KBA Releases Financial Results for 2013; 2014 Characterized by RestructuringMarch 21, 2014
KBA CEO and president Claus Bolza-Schünemann emphasizes in his letter to shareholders that “The financial repercussions of this project will also be noticeable for KBA in 2014. However, in 2015 we anticipate a notable turnaround in earnings and a return to sustained profitability by 2016 at the latest.”
Traditional core business is shrinking
According to statistics issued by the VDMA (German Machinery and Plant Manufacturers’ Association) orders and sales of printing equipment produced in Germany fell by up to 10 percent. This was due to economic impacts of the sovereign debt crisis in parts of Europe, slower economic growth in the BRIC countries, negative currency effects in emerging markets, changes in media consumption and ongoing consolidation in the printing industry in industrialized countries. KBA, as the world’s second-largest press manufacturer, also felt this development.
At €1,012.2m Group order intake in 2013 failed to top the previous year by 9.3 percent and Group sales of €1,099.7m were 15 percent lower than the prior-year figure (2012: €1,293.9m). Whereas sales in the sheetfed offset division sank by 11.1 percent to €571.9m, revenue in the web and special press segment was down by 18.9 percent to €527.8m. Demand in KBA’s traditional business with newspaper and commercial web presses which has been reduced to a great extent in recent years has left its mark. The above-average business volume in the special market for banknote printing systems in previous years is now returning to a normal level. Order intake in the sheetfed segment of €608m was 8.9 percent below 2012 and compared to the previous year new orders of web and special presses declined by 9.9 percent to €404.2m. Group order backlog to 31 December reached €560.5m (2012: €648m).
Operating profit displaced by special items
Despite a decline in Group sales of nearly €200m and associated lower contribution margins, KBA posted an operating profit before special items of €24.5m (2012: €40.8m). The savings in personnel costs as a result of the amendments to wage agreements in place at the main plants in Würzburg and Radebeul were offset by a smaller earnings contribution of special presses and poor capacity utilization levels at the web press plants.
Provisions for capacity and structural adjustments as part of the Fit@All program and impairments of fixed assets led to sizeable special effects of –€155.2m in 2013. This accounted for an operating loss after special items of €130.7m. Following a pre-tax profit of €3.7m in 2012, the KBA Group generated a net loss of €138.1m. This corresponds to earnings per share of –€9.31. Accordingly, in his letter to shareholders Bolza-Schünemann points out that “we are unable to pay a dividend for the 2013 business year due to the exceptional impact resulting from our Fit@All program.”
One-off effects strain segment results
The one-off effects, around two thirds of which will impinge on liquidity, had an impact on the results of both business divisions. The sheetfed segment disclosed an operating loss after special items of €77.6m (2012: –€38.6m). Without special items the operating loss from KBA’s sheetfed offset business could be cut from –€11.5m to –€8.4m, although sales were down. In the web and special press division special effects resulted in an operating loss of €53.1m after a profit of €52.3m in 2012. Without the high special expenses this segment would have posted an operating profit of €32.9m.
Positive cash flow finances investments and acquisitions
Once again high customer prepayments had a decisive influence on KBA’s cash flows from operating activities which remained clearly positive at €34.1m. Prepayments came to €175m at 31.12.2013 and supported the financing of investments, acquisitions and scaling back bank loans by over €10m. The free cash flow stood at €3.2m. At the end of 2013 liquid assets totaled €185.4m. After deducting €21.5m in reduced bank loans, net liquidity came in at €163.9m. From the credit lines available, only guarantee credit lines were used to secure prepayments. The equity ratio sank from 38.3 percent in 2012 to 25.3 percent due to the net loss resulting from the high special expenses. However, in comparison to other machinery manufacturers KBA is still very financially stable. In 2013 the company which is known for its innovative strength invested 5.8 percent of sales in research and development.
China remains largest single market
Domestic sales rose year-on-year by €44.9m to €197m, correspondingly reducing the export ratio to 82.1 percent (previous year: 88.2 percent). Given the weak economy in important markets, the proportion of Group sales in Europe outside Germany only stood at 30.1 percent. The regional total for North America jumped from 10.4 percent to 12.8 percent and growth region Asia/Pacific contributed 27.4 percent to Group sales. China remained KBA’s largest single market. The above-average sales volume in the emerging markets Latin America and Africa of 23.1 percent in 2012 boosted by a number of large projects for special presses returned to a normal level of 11.8 percent in 2013.
Less personnel in core business
At the end of December 2013 there were 6,409 employees on KBA Group payroll (2012: 6,187). Excluding the subsidiaries KBA-Kammann and Flexotecnica consolidated for the first time in 2013, and without apprentices, trainees, temporary employees and staff on phased retirement schemes, the Group workforce totaled 5,347. This is 75 fewer than twelve months earlier. The number of employees is likely to fall once more by more than 1,000 as part of the realignment. Nonetheless, KBA continues to take responsibility for the younger generation with an above-average training rate of 7.2 percent.
2014 characterized by restructuring
KBA refers to the positive growth prospects for the global economy and machinery manufacturing industry in its outlook for 2014. Nevertheless, the KBA management does not anticipate sustained growth of the declining market volume in traditional sheetfed and web offset market segments in 2014 and beyond. This is primarily due to ongoing structural shifts and trends towards consolidation in the print industry.
In contrast, the management sees opportunities for growth in other areas of KBA’s broad portfolio. These include the expandable field of digital printing, industrial coding systems and the diverse field of packaging printing. There the KBA Group is already well-positioned in some important main and niche markets as well as market leader in printing systems for board, metal sheets and the direct decoration of glass containers. In the second half of 2013 two companies were acquired, KBA-Kammann in Germany and Italian Flexotecnica, the latter specializes in printing systems for flexible packaging. Thus granting KBA access to market segments which the Group had previously not addressed.
Along with the integration of the new subsidiaries, 2014 will be marked by the implementation of the comprehensive program for the realignment of the KBA Group. The management board expects further expenses in 2014 due to the upcoming relocation of production equipment, adjustments to capacity, training and other measures.
For the new fiscal year KBA management is targeting €1bn to €1.1bn in Group sales and a positive operating result before special items. Group earnings before taxes (EBT) after special items will likely be negative once again in 2014 as the profit increasing measures associated with Fit@All will have not yet fully come into effect. Management will therefore provide further information on the progress of the implementation of the restructuring program and its impacts on the current business performance in the regular interim reports and other announcements.
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