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Edited Transcript of AGFB.BR earnings conference call or presentation 28-Aug-19 9:00am GMT

Half Year 2019 Agfa Gevaert NV Earnings Call

Mortsel Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Agfa Gevaert NV earnings conference call or presentation Wednesday, August 28, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Reinaudo

Agfa-Gevaert NV - CEO, President & Executive Director

* Dirk De Man

Agfa-Gevaert NV - CFO

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Conference Call Participants

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* Guy Sips

KBC Securities NV, Research Division - Executive Director Research

* Stefaan Genoe

Banque Degroof Petercam S.A., Research Division - Head of Equity Research

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Presentation

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Operator [1]

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Welcome to half year 2019 earnings call, and thank you for standing by. (Operator Instructions) Today's call is being recorded. If you have any objection, you may disconnect now.

I would now like to turn the call over to Christian Reinaudo, CEO of Agfa. Please go ahead.

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Christian Reinaudo, Agfa-Gevaert NV - CEO, President & Executive Director [2]

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Thank you, operator. Good morning, everyone. So we're going to present the Q2 results 2019, which we have seen good results for the quarter.

I think we have to read these results maybe in 2 ways. Tactically, that means on the short term, on the quarter itself, it has been a good quarter for different reasons. First of all, the top line growth that you have understood has been back for the first time since 2015 is the top line growth both for our IT health care activities but also for the other activities. Second, we see an improvement of our gross margin, and I will come back to that during my presentation. The cost OpEx in general terms are resisting pretty well in spite of the extra costs we have to bear on the -- because of the ForEx. The dollar is more expensive than the euro, et cetera. And finally, our growth engines are all performing well.

But you can look at that also more strategically. The offset market is worsening. We see that in the announcement of results of our competitors. We see that in our results. And the winners will be the ones with the lowest cost base on the longer term. And I think it further validates our alliance with Lucky, a step which was taken a year ago. And we are clearly improving the situation week after week, and I will come back on that point also.

The IT business reorganization that we have done, the refocus on some countries and the refocus on the activities that Luc Thijs has conducted is also starting to pay off. The radiology reorganization in China is paying off now. And the inkjet strategy, I would say, based on the industrial inks and the Jeti product range is also paying off. So without being too much complacent, I would say that we see the first elements of validation of the strategy we started 2 or 3 years ago.

Moving now to the Slide 2. Just a reminder of what we have done in the quarter. So on the Lucky side, we have extended (sic) [expanded] the sales platform -- the common sales platform we have in China. So I think we -- I announced that -- I told you that it was underway when we presented the results of Q1. But now it's in place. And Stefaan Vanhooren and the team over there are progressively migrating the different regions in China onto this platform. So you start to see a limited amount of extra top line in the quarter 2, very limited, it is single digits, small single digit. But progressively in Q3, and even more in Q4, you will see an increase of our sales. Of course, the structure of this platform doesn't bring a lot of profitability on this consolidation of sales, but it will be visible on the top line.

Second, on the process of selling part of our IT activities, the summer was pretty busy. We are preparing all the documentations we need. And it is now clearly decided to start the process, let's say, in the autumn or early autumn, I would say.

Thirdly, last year, we stopped the reselling activity of the offset media or offset plates for flexo that we were selling in particular in the U.S. And we have decided in the second quarter to also stop now the reselling of media for the inkjet business. These businesses were businesses we got from the acquisition of Pitman 10 years ago or 9 years ago. They were not growing. They have not a big amount of profitability. They were defocusing the team over there in the U.S., so we have decided to sell. So there will be a limited impact on the EBITDA this year because we have to cut some of our cost. On the longer term, it will be 0, even more positive, but that will come next year.

And finally, we have done in Q2 the last tranche of our 2-year plan of derisking the pension plans which has, of course, an impact on the debt. But we have, at the end of the day, eliminated something like EUR 180 million of liabilities in the U.S. and the U.K. for a rather limited amount of cash that we had to put in these pension funds. So these are the key elements of the transformation process of the company. And I would say at this stage, on this different element of strategy, we have no red flag.

Next slide, the sales by division. I think it's very stable because the 4 divisions are evolving a bit in parallel. So there are a few percent of differences in terms of growth of the 4 divisions. But frankly, compared to the first quarter, there is not a big difference on this slide.

Moving to the next slide and the figures. So all the lines are trending in the right direction. The top line is increasing by 3%, 1.6% if you exclude the currency exchange rates, which means that we have an increase of sales both in the -- as I said, in the IT HealthCare business and in the rest of the business. The gross profit is increasing, but I would like that you watch more at the half year results because we had some corrections to make between Q1 and Q2. So the actual increase of gross margin has been in the range of 1 point in the first half. But I will come back to that when I link it to the effort we have to do on the working capital.

