Barco NV

XBRU:BAR

Earnings Call Analysis

Barco's Solid Profitability Despite Flat Sales

In 2023, Barco's sales remained steady at EUR 1,050 million, echoing last year's performance. The company saw a robust increase in the Entertainment division with a 15% growth, but Healthcare lagged due to high customer inventories. EBITDA margins improved to 13.6%, up 1.6 percentage points from the previous year, and reached 14.6% in the second half of 2023. The year concluded with an 80 million EUR net income and a free cash flow of 38 million EUR, post a restructuring cost of 11 million EUR. Despite a decline in Healthcare orders and sales by 16%, gross profit margins surged across business units, particularly in Entertainment. Geographically, EMEA and Americas equally contributed 40% each to the global sales, with APAC at 20%. Net cash slightly decreased to 241 million EUR, down 23 million EUR from the previous year.

Steady Top Line with Profitability Gains

In the fiscal year 2023, Barco maintained its top line sales at EUR 1,050 million, mirroring the previous year's performance. This static topline is a result of mixed divisional outcomes, with Entertainment achieving double-digit growth, while Healthcare lagged due to high inventories at customer locations. Nevertheless, Barco's book-to-bill ratio remained positive, easing into the new year with a robust EUR 500 million order book. Notably, environmentally conscious products comprise an increasing share of revenue, having grown to represent 65% of total sales.

Margins and Net Income on the Rise

The company's commitment to efficiency and product mix optimization paid off, as reflected by a 1.6 percentage point increase in the EBITDA margin to 13.6% of sales. The trend was even more pronounced in the latter half of the year, where the EBITDA margin swelled to 14.6%. On the bottom line, net income reached EUR 80 million, and free cash flow was reported at EUR 38 million, accounting for EUR 11 million in restructuring costs.

Operational Excellence Underpins Financial Health

In pursuit of its strategic goals, Barco diligently invested in core initiatives, resulting in a step-up of CapEx reflective of the company's commitment to long-term growth. Furthermore, the diligent focus on operating expenses and inventory management led to an improved gross profit margin of 42.6% in the second half, ultimately contributing to the higher EBITDA margin. Net cash position was reported at a strong EUR 241 million.

Balanced Global Sales and Divisional Dynamics

Sales in EMEA and the Americas balanced each other, each making up 40% of Barco's global sales, and APAC representing 20%. While Entertainment thrived with 15% growth across regions, Healthcare's performance varied, with declines in the Americas. The Enterprise division managed a 4% decline amidst market challenges, showing resilience particularly outside of the China market.

Investments Align with Strategic Vision

Barco's investment in new factories and initiatives such as cinema-as-a-service demonstrates forward-thinking and alignment with strategic vision, even as CapEx doubled to EUR 45 million. Acknowledging the impact such investments have on free cash flow, the company's strong net operating cash flow of EUR 100 million highlights robust core EBITDA performance.

Sustainability and Customer Satisfaction Achievements

The company has made significant strides towards sustainability, cutting carbon emissions by over half since 2015. Revenue from ecolabeled products surged an additional 15% year-over-year. In parallel, Barco's focus on customer experience bore fruit, with the customer net promoter score climbing 4% to 48, underpinning the company's commitment to customer satisfaction and product quality.

Healthcare Division Faces Hurdles

The Healthcare division faced challenges, with a 16% decline in orders and sales from the previous year. Despite this setback, the division managed to enhance gross profit margins by 2 percentage points. This improvement indicates Barco's ability to raise profitability through product mix adjustments and other operational efficiencies even in the face of declining sales.

Earnings Call Transcript 2023-Q4

[Willem Fransoo, executive]

Good morning, ladies and gentlemen. Welcome to this conference call on Barco's Full-Year Results for 2023. My name is Willem Fransoo. I'm heading Investor Relations. And today with me in the room are Charles Beauduin and An Steegen, our Co-CEOs; and Ann Desender, the CFO.We are publishing our annual results today under the headline "solid profitability improvement with stable topline." An Steegen and Ann Desender will take us through the presentation this morning. And this presentation is also available on the portal on our website. After the presentation, there will be room for Q&A.And I would like -- now like to give the word to An Steegen to kick it off with the presentation.

[An Steegen, executive]

Thank you, Willem. Good morning, everybody. So I'll start with a summary of the group results for the full-year 2023. So top line sales, we came in at EUR 1,050 million, which is in line with last year. We saw double-digit growth in Entertainment, but our Healthcare division was lagging, mainly because of the unusual high inventories at our customers. Book-to-bill remains positive, so we basically entered this year with a very solid order book of about EUR 500 million and 65% of our total revenue came from ecolabeled products, which is up from 50% last year.In EBITDA margin, we landed at 13.6% of sales, which is 1.6 percentage points up compared to last year. And in the second half of '23, our EBITDA margin was 14.6%. So we had a record high gross profit margin that mainly came from a very favorable product mix, but also, of course, an ease in our supply chain and focused actions when it came to the OpEx control. But of course, we continue to invest in our core initiatives throughout the year.Then our net income landed at EUR 80 million, free cash flow at EUR 38 million and that is net after EUR 11 million restructuring costs. And as I said before, we continue to invest in our core initiatives. So we stepped up in CapEx executing on our strategy. We are -- we definitely work on inventory reduction and that these are efforts and work that is still going on in '24. Net cash, we landed at EUR 241 million.Now I hand it over to Ann for the financial details.

