indiscernible] receivables, payables, and inventory is that they – is on the very sharp position. So indeed don’t calculate in your model, it’s a – and the even further increase, already improvements on that expect us to remain within, let’s say, 20% to 24% working capital position calculated on the inventory’s payables and receivables.

Emmanuel, if you look, let’s say, under the hood and go one step, I mean if you look on the receivables to-date 58 days. And I think if – we in earlier conversations, I always mentioned that 650, 550 that’s a good number for a benchmark number for Barco, no improvements. Payables, we’re also – where we should be. Inventories, if you look to the turns 3.6 and some of the divisions are, let’s say, considerably higher, some were a little bit lower. So let’s be careful on that. We can further optimize, but 3.6 is already a very sharper number. So that’s the answer on that first question. Eric?

Eric Van Zele

Yes, on the conversion rate in digital cinema, when you look at Western World and you look at premium large format screens, PLF screens, then you can say that more than 85% probably even closer towards 90% have been converted to digital solutions. But what people continue to underestimate is the fact that the new cinemas are being built and are coming to market, in emerging markets in particular.

That’s why China is so important for us. It’s not just a conversion of existing theaters, but also, India as well by the way, also new construction, and opening up of smaller theaters with the introduction of the projected line for mid-size screens. We continue to ran for or anticipate that the sales will decline, but we continue to experience good demand. And going into 2016, we again, when you look at the book-to-bill ratio, it is largely positive because of strong demand in cinema.

So obviously, we’re doing something right and we’re capturing all the growth factors in that industry, which is the emergent one. First of all, new builds in the emerging markets. Second, opening up of smaller screen applications with a new projected line, then the introduction of laser or the very high-end, IMAX is a good example.

Third, new service models and some other initiatives has yet not identified or not to be commented on. But all of this makes us believe that this is a solid ongoing business. And as we’ve always stated and we’re not necessarily always believe, this is not about to fall off the map.

Emmanuel Carlier

Okay. Thank you.


The next question is from Marc Hesselink of ABN AMRO. Your line is now open.

Marc Hesselink

Yes, thank you. Also on digital cinema, what is your feel on market shares there? If you are looking to your – where the Christie, they are very positive on the market. They also announced Eid, that they are success with Dolby Cinema there as a competitor of Europe [ph] and IMAX. How do you see that market? Is that – especially given that they also saying that it seems like a bit of revival in the cinema market, and therefore, they are quite positive. Are you on the same line or are you winning some extra market share? Are you from losing market share against them? What’s your view there?

Carl Peeters

Yes, also may be first on the facts on IMAX in 2015. So our capture rate was even slightly higher than the year before, so a bit more than 50% of projected stock in cinema where from Barco. Then if you specified down to laser and latest cinema, so we’re also, as we have indicated before, we’re leaving in that game. It’s true that Christie has alliance with Dolby. But actually it’s not always that to be through to let’s say, promotes laser to the market and there is clearly a lot of enthusiasm around the potential of laser and the addition of value and benefits that it can bring to that market, which we also experience with IMAX and also on our own Barco branded flagship project.

Eric Van Zele

I don’t think it’s up to us to comment on our competitors. The factor is that we’re all buying the DLP chips from Texas Instruments, and the capture rates or the number of chips that we buy versus competition is a mathematical given and that’s why we’re quite confident that we’re leading and leading by a significant margin. There is a distant follower, but we’re not really seeing the success, that they have reported as a substantial number.

Marc Hesselink

Great, that’s clearly. And maybe little bit of information on what you said in your introduction like funding the transformation towards the new format. What do you exactly mean with that, is that the focus on the contract that you have with 20th Century Fox for the titles that you are defending partly that or also the transformation in cinemas is that also something that you defend yourself or do you have partners with them?

Eric Van Zele

We’re opened, we are looking at partnerships, we have not made any announcements along those lines, but it is clear that if Escape is as big as we hope it to be, we would certainly entertain possibility of working together with strategic partners that could be cinema exhibitors, that could be studios, could also be large integrators or partners such as China Film Group.

So journey is still out on this, but if the world is really going to go for the premium large format screens to large three screen environment, then obviously content has to be made in that standard. So, yes, the cost of making a movie will be affected by the needs to produce two additional content streams for the two side screens. And also the theaters will have to be equipped with those three screens. So that is a substantial investment, particularly if you do that globally with a number of exhibitors out there and it’s probably a story that we would rather not go alone but go hand-in-hand with strategic partners.

Marc Hesselink

So you implied that you are going to use your balance sheet to fund that?

Eric Van Zele

I would not exclude that money, well, that’s obviously a Board decision, but obviously the money that we have in the company is meant to fund growth initiatives. And so, if Escape meets the criteria of a good solid business prospect, then we might very well invest in that indeed, but along side other growth initiatives.

Marc Hesselink

Okay, clear. Thanks.


There are no further questions. I’ll hand it back to the speakers.

Carl Vanden Bussche

Okay. If there are no further questions, I think we can conclude this session today. For your information, we are working hard to conclude directors’ report, so this being finalized as we speak. And the target is to release and publish it on the investor portal till to-date, so we would find more information of course in the disclosure in the directors’ report and in the coming days actually the full grown annual report will also become available.

If you would have some spare time till this week, there is ISE in Amsterdam where you can actually witness a couple of very nice solution of Barco in the entertainment and enterprise atmosphere. So that’s a real recommendation if there would be some time left, some of you are not too far away. So let me thank you for participating to the call and shoot anymore questions from us. You can of course always contact me. Thank you, Eric, thank you, Carl. And have a nice day.

Eric Van Zele

Thank you.

Carl Peeters

Thank you, bye-bye.

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