SG&A, constant basically in value. And in percentage of sales on the first half, slightly better because of the growth of top line in Q2. R&D, constant. And EBITDA is now at 9.6% in the quarter, 7.9% on the first half compared to basically the same value in the first half last year. So I think it's probably going to be a fair picture of what we are going to land this year with an EBITDA very similar to the one of last year. By the way, on the EBITDA ratio, you have some distortions which are going to come progressively in the second part of the year because our top line, as I said, because of the consolidation of sales with Lucky, will increase while there will be no impact on the EBITDA. So the ratio of EBITDA on sales will be somewhat distorted.

The other thing is that the currency impact, which is very positive on the top line because of the impact of the dollar ratio to euro on the raw materials we buy and the costs that we have to -- in the different operations of Agfa, the currency impact on the EBITDA is not similar to the one we have on the sales, so this also distorts a bit the ratio.

Below EBIT, the restructuring and nonrecurring is at EUR 11 million in the quarter, EUR 15 million in the first half. Of course, we have some restructuring, as you understand, with all the transformations we are operating on the company, there are some costs which I consider an investment for the future improvement of the company's situation. And nonoperating result is minus EUR 9 million compared to minus EUR 11 million, EUR 20 million in the first half, nothing really new on that. The taxes are slightly below last year. And the net result is at EUR 15 million compared to EUR 5 million in the same quarter last year. So overall, a good set of numbers.

If we summarize once again what I said, we grew the top line, and the growth came from the growth engines. So inkjet performed well. The DR business performed well, and the IT business performed very well also. And of course, the Chinese reorganization we have operated 2 years ago, finalized last year, is now paying off. The gross margin has improved, and the rest has been commented.

On the debt. Because I know it's a concern for some of you, the debt has increased to EUR 194 million. It was EUR 144 million at the end of last year so have increased by EUR 50 million. I will just repeat what I said in the previous quarter. The debt increase is under control because we are taking decisions which are costing to transform the company. You obviously know the pension program for derisking which is now closed. You know the restructuring that we have to do in terms of offset in particular linked to the alliance with Lucky. We have a certain number of changes in our model due to what we have done in China for the hardcopy film due to the alliance with Lucky and the tariff increase in the United States. So this is also weighing on our cash outflow. And there are some extra spending that we have to do because we are preparing a transformation. We are selling part of our business. We are transforming the company. So this has a cost which I think will pay out later.

What we have decided to do, and this is something that I will report to you quarter-after-quarter, we have decided to launch a program to reduce by EUR 100 million our working capital in the next 18 months, before the end of 2020. So that's a program which has started, and it is going to be underway until the end of next year. So you see on this working capital slide here, the inventory level is at 125 days, which is far too high compared to where we were a few quarters ago. This is obviously explained by, as I said, a certain number of systemic transformation items, but we need to improve. The receivables are slightly trending down, but we need also to improve the situation here. And the payables, of course, the payables, when you start to reduce your inventories, you have less purchase, and that way therefore, you have a negative impact on the payables.

And there is another effect of this program of reducing the inventory, but I think it's mandatory for the cash flow, which is that in the second half, we will have probably a rate of production in the factories which will be lower because we're going to empty some part of the inventory. Part of it is done every year. This is a seasonal effect. Part of it will be a bit stronger this year. Therefore, you will have an impact on the gross margin which will be negative compared to what we have seen so far.

So I just want to give you a fair picture that the second quarter is a good quarter. It reflects very well where we stand. But we need to take a few decisions in terms of the working cap management which may have a slightly negative effect on the gross margin in the first half -- in the second half.

Moving forward, the Corporate Service. You know that we have decided this year to report the Corporate Service in a different manner. You see that costs are basically constant compared to last year in Q2, slightly above it in the first quarter, you remember that, but nothing really special to comment.

Moving to the business groups or the business divisions. Starting with offset, so offset is obviously, when you look at the quarter 2, the needle in the shoes, I would say. This is the place where we are not growing the top line even if in the second quarter we improved significantly compared to where we were in the first quarter at minus 4%, which by the way, compared with the announcements of our competitor, is not a bad performance. But it's a negative 4% excluding exchange -- currency exchange rates.

The gross profit is declining. Two effects basically: the shift, as we said several times already, to the -- the shift of the market to places where the prices are lower, number one; and number two, the cost of aluminum which is, of course, higher this year than it was last year. Hopefully, the situation should improve going forward, in particular for next year. And the costs are under control. And the EBITDA is at 4% in the second quarter. Here also I think we don't have to blush in front of the results announced by the competition in this market. I think I commented most of the drivers of these figures on this slide.