[Ann Desender, executive]

Thank you, and good morning from my end. Starting with the comparison on the key figures compared to 2022. So in a comparison, you see and I'm happy to see a lot of green in there overall. So orders and sales landing at the same level as the year before. Gross profit is the main up 2.8 percentage points higher, EBITDA 1.6 percentage points higher, free cash flow higher, net income of EUR 5 million higher and with that earnings per share 6% higher. And going in more detail and more -- in the following slides on the different figures.Starting to give a little bit of more insight on the different semesters, first, second and then full years and maybe zooming in on this second semester over here. So landed with about EUR 10 million more sales than the first half. Gross profit, and this is really where throughout year, you hear the same on steady improvement across the year throughout the year and has been confirmed. So with a step-up to 42.6% gross margin for the second half. And this is throughout the different business units, actually, but with the main uptake into Entertainment. OpEx control being confirmed here with the second semester OpEx, not higher or quality in line or even lower than the first semester. And with that then landing at an EBITDA margin of 14.6%.Maybe one -- I'll go back -- one, two and you will see later on and the overviews of different decisions on the EBITDA uptake of the second semester, that the most important uptake was noted in enterprise compared to the first semester.Looking into the dynamics of the different regions. Yes, looking at the pie, I would say, you can see that EMEA and Americas are now equal size into our global sales and accounting for 40% each of our group top line and then APAC for 20%. The regional dynamics, it's between minus 4% and plus 4%, the growth year-over-year with quite some different dynamics, of course, in the different divisions. So entertainment landing at double-digit growth 15%. This is a growth in all of the 3 regions. Healthcare is growing in both business units in EMEA, but has seen a lower top line in the Americas.Enterprise landing at minus 4%, holding quite well, actually, despite the challenging market situation, which we have seen rising in particular, as of the second quarter. The difference is there or, I would say, of 20 years before or equal in EMEA and into the Americas. And then looking to APAC, yes, you heard a lot about China last year. If we exclude China and from APAC, then this region has really performed very, very strong and as such, that for all our 3 divisions and as such, landing APAC at minus 4% compared to the years before.Usual graph on EBITDA, but there is more the visual, if you could say, that's the big winner. And the whole year and hard work behind is this gross profit margin uptake. So with that landing at EUR 142 million of EBITDA, the net of gross profit up and then contained OpEx increases, offsetting partly and in the second half, fully actually the inflation with cost efficiencies and then having higher spend, which you will see in the details more has been limited to or extra investments to entertainment.A little bit more detail on net income starting from EBITDA, the depreciation EUR 4 million higher than the year before. This is linked to the cinema as a service projectors which we miss out. Restructuring costs, EUR 10.8 million includes a EUR 9.5 million layoff costs, which embraces actually diverse organizational efficiencies, and we booked a EUR 1.3 million impairment on inventories related to [ stock ] activities. Our effective tax rate has been reconfirmed at 18%, and we also voted there for the next year, you can say, despite the upcoming Pillar 2. So with that, net income landing at SEK 80 million or 6.7%.So more details on the free cash flow. Free cash flow landing at EUR 38 million. Looking at our net operating cash flow landing at about EUR 100 million, which is about SEK 70 million higher compared to the year before, primarily coming from the improved EBITDA results. Working capital is still too high at 16.6% and the main work at hand there is inventories. We have higher trade receivables, which is really linked to the year-end peak sales. So that is cash that is coming out now after the year end. We had lower trade payables, which now temporarily has an impact on our free cash flow. This is linked to lower component purchases. Inventories started to go down primarily into components and raw materials, not yet and to finished goods. So that's then the clear focus for the next months to come.CapEx almost doubled actually to EUR 45 million, which is as explained before and is fully in line with our strategy, includes the investments into our new factories includes cinema-as-a-service. So with that net cash landing at EUR 241 million, which is EUR 23 million lower than the year before. Free cash flow of course comes on top. But this is also not after a dividend of last year's EUR 14 million and the start of our share buyback, which so far has had an impact on the net cash of EUR 8 million.Next to our financials. We further progressed on our non-financial metrics. We made further very nice steps on our planet related KPIs as well on the other. Here, we pick out 3. So the further reduction of our carbon emissions, own operations compared to our baseline 2015, we now reduced our footprint with more than half. We stepped up the revenues of our ecolabeled products with another 15% compared to 22%, which is really all of our new product introductions being ecolabeled actually and so gradually, we further improve on that. The customer net promoter score landing at 48, which is again 4% higher compared to the year before and worked on all of the different recommendations actually which we get through this post surveys and with that steady improving on that as well.We have published not only our figures via the press release this morning, but also our annual report is coming out, so check it out, very nice updates coming. And so with that, a little bit more colors on the divisions, and I'll give it back to you, An.

