Cyclical Reluctance to Invest Weighs on Start of Heidelberg 2019/20 Financial Year
The business performance of Heidelberger Druckmaschinen AG (Heidelberg) in the first quarter (April 1, 2019 to June 30, 2019) of financial year 2019/20 was impacted in particular at the end of the reporting period by the increasing reluctance to invest and the corresponding shift in sales due to the economic downturn. In the traditionally weakest quarter of the year, the company recorded sales of € 502 million, compared with € 541 million in the same period of the previous year.
Especially in Germany and parts of Europe, it was not possible to repeat the previous year's performance. Demand for contract offerings (service, software and supply contracts for consumables and, in the final stage, subscription contracts including equipment) developed positively, with the proportion of recurring revenues rising by almost 10 percent year-on-year to around € 80 million. Due to the ramp-up, however, it has not yet been possible to compensate for the overall decline in sales.
Despite significantly higher demand in China as a result of the positive outcome of the Print China trade fair, as at June 30, 2019, incoming orders were down on the previous year (€ 665 million) at € 615 million. At around € 14 million (including the IFRS 16 effect of around € 4 million), EBITDA excluding restructuring result was also below the unadjusted prior-year figure of around € 20 million. After taxes, the Group reported a minus of around € 31 million (previous year: € –15 million). In view of the net working capital build-up during the year and investments in the expansion of digital business models, free cash flow was negative at € –83 million (previous year: € –45 million).
Sales Forecast Confirmed, Margin Target Adjusted
For the 2019/20 financial year as a whole, Heidelberg continues to anticipate sales at the previous year's level. Despite the economic downturn and the associated reluctance to invest in the equipment business, the company expects to compensate for this by further stable expansion of the contract business.
"The increasing share of recurring contract business will have an increasingly stabilizing effect on our total sales," said Rainer Hundsdörfer, CEO of the company. "We will counter the negative impact on earnings with short-term measures and sustainable structural improvements."
The successful expansion of the contract business means that the customer relationship is sustained at a higher share of wallet as a basis for business that is more resistant to cyclical fluctuations. However, the reluctance to invest is also leading to a product mix with lower overall profitability in the equipment business.
The company is therefore adjusting its outlook for the operating result in the current financial year and is assuming a target margin for EBITDA excluding restructuring result in a range of 6.5 to 7 percent of sales (to date 7.5 to 8.0 percent). A break-even net result after taxes is expected.
As a consequence of this development, the Management Board has decided to review planned investments, significantly increase cost discipline and use instruments to make working hours more flexible in the short term in order to stabilize the operating result. In addition, the projects initiated to increase efficiency (Operational Excellence) such as the optimization of the manufacturing footprint, the adjustment of sales structures to new business models and the expansion of shared services will contribute to reducing structural costs in the future. In addition to measures to stabilize earnings, free cash flow is expected to improve sustainably in the coming quarters as a result of the reduction in capital expenditure plans and the expected reduction in net working capital.
Investment projects in the new product and solution offerings from Heidelberg's ongoing digital transformation will be implemented as planned. The goal remains to strengthen the contract and subscription business with recurring revenues, to expand the share of wallet per customer and to significantly reduce the impact of economic cyclicality on the company. In the medium term, the share of sales from recurring contract business is to be increased to around 1/3 of total sales.
Heidelberg will publish the complete interim statement of the 1st quarter 2019/20 as planned on August 6, 2019.
The preceding press release was provided by a company unaffiliated with Printing Impressions. The views expressed within do not directly reflect the thoughts or opinions of the staff of Printing Impressions.