And I move to the Digital Print & Chemicals which, as you know, is finally the sum of our former specialty business and the inkjet business. The levers are good in the quarter 2. The sales are up 9%, 7% excluding currency exchange rates. The gross profit is improving by basically 2.5 points in the first half. The costs are under control. And the adjusted EBITDA is at 10% -- a bit above 10%, 10% in the first half compared to 7% or 8% last year. In this business, you have one business which has performed pretty well in Q2, which is the inkjet business, which will, of course, suffer a bit in the second half of the year of the rationalization we need to do, but that's a transitional situation.

The film and foil business, basically the Synaps Synthetic Paper, the Security business have performed well. And the Orgacon, which is the transparent conductive ink that we use in electronics, is also performing well.

Moving now to Radiology Solutions, which is exactly the perimeter what we were calling imaging before the transformation of the company. You see that the top line is also evolving in the right direction here, plus EUR 5 million in the quarter or 3.8%. The profit is improving even more, and this is clearly the impact of what we have done in China, which is kicking off progressively a bit bigger. The costs, SG&A and R&D are slightly up in particular because in the transformation that we have done in China, we needed to recruit our own sales team to replace the distribution layers that we have eliminated. So there is a sort of trade-off between extra cost of sales compared to improving of the margin, but you see that the delta is very positive. So the EBITDA of this division is at EUR 22.2 million excluding IFRS 16, of course, EUR 22.2 million compared to EUR 20 million a quarter -- a year ago. In the first half, we have improved by 1.5 point. So good results.

A bit of contrast on the businesses. So as I said, the film business is performing well in particular in China, but there are some weaknesses here and there in particular in Latin America. The DR business, which is the direct radiography, is performing well in terms of top line. We still struggle a bit in terms of profitability, but we have a plan to improve the service efficiency in particular in this business furthermore. And the CR business, as you know, is declining, progressively being replaced by the direct radiography.

HealthCare IT, good news on both fronts. The 2 divisions, which are the hospital systems and the Imaging IT, are performing well. Good news also in the split that we are preparing to sell the part of our business which, as you know, is basically the HealthCare IT division and the Integrated Care, but also some part of the Imaging IT division related to our base in particular in the DACH countries and France and Brazil. And both are progressing well.

Looking at the numbers. In the quarter, the sales were up 7%, 5.6% excluding currency exchange rates, which is clearly better than the first quarter. The profit is also increasing in particular because we improved a lot of efficiency in the service side. We got the lessons of the downturn we had in the U.S. 2 years ago. And Luc and his team are doing a fantastic job in terms of streamlining the teams, improving the efficiency, streamlining what we do in terms of contractual terms with our customers, reflecting on the situation we have now in IT, in particular in Imaging IT where we deliver a solution which is Enterprise Imaging, which is very similar to what we do in the EMR, that means for hospitals.

Therefore, we have to establish a different level of relationship with the CIOs and the organization of hospitals. And this is now clearly understood, and the steps are taken to improve the situation, which was not the case when we, a bit naïvely, came to the U.S. in 2016 without having that much preparation on this domain. The costs are well under control. And of course, basically all the extra sales is now flowing into the EBITDA. So you see a EUR 17.5 million EBITDA, 13.8%, which is compared to the first quarter clearly better, bringing the first half of the year at 11.8%. And this will continue to further improve in the quarters to come.

So I think I summarized most of this slide, and we can open the floor for questions.

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Questions and Answers

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Guy Sips, KBC Securities NV, Research Division - Executive Director Research [1]

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Yes, Guy Sips, KBC Securities. Two questions. First one is on the ex-Pitman activities that you will stop, can you give us a little bit of indication of the magnitude? And second one is on the China JV. So you said that it will have an impact on the top line, not on the margins. I understand that. But can you also give us an indication where that will end?

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Christian Reinaudo, Agfa-Gevaert NV - CEO, President & Executive Director [2]

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Yes. So the first question is pretty simple. The impact on the full year basis of what we have done in this year, that means stopping the sale of media for inkjet, will be in the range of EUR 60 million, which is a bit -- but half of that in this year because the sale has been actually executed at the end of June.

On the second question, which is the relationship with Lucky, you will understand that I have to stay cautious, but the top line is clear. It's a mechanism of consolidation. We have established a joint venture together, that Agfa controls for 51%, and therefore, we consolidate the entirety of the sales. But of course, in terms of distribution of profits on that, everybody gets the part of what it brings to the company. So there will not be an improvement of profit on this one.