[An Steegen, executive]

Yes. Okay, a little bit more detail on our divisions, starting with Healthcare. So in health care, we saw a decline in orders and sales, sales about 16% since last -- since '22. We did see the gross profit going up with 2 percentage points, mainly again because of a favorable mix, but also ease of the supply chain costs. That, of course, then an EBITDA down 1.5 percentage points because of the top line, the reduced top line, of course.Now for Diagnostic Imaging, as you know, we are a leader in diagnostic imaging. These have always been very healthy markets for Barco and also the markets remained healthy in '23. But we saw an unusual high inventories at our customers in the diagnostics markets. Why was that? Because in the second half of '22, when the supply shortages really eased out and were solved, we got an over demand actually in orders because everybody was anticipating a second shortage wave. That didn't happen. So our customers are ending up with higher inventories, which they're building off now.Now for Diagnostic Imaging, we saw solid growth in the EMEA region, driven by radiology and pathology. We also saw growth in APAC, except in China, where we are, of course, dealing with the local governments and the budgets -- the low budgets of the local governments, but also the anti-bribery measures that are being taken in the medical sector in China. That said, we are investing and continuing to invest in our core initiatives. So one of those is focused factories, as you know. So this is basically where we have a limited set of products in a very highly operational environment, so with high throughputs and very cost efficient.For Healthcare, Suzhou is our volume manufacturing. And we completed actually the full ramp-up of our Suzhou factoring, and that is already starting to yield the first improvements on gross profit coming from cost reduction on our products. We also continue to invest in innovation and in new products, and that is as well in hardware as in software for diagnostic imaging. So in hardware, we have our 8 MP home reading display for radiology. We also have this year coming out our new flagship for mammography. And we have more -- actually these are the most important new displays that we're bringing out. On top of that, within Diagnostic Imaging, we also have a software platform. You can see this as a management system for IT managers within hospitals. This is a way with very intuitive workflows so that they can manage actually their fleet, their installed base and also the calibration of these displays that guarantees actually a good performance over the lifetime of the displays.So this is a very important software platform. It is also -- it has external portal, so it's open system, so we can attach very easily software, third-party, our own software to it. And last December, we announced actually a first collaboration with DeepLook, where we basically have now a software application, it's AI-based that can basically distinguish dense breast tissue versus cancer. So -- and this is actually for us, also a migration more into software from diagnostics point of view.Surgical market, surgical modality that's, of course, as you know, driven by digitalization of the operating rooms. Here, of course, we had challenges with high inventories, too. We also phased out a very large contract in the U.S. and because of the high inventories in the channels, we're building up a nice funnel to basically replace that large contract. But where we had anticipated we could do this in 1 year because of the high entries, it's taking longer. Then for our product portfolio and the investments we're doing there, we have our Nexxis platform so that is basically our network in the operating rooms, our proprietary network. We saw definitely a lot of momentum on that platform, especially also in EMEA.For new investments, we definitely are looking in more features on our Nexxis platform and also entering this year into the mid-segment operating room markets. Those are more basic versions of our Nexxis. So we come up with a mid-segment Nexxis solution. From display perspective, we are definitely working on the next technologies when it comes to panels, but also on disruptive technologies, where we basically start working on interactive displays. So [ voice steered ] eye tracking, Haptic gesture touch, that is definitely something that will help the surgeons in the operating room. And then, of course, also 3D displays, which is definitely something for surgical robots. And again, here, Suzhou is very important. The [ volumes manufacturing ] that we do there, especially to protect our gross margin in modality.Next slide, please. So then going to enterprise. So in enterprise, we saw sort orders coming in throughout '23 and sales landed about minus 4%. Now for our ClickShare, our meeting room experience, we were pretty much in line with '22, which was in very challenging market conditions, especially like onset since second quarter, second half of '23. Corporates are rethinking what they are going to do with their office space, where in '22, we saw an uptick, of course, in -- there were more video solutions needed because people came back from work and there were not enough rooms with video conferencing capabilities. So basically, that was all in the first phase.Now yes, corporate fee that the office space is too large and they're rethinking this. Now on the mid-term, this outlook will be that people, hybrid is there to stay, but people will come back to the office to have meetings, while for individual work, they will stay at home. And in that sense, we think on the mid-term that the office space will actually be more meeting rooms. And since, by far not all meeting rooms are equipped with videoconferencing equipment, we definitely see a growth here. But ClickShare did very well. So actually, we grew market share in the agnostic space in '23. And that is definitely again, this market -- in this market environment was definitely a very important element.Towards the future, what is our strategy on ClickShare? Basically expanding in the agnostic space, so further growing in the wireless space, of course, taking also market share in the traditional wired rooms and also finding a strategic path in the [indiscernible] systems. And you will hear more about that in the course of '24. And on top of that, of course, we're also expanding our portfolio in ClickShare with different form factors. We were at ISE that is the AV biggest trade show last week in Barcelona, where we launched our ClickShare Bar. This is basically a ClickShare equipment where we add audio and video capability. And this is really geared towards mid- and small meeting rooms. So it's extremely easy in install, just one cable, you connect monitor with a bar and it's very easy in install. This was very well received last week and this is then also on the market right now.Then for large video walls, we saw actually a very solid order increase throughout the year. Sales was slower in the first part of the year, but then definitely ramped up towards the second half of the year with actually a record high in the fourth quarter. Then for our video walls and for our large video walls control rooms, we -- as you know, we transformed our strategy last year. The trends in the control room is that the operator will become centric and that the workflow that you generate and create for the operator is actually the central piece of what you need to offer. That needs to be flexible. So that's why we basically have now grown the market back to control, which is our new software platform was launched in April last year, very well received.We see first sales also coming up there. And this is basically now the center of what we're going to do in our control room business unit. Meanwhile, we still have a very up-to-date hardware portfolio in control rooms. We have, of course, our LED portfolio, but we also launched our very latest LCD solution, UniSee II in third quarter of '23, which is also extremely well received in the market. But for the future, more focus on software. And I think when you look then at the EBITDA for Large Video Walls, where in the first half, we were still negative, we definitely basically made up for that in the second half where we turned positive and for the year, we're close to breaking even.And then in entertainment. So entertainment is basically building on the momentum that we've seen in the second half of '22. So sales growth 15%. And overall, of course, also a tremendous step-up in gross profits because all supply chain restrictions that we have eased out, and that's leading also into like a big step-up in EBITDA to 12.5%.In Cinema, building on the lamp to laser projector replacement wave, continue to build on that one. Land projectors are getting end of life. And of course, with laser projectors, we are offering a much more cost-efficient solution to the exhibitors. Also, our cinema as a service, we continue to roll this out and that is ramping up our recurring revenue in cinema. At the end of last year, you know that we announced the integration of our Cinionic sales activities back into Barco and that integration process is running smoothly. And of course, for the new product introductions in cinema, this is the year that we roll out our laser light steering projective. This one basically got already a lot of good reviews from the ecosystem. This is 10x more contrast, it's 1.6 better in efficiency compared to even a laser protector.And next to the light steering projector, we're also bringing out a new media server. Media server is the playout tool for the movie on the projector, which is a completely integrated media server. So for exhibitors, they can basically streamline all their operations in this media server and it is also future proof for new formats, immersive sound, [ HDR ]. So this will also come to market this year.Last but not least, the immersive experience, so also here, we saw growth mainly in EMEA and in the Middle East. China, not because, of course, the lower budget of the local governments and still high inventories in the channels. So we did not see growth in China for immersive experience. For all the different verticals that we are in, all verticals did grow especially also our simulation business line. Here for the new introductions that we're doing, we launched last week in Barcelona at ISE, our mid end projected the I600. You can call it the swiss knife for all mid-end projectors. It's a 4K projector. It has high performance. It is really lighter and it this very affordable in price. So this one was, again, very well received. It's a house built on DLP projector. And on top of that, we will also bring to the market a new flagship [indiscernible] DLP projector.This is an 8K projector for the large tents. From image processing perspective, last week, we brought to market our [indiscernible] which is our high-end switchers for events, double the bandwidth of the one that we have currently on the market, and again, very well received at ISE last week. Also here, focused factories is very important. So we are basically ramping up our Wuxi factory. This will be a projector-based fully automated factory where these mid-end projectors will be the first one that we ramp up by second quarter of this year.And then just as a summary, so Barco we're a technology company. And if you see the common trends through all our business units for the future, then I think it's summarized in this page. So first of all, at Barco, we change paradigms when it comes to visualization, which means towards the future, more interactive displays displays, 3D displays for that interactivity. That's one of the things that you will see on roadmaps going in. Data, as you know, big data very important. At Barco with our connected network solutions, we already, of course, helped in handling and making use of the data because we give easy ways to visualize the data. But the future is, of course, to start working with the data and doing data analytics, adding AI algorithms to the data between the stores, so the camera, the input and the output display. So in many of our roadmaps, you will see an edge compute, GPU compute coming in to basically deal with this real-time compute. And this will be then our platform to expand our offering also with AI software.And of course, everything that Barco do is always excelling in quality, it's of course, in the hardware, in the image, but in the software, it's also in the whole workflow solutions that we offer. And of course, sustainability is the heart and core of what we do and in every activity in [indiscernible].And with that, we can come to the outlook. So if you see the investments in our -- in '24 that will help us for future growth. It's all about new product introductions. We had already a few that we launched, but there are many more coming. Focused factories, this will help to protect our gross margins, getting closer to the end customers to basically create even more opportunities for us in the markets. And of course, the spirit at Barco is one of winning culture and we care about our people, we care about our planets, we care about our communities and that's all captured in our sustainability charging.And then for the outlook for '24. So macroeconomic and market condition remain uncertain. The visibility there is not where it needs to be. We are assuming that throughout '24, we see a return to normalized inventory levels at our customer base. And of course, as I said, we plan multiple new product launches over the course of the year. So that's why for '24 more in a cautious way, we basically expect the top line for the year to be in line with '23, with a gradual year-over-year increase as of the second quarter. And for '25, we expect to resume a top line growth on a full-year basis. For EBITDA margin, we expect further improvements and be above 14% for the full year '24.And then before we go to the closing, a last word on our dividends. So the Board of Directors will propose to the general assembly to distribute a gross dividend of EUR 0.48 per share, which is up EUR 0.04 versus last year's dividends.And with this, I hand it back to Willem.