As we said when we announced this deal last year, the intention with Lucky is to go far beyond a pure Chinese go-to-market association. There is an element of manufacturing. There is an element of technology. There is an element of go-to-market. So without being too detailed on that, we continue to discuss with Lucky. And by the way, I will meet them again next month.

We continue to discuss with Lucky on the way we can further streamline the overall structure of what we are doing in terms of cost and in terms of go-to-market, in particular how to address the markets which are emerging as different markets today. There are -- there is a market which is clearly what we call a value market where the customers, for various reasons, are appreciating the fact that Agfa offers some software services, support long term, et cetera. And there are some part of the market which is really a market where our customers are valuing the plate for an aluminum with a photosensitive layer on top of it, and that's it.

So in these 2 different markets, of course, the prices are somewhat different, and we need to address these markets in a different way. And we believe that the alliance with Lucky and the know-how of a Chinese player in this field could bring fruit on the longer term. So this will not be a short story, it will be a journey. But on the longer -- medium to longer term, we expect to improve also the profitability of this consolidation of sales.

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Unidentified Analyst, [3]

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I am interested in 1 -- 2 questions actually. So the first one, regarding pension liabilities, can you confirm the guidance that you gave us, well, during the first quarter? And the second one, well, it was about Klaus Röhrig and, well, his appointment as Chairman. The first positive result is coming just after his appointment. Is this like something related, in your view, on the business, or something like that?

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Christian Reinaudo, Agfa-Gevaert NV - CEO, President & Executive Director [4]

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I will take the second question, and I will leave the first one to Dirk maybe. I mean Klaus, as you know, is representing active ownership. They have a significant share of our shares. So Klaus joined the Board in November, officially in May. He is acting as Chairman, which we thought was normal and natural. He is part of the Board, like the 6 other members of the Board.

The fact that the results in Q2 are good, I mean it's something which is coming from a huge amount of work we have done for some time. And I would almost say the opposite, the fact that active ownership has jumped into the equity of Agfa is probably because they anticipate that we were doing a good job, which is what Klaus seems to say publicly. Now in terms of relationship and the way we were, Klaus is one of the members of the Board, and we work pretty well together. But you should ask him.

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Dirk De Man, Agfa-Gevaert NV - CFO [5]

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Maybe a quick comment on the pension plan. So basically, we've completed the program that we discussed already a couple of times in the past. So basically, overall, we invested about EUR 60 million into this derisking program, which in total resulted in about EUR 180 million of liabilities that will disappear from our balance sheet. So in the end, it doesn't do much to the net liability, but it derisks the program by eliminating both the assets and the liability. So the final part, we did at the end of June, so that's why it's reflected in our cash flow. It was about EUR 27 million, and that was the U.S. program. Earlier this year, in Q1, we had also a payment that we did. So in total this year, we had about EUR 36 million. Last year was EUR 24 million. So in total, that was the -- the EUR 60 million has concluded now at the end of June.

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Stefaan Genoe, Banque Degroof Petercam S.A., Research Division - Head of Equity Research [6]

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Stefaan Genoe, Degroof Petercam. Perhaps as a small follow-up first, does that -- given the reduction of EUR 180 million I think you said, I assume that the cash payments in the future are not materially impacted.

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Dirk De Man, Agfa-Gevaert NV - CFO [7]

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No, they are not. So I think in terms of guidance, we stick to the guidance of around EUR 15 million below -- of cash-out below EBITDA. So structurally, that remains about the same.

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Stefaan Genoe, Banque Degroof Petercam S.A., Research Division - Head of Equity Research [8]

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Okay. And then 2 questions. On -- first, on the working capital reduction target of EUR 100 million towards end of next year, I suppose this is in the current consolidation scope with HealthCare IT included. And could you a bit elaborate on what are the most important, I would say, items that you can handle to reduce working capital? Where do you see inefficiencies today? And does it take into account, for example, a larger exposure to China where typically you've got much longer payment periods? Those kinds of things, first question.

And then perhaps a second question on HealthCare IT. You indicate a stable EBITDA at group level for Agfa. I think last year, for example, Offset Solutions had a very weak second half of the year already, where we might see improvement in the second half of this year. Does this imply that the EBIT margin we see for HealthCare IT in Q2 of this year is probably we should see lower -- somewhat lower profitability in the second half of the year for HealthCare IT?

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Christian Reinaudo, Agfa-Gevaert NV - CEO, President & Executive Director [9]

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Yes, on the second question, the answer is no. But there will be a certain number of things, as I said, in terms of the gross margin on the industrial part of Agfa which are going to weigh on the profitability but not on the IT side. The first question was?