[Willem Fransoo, executive]

[Operator Instructions] And I will start the questions from the analyst, Matthias Maenhaut.

[Matthias Maenhaut, analyst]

Congratulations for the results. Two then from my end. Maybe firstly on the guidance. Could you maybe elaborate a little bit what we should expect in terms of the different divisions? And also, I heard about visibility, would you say visibility has further worsened or it's actually improving at this stage? And then a second question is maybe in terms of capital allocation. If I recall, previous calls, there seems to be some M&A that is currently being considered. Is this still the case? How are those files proceeding? And I know it's always difficult to comment on any future targets, I would say. But if you could give us some flavor on what we can just expect in which in terms of -- is it in line with the present divisions I would say if it's something completely different? Will there be significant synergies? That are my questions at this stage.

[An Steegen, executive]

Okay. Maybe start on the outlook question and then feel free to ask. So there are not that over the full year. There are not that many differences throughout the 3 divisions actually. If I say, over the full year, actually and this is primarily because of the, I would say, the reopening or softening, I would say, of the macroeconomics that comes for most of all primarily enterprise and healthcare then, the new product introductions throughout the year is also in the different divisions. If you look more towards the start of the year and then the divisions which will have to deal with more, I would say, building down inventory levels and that will have an impact in the beginning of the year. This is done primarily into enterprise with respect to ClickShare actually and into Healthcare that in particular.But with respect to gross profit margins, capturing further product mix improvements, focused factories improvements, this is yielding the different divisions actually.

[Charles Beauduin, executive]

On capital allocation, the first thing to understand is that we continue to invest in recurring revenue and in focused factories. Next to that, yes, we are considering a few M&A yields. This is correct, but we will approach it in a very disciplined way. We are not in a hurry. We want to make sure that we are prudent and careful with the shareholders money.

[Matthias Maenhaut, analyst]

If I may, just one short follow-up. You do not reiterate the margin guidance bracket and the guidance 14% to 18%. Do we need to read something in there or not necessarily?

[Ann Desender, executive]

No, definitely not. This is focused on -- so we're not changing that range for the years to come. But particularly on '24, you say, okay, it's above 14%, yes. No, nothing more to be looked into this.

[Willem Fransoo, executive]

Kris Kippers is next.

[Kris Kippers, analyst]

Yes, I'll raise 2 of them, indeed. Firstly, if you -- one moment, I had a list here. If you look at cinema as a service, 25% in '23, to what extent is this the impact of one big player doing this? Or how should we see this evolving? And also, are you now considering to search for external financing solutions on that? Or will you do this on the Barco level still?And then second question, we -- you indeed presented the ClickShare Bar, a nice add-on feature. The question is, how do your partners actually react to that in the sense that are they shocked by this? Or is it just a first step and you would do other things as well and you communicated on forehand with them. What was their reaction actually on that?

[An Steegen, executive]

So cinema as a service, so indeed, 25%, as you know, there is one large contract there. That's the AMC contract, where you're talking about 3,500 units. But we see more deals and more discussions going -- coming in there also. So we basically are growing our recurring revenue when it comes to cinema as a service. Will we finance that over time all by ourselves? That is not what we're going to do, and we will handle that case by case actually.And then for the ClickShare Bar, so very well received. So if you look at the ecosystem last week for instance, so we had our distributors and our resellers and also our end customers there, very well received because it really targets a particular mid segment, mid- and low-end meeting rooms kind of segments. So in that sense, it was really an addition to the portfolio that they have today. For our alliance partners, where, of course, we bring now also a video bar to the market. Actually, the whole agreement there is that it is an extension of the ClickShare portfolio. So we bring another ClickShare form factor to the market, which has then also audio and video capability.So in that sense, it is positioned in a way that it is enabling video conferencing with the features on it. So in general, there was a common understanding also from our alliance partners that we will basically have a solution on the market.

[Charles Beauduin, executive]

What we have also announced is we are open to licensing deals. So that for which we did one last year, there could be others following.

[An Steegen, executive]

So this was the licensing with guest room as you're well aware of. This is another way that we actually can expand our ClickShare into the market. So in the end we want ClickShare as broad as possible embedded in the meeting environment and that was another way that we indeed did that, yes.

[Kris Kippers, analyst]

Yes. An, fully understand, but given the fact that your product portfolio becomes wider and given the press release also mentioning some launches in 2024, I can imagine that certainly the product portfolio gets to such an extent wider, that some partners would say, why would we team up with Barco in the end --

[An Steegen, executive]

No, no that was not the case. Actually, it was more in a constructive way that you basically say, that maybe also opens possibilities towards the future for their portfolio. So in that sense, no, it was definitely not perceived --

[Kris Kippers, analyst]

Okay. We should not read too much into that?

[Willem Fransoo, executive]

Guy Sips, you're next and you can mute yourself before you ask your question.

[Guy Sips, analyst]

Also 2 questions from my side. You were indicating that the working capital with 16.6% of sales is still too high. What is kind of an internal target that you're aiming at? And then in health care, you were focusing on the phase out of this large contract in the U.S. Can you quantify that a little bit? And how do you -- how will you tackle this going forward?

[An Steegen, executive]

The first one, I'll answer short. The target is to go to 12% and better and lower.

[Ann Desender, executive]

Yes. And for the large contract, so yes, this was an unusually large. I think we mentioned last year already in order of like EUR 25 million. That was just end of life of the product of that customer and then phasing in and getting into the design cycle of their new product is one of the things that takes time in surgical. And what happened also with this customer is that they still have some of these old systems in stock. So they actually could postpone this new system actually a little bit lower in time. So that's what happened there. For us, it means that we need to make sure that we -- that our pipeline that we are early on in the design in cycles of all these OEM partners that we have.We have good leads there with this particular partner because this is not the only program that we run with this particular OEM partner. So we have a lot of leads in the funnel. The only thing is now a little bit like when do they start with the contracts because they're still building off their inventories. That's actually the thing. So we see this definitely improving over the course of '24. So these inventories will come down. Visibility on the market is not completely clear, but we see signs, of course, that the stock is going to build on and that the healthcare sector is getting healthier. And in that sense, yes, we believe that our customers will build of their stock and then we can basically convert those leads into actual contracts.

[Guy Sips, analyst]

And this, let's say, positive news is also already taking into account in your stable 2024 top line outlook?

[Ann Desender, executive]

Yes. Because again, the design cycles in surgical, they take typically longer than 1 year. So this is just very long design cycles. So this will start kicking in at '24, but it will also be for '25 and '26. That's the nature of that business.

[Willem Fransoo, executive]

Next question is for Stefano Toffano from ABN AMRO.

[Stefano Toffano, analyst]

I have quite a few questions, but we'll restrict to try to be short. The first one is on the guidance. I did not understand your comment about the cadence of the guidance of flat year-on-year, but you were saying something about improving year-on-year as of Q2 and for the rest of the year, if you can maybe just explain a little bit more. I did not quite get that? The second question is on the Large Video Walls, obviously, quite good improvement over the second half, maybe something on what we can expect going forward to H1 this year and also in terms of the cadence there of the profitability throughout the year, if you can say something on that?And maybe a very quick one on accounting wise, the EUR 4 million extra depreciation from cinema as a service. What can we -- how do we have to see that for the full year 2024. I don't know if you can maybe say something on that?

[An Steegen, executive]

I'll start with the first one, maybe. So on the full-year guidance, sales in line and then gradually picking up sales increase as of the second quarter, means that we do see in the first quarter, still lower sales compared to a high comparison basis for the [ third quarter '23 ]. That's actually what it means first quarter '23 where we were growing year-over-year at that moment 20%. And if you look to the different years has been also a record high first quarter. So that is a comparison basis. This is also because of, I would say, market conditions, which we see gradually improving, but not yet kicking in. And that's an impact of those inventories being billed off. So that's where we are more cautious on this first quarter.The new product introductions, which are being launched over the course of the year will, in particular, start to increase or have a positive impact on our orders. And as of the second quarter and then sales as of the second semester. So this is the cadence over the years. Hope that clarifies Stefano.

[Charles Beauduin, executive]

On the Large Video Walls, we are engineering a massive change where we go from a hardware-centric additional business unit to a software-driven decision. It's been driven by the demand of the market to go for high security. So we expect -- we have seen now the change is in a positive direction. It is healthy on margins and healthy on improvements. This will continue over the next 3 years. We expect -- this is the reason why we don't decide to [indiscernible] because we believe it has potential.

[An Steegen, executive]

Maybe to complement on the last question then. So increase in depreciations for '24, a couple of million higher, so far not guiding for more. And it really depends on how many new deals on cinema as a service then actually do land. So in that sense, as soon as there are, I would say, tangible more, then we'll give more specific guidance or change our guidance accordingly in that sense, but not as big increase as we had it in '23 of EUR 4 million compared to '22 to be foreseen in this year.

[Willem Fransoo, executive]

Marc Hesselink from ING, is next.

[Marc Hesselink, analyst]

Yes. First question is actually on the moving parts for the increase in the margin in '24. Quite clearly, you have addressed the gross margin issues. I just want to check if that is the reason why you expect it to be up year-over-year? And maybe if you talk a bit about how that goes on the different divisions? And my second question is on -- yes, the second question is free cash flow. Looking at it year-over-year, I think you will have a slightly better profitability, so that's a positive. I think the working capital will be better towards the end of the year. Can you maybe quantify a bit there, if you talk about going towards that 12%, how much can you achieve in the coming year?And then secondly, also thirdly, the CapEx, what do you expect as a CapEx level also taking into account what you said on cinema as a service?