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Stefaan Genoe, Banque Degroof Petercam S.A., Research Division - Head of Equity Research [10]

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On the working capital.

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Christian Reinaudo, Agfa-Gevaert NV - CEO, President & Executive Director [11]

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Working cap, yes. So the working cap, as I said, we have decided to refocus more than we have done in the past quarters. You have -- I think you can imagine that we did a pretty big amount of work in the last quarters which have somewhat defocused a bit the top management from some operational issues. You may remember that at the end of 2016 and '17, we were at the level of 25% of our sales in working cap, and we are now back to a level of 29%. So the idea is to find a way to come back to the 25%. And the 25% of sales, that's basically the EUR 100 million I was talking about. Where is it going to be? It's a bit premature to tell you the details of that because we are working. We have launched the plan actually not even in Q2, it was at the beginning of Q3, in July. The rough idea is that half of that should come from the inventories, and the rest would come from the receivables and payables.

In terms of inventories, there will be different effects. As you've said rightly, the supply chain has changed. So we need to reanalyze what it means in terms of the flows between the different parts, in particular for offset. There will be a natural reduction, I believe, on inventories because we are trending to lower costs, therefore, there will be a lower cost in our cost of goods sold. But it's overall an improvement of efficiency everywhere, in particular, an effort on the forecasting of this company which is not one of our strengths. So there are different things in terms of process and in terms of disciplines that we need to reinforce. And the same applies to our receivables. We need to fight against the overdues from our customers, for example.

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Dirk De Man, Agfa-Gevaert NV - CFO [12]

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Maybe just to add to that, there is also obviously some safety margin that was built in our inventories while we were closing our U.S. plant which also needs to be pushed out of the system. So it was just to make sure that the supply was guaranteed for our customers. And while you close a plant, you tend to build up a bit of a slack in your inventories to insure. So I think we will be able to eliminate those in the second half of the year, so that should also have a positive impact.

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Stefaan Genoe, Banque Degroof Petercam S.A., Research Division - Head of Equity Research [13]

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Okay. And perhaps one additional question, I think in an important Belgian newspaper, there was an interview a couple of months ago where you stated that there are several candidates for the HealthCare IT unit. I suppose that's still the case.

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Christian Reinaudo, Agfa-Gevaert NV - CEO, President & Executive Director [14]

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To my knowledge, it's still the same.

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Unidentified Analyst, [15]

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I have 2 questions on the sale process. How many potential buyers will you meet in autumn? And second, what will you do with the proceeds of that sale?

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Christian Reinaudo, Agfa-Gevaert NV - CEO, President & Executive Director [16]

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These are 2 good questions. So for the first one, I will refer you to JPMorgan because they are conducting the process. And for the second one, I would be patient. As I said, we've been working in the last 3 years now on the plan. Since we got the good results of '16, I mean we started to prepare a deeper transformation of the company. A certain number of decisions we have taken show that we were not that bad. We still need to continue. There is a plan actually starting to clarify the strategy of the different businesses but also to clarify the strategy of the group because there are some basic questions in our processes, in our structure, in our organization that we need to further address. And that will be a reflection that we will conduct between the fourth quarter, Q3 and Q4.

That means we will be ready to indicate to the Board what would be the proposal of the executive management in terms of use of proceeds. As I said several times, there are other stakeholders which have their word to say. And the Board is representing pretty clearly the shareholders, so that's a part of it. And of course, the pensioners and the pension funds and this kind of stakeholders will have probably their word to say particularly in the U.S. and the U.K. So we are going to analyze all these kind of things with one target in mind which is to make sure this company is safe on the long term and returning better profits to the shareholders than we have done in the past years. And I will give you the answer probably in Q1 or Q2 next year.

So there is no more question in the room, we can check if there are questions on the call. Operator?

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Operator [17]

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(Operator Instructions) Excuse me, speakers, there is no question in queue as of this moment. (Operator Instructions) Speakers, there is no question in queue over the phone.

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Christian Reinaudo, Agfa-Gevaert NV - CEO, President & Executive Director [18]

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Okay. So I'm not surprised there is no question because most of the question -- big questions are coming from the analysts in the room here. Thank you, everyone.

So just to close this call, I would repeat that we had a good quarter 2 which is, to some large extent, supporting the strategy we have launched a few -- 2 years ago, I would say, which is starting to pay off. I am still cautious on the second half of the year for the reasons I indicated and also because of the overall economic environment in which we are acting, which is, to say the least, very uncertain and difficult to predict and to forecast. But we have -- I mean we have good hope that we will continue to deliver on the same path. Thank you.

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Operator [19]

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And that concludes today's conference. Thank you all for your participation. You may now disconnect.