[Ann Desender, executive]

So maybe on margins first? So on gross margin, so I think the improvements that we saw in '23, favorable product mix. So Charles just said it. So moving more into software, this definitely weighs in our gross margin. That's definitely one element. That the supply chain, the high PPVs that we had to pay actually when there were shortages those is [ peered too ]. So that definitely gave us a boost in gross margin. Also entertainment, of course, top line doing so well, that has also helped us in stepping up the gross margin there. We plan to continue to step this up over the next years. Of course, the supply chain shortage and the large -- the high PPVs we had to pay. Those are now out in the system. We don't necessarily see the component costs coming down further.But what we are now definitely are going to leverage towards the future is our investments in focused factories and the fact that we are going to protect actually our gross margins by actually the improvements we can make through our manufacturing, our automation that we have there, our local sourcing of components. So this is basically the actions that we put in place to continue to work on our gross margin.

[An Steegen, executive]

Towards the outlook, you're looking at the uptake, further improvement of EBITDA margins for next year, then actually, I would say, healthcare because of the reasons which you mentioned, indeed to step up above that 10% EBITDA margin, which was close, but not being surpassed. And then the other divisions, they are holding to the strong performance, which we have seen over, an improvement over and the EBITDA, which was there in '23 and in particular, than the second semester, yielding further from the decisions taken also in Large Video Walls. So in that sense -- second question, free cash flow, what was the question?

[Marc Hesselink, analyst]

Well, how much is free cash flow --

[Ann Desender, executive]

Okay. So a further improvement on the EBITDA margin, as you can calculate, the working capital going towards 12%. Cash flow -- CapEx, we keep in line with between around EUR 55 million -- EUR 50 million, EUR 55 million for this year. And then tax rate will be steady compared to where we had it now. So if you all calculate that, then you should get to a, call it, towards 10% of free cash flow on sales actually.

[Marc Hesselink, analyst]

Okay. So do you think that going to 12%, you can achieve that in 1 year from 16% to 12%?

[Ann Desender, executive]

That's what we are going for internally, yes.

[An Steegen, executive]

Stepping up --

[Ann Desender, executive]

Not, it will be throughout the years.

[Willem Fransoo, executive]

We have Matthias again with additional questions.

[Matthias Maenhaut, analyst]

Sorry, 2 follow-ups -- 2 follow-ups. Maybe just on the cinema as a service and the 25% share of revenue, is it correct to understand that 25% share of revenue of cinema is all of the services revenue, and it's not exclusively cinema as a service? And if so -- and if so cinema as a service, could you maybe elaborate a little bit on sales contribution and EBITDA contribution for the business? That would be my first.And then a second question would be actually on Cinionic, you've opted to buy out key minorities entirely. I've seen that it has not been taken into account in the free cash flow statement. So it's not yet closed. What should we expect in terms of cash layout for next year? For this, is previous transaction a good benchmark? And what can we expect from this integration? Overall, I would say, maybe following up also on Marc's question, is there any room for any OpEx savings next to Large Video Walls? What's the flexibility there? Are there any initiatives being prepared? What if sales would go, maybe softer than expected or macroeconomic developments would be softer than expected. Is there any self-help potential or planning that's presently being studied?

[Ann Desender, executive]

Yes. So on the cinema as a service included into this 25%, actually, yes, you can say we had it at between 22%, 23% the year before. So the uptake is actually relating to cinema as a service. If your question on the EBITDA impact then, yes, actually, when you see the increase of our depreciation versus last year, that is actually, I would say then the particular half you can say on EBITDA. Also I have to say that, and also know that, that it is -- and looking for this more recurring revenues very well, temporary then or in the first year, yes, it does has an impact. You can say then negative on your top line. So if we would have recorded at all a CapEx sales instead of the recurring, which we, of course, preferred the recurring, then our top line would have been more than EUR 35 million higher.So that's that. On the -- first, on buying the shares back and then the capital decrease that will follow, that's not going through the free cash flow, but directly into net cash because it's a -- but anyhow it's not cash. So that indeed still to come and will be in this first quarter. As to the integration opportunities and synergies, yes, there are and that's part also of the OpEx improvements which we are seeing and taken also into the guidance of -- and I did not mention it before, so it's a valid one to add on this.

[An Steegen, executive]

But in general, we are actually integrating now sales into the business unit cinema within Barco. This is what we have done when we started 2, 2.5 years ago in all our other business units that you put product R&D and sales together in one business unit, depending on which market they're serving. And that is basically to accelerate the go-to-market, to accelerate the connection with the end customers. And this is here, now again, you bring sales closer to product supply and R&D, and we see definitely also improvements there towards the end customers in the end.

[Willem Fransoo, executive]

Kris, you also had other questions?

[Kris Kippers, analyst]

Small questions still from my side. Firstly, just on healthcare, just to check regarding the fraud cases in China, what is the actual situation because I might have missed it, but where are we right now? Or do you see there is an end coming to it and would indeed the rebound be quite sharp? That's my first question.And secondly, if you look at the factory moves you've done in 2023 and you've taken those costs, I would say, more as a recurring operation, of course, but what would have been the hindrance on EBITDA in that level in 2023 in the numbers?

[Ann Desender, executive]

On the anti-bribery actually, yes.

[An Steegen, executive]

I think we did a full due diligence there of the case --

[Ann Desender, executive]

Oh in healthcare, yes, yes --

[Charles Beauduin, executive]

Yes. On the enrollment, this is a Central Government of China doing. We have no effect on that, still going on. What they we say is that they could [ relent ] this year. As you know, a lot things are not very clear, because in China new measures are announced after Chinese New Year. Chinese New Year is tomorrow.

[An Steegen, executive]

Yes. Okay. And then on the impact of the focused factories, rightly. So Kris, is when you do the moves of the -- what we have done over the course of this year, actually from Europe, the production towards China for Suzhou in particular, that had some double costs in the second half or second of '22 and the beginning of '23, actually, but that has now been taken out. I would say that double costs with respect to healthcare are not there. You will have seen that despite the lower top line in healthcare, that gross profit margins for healthcare over '23 improved. And that's one of the reasons also helping out there.

[Charles Beauduin, executive]

It's also one reason that the inventory is too high. We have doubled up in order to be able to move.

[An Steegen, executive]

Yes, because as long as you transfer, you have to do that, yes.

[Charles Beauduin, executive]

Yes, and [indiscernible] also will naturally decline this year.

[Kris Kippers, analyst]

So you're still cycling in relatively easy comp in the start of the year on that side a little bit, more or less, not convinced.

[Ann Desender, executive]

No, no, no, it's not convinced. The question is not clear. Can you repeat?

[Kris Kippers, analyst]

No, because you said you still had some impact at the start of '23 with the move double cost. So that means you have a bit of an easy comparison based starting of the year this year. That's my question.

[Charles Beauduin, executive]

Appreciate that we would improve margins for the full year, yes.

[Willem Fransoo, executive]

Marc, you also have some other questions.

[Marc Hesselink, analyst]

Yes. I have some follow-ups. First, actually on China in general, I think that was one of the areas that disappointed in '23. I think feasibility is still low, especially now just what you just said ahead of Chinese New Year. What are your assumptions in the full-year guidance on China?

[An Steegen, executive]

Cautious, I will say, but also assumes that in '23, actually, yes, call it, we reached a little bit the bottom I would say, so the only way on top line.

[Charles Beauduin, executive]

We have pointed this last year. So we are careful for this year.

[An Steegen, executive]

Yes, we are. So we're cautious --

[Ann Desender, executive]

No, we think that if we reach the bottom now that there are some signs of relief, like box office is coming. But then again, there are also inventories in the channels there too. So same as we've seen it in the rest of the world. So we need to be cautious also because they need to build off their inventories too. So in that sense we need to see it all coming together. Anti-bribery, hopefully by the second half of this year also we see a release, but we're not sure, we don't know. So hence the cautiousness.

[Marc Hesselink, analyst]

Okay, clear. Then maybe talk a bit more on ClickShare. I think you just said that the inventories are still relatively high levels. You are launching the new products. What are you expecting for the full year? I think if you said it's sort of flat for all the divisions then enterprise, you still have the facing out of the old hardware part of the Large Video Walls. So that sort of implies that ClickShare should grow. And, yeah, maybe you can say a bit more.

[Ann Desender, executive]

It's the same answer actually as we gave before on a group level there, so on a full year, confirming on Large Video Walls indeed, that has an impact on your top line, but for the better of the EBITDA margin. And then in the first semester will be impacted by customers lowering their inventories. So that will certainly have an impact on the first quarter. The new products which we introduced will primarily being shipped as of the second quarter. So in that sense then a gradual improvement as of the second quarter and growth, but that is done more, I would say further kicking in as of the third quarter to get done flatten and first growth as of a full year on enterprise level.

[Marc Hesselink, analyst]

And then squeezing in maybe last one a bit like what Matthias earlier asked also on -- if you read something into the beyond '24, you say back to growth in full-year '25 previous guidance was always high-single digit growth. Can you immediately achieve that or do you then need a sort of build-up period to go back to that high-single digit growth?

[Ann Desender, executive]

As soon as we have more visibility, we will be more clearer. And we're cautious over last year. So in that sense, at this moment, you're not doing, I would say bold statements in respect to the percentage focus is really executing every opportunity and building up further I would say the momentum to be able to confirm the percentage as such.

[Willem Fransoo, executive]

I have no other questions at the moment, so we'll call to the room if you have any other questions, you can now raise your hand. And I see no hands. There's also no questions in the chat so we can close the session. I would like to thank you all for your attention today and for your questions. I would also like to invite you to visit our webpage where our new annual report is live this morning with a lot more details of all the divisions and we would like to close the session. Thank you very much.

[An Steegen, executive]

Thank you.

[Charles Beauduin, executive]

Thank you, bye.

[Ann Desender, executive]

Bye.