Heidelberger Druckmaschinen Aktiengesellschaft (HDD) Earnings Call Transcript & Summary

Thank you, ladies and gentlemen. Welcome to our press call on the occasion of the publication of our key figures for the first quarter of FY 2020/'21 -- this -- today. Together, my colleague, Marcus Wassenberg and I will be presenting the highlights and most important huge developments at Heidelberg. Afterwards, we will be available to answer your questions as usual. The start of our new fiscal year was marked by 2 main impacts: one, the effects of the COVID-19 pandemic continued to pose major challenges, particularly for export companies such as Heidelberg. As already announced at the annual press conference in June and just a few days ago at our Annual General Meeting, our sales and incoming orders were, as expected, heavily impacted by the pandemic. However, the first signs of recovery in incoming orders have been steadily noticeable as the economy picks up worldwide. As things stand at the present, we can say that we saw the bottom in April. As the feedback from our market shows, we can be cautiously optimistic that business will gradually return to a more positive trend. However, it will take some time for the market to return to pre-crisis levels and for us to benefit sustainably from the recovery. Second, thanks to the strategic transformation initiated at an earlier stage to increase profitability, competitiveness and safeguard the future, Heidelberg is successfully resisting the massive operational burdens resulting from the COVID-19 pandemic. Over the past 3 months, we have achieved significant implementation success on the cost on financing side in order to make Heidelberg waterproof and weatherproof in the short term and to position it for sustained profitability in the future. The central message of today's call is, therefore, we deliver what we promise and are making great progress in implementing all measures announced. Let me start by illustrating this with the current example that we communicated last Friday afternoon, the early and full redemption of our existing high-yield bonds. Marcus Wassenberg will go in details in a moment. The topic shows how the measures of our programs interact. With the transfer of funds from the Heidelberg pension trust in March, we have gained liquidity to be able to repay the bond now and free ourselves sustainably from high interest periods. This is undoubtedly one of the highlights of the current financial year, and it's of crucial importance for the long-term development of Heidelberg. But now to the first quarter. We have made significant progress in the area of cost efficiency, for example, in the sustainable adjustment of our production and structural costs. The announced reduction of a total of 1,600 job is taking place in close consultancy with our employee representatives with whom we work together in the spirit of trust. The aim is to make the cutbacks as socially responsible as possible, especially through part-time work for all the employees, respective early retirement plans. We are making good progress in this respect. And the next step will increasingly offer volunteer programs in the short term. I have already talked about streamlining our organization from the Board to the -- of management and throughout all management levels on several occasions in our last call. Also there, we're making good progress. We are also implementing the optimization of our global production network point by point. In future, Wiesloch will establish itself as the strong location for the high-end products. The start of serious production for printed organic electronics also announced in July is to be seen in this context. To this end, we have established a separate business unit for the industrial development, production and sale of printed and organic electronics and invested around EUR 5 million in the construction of a complete production line for printed sensors. As the operator of this production of high-tech sensors, we see future growth opportunities for us in this field. This is also a clear commitment to our Wiesloch site and headquarters, which remains our most important location and headquarters. At the same time, also we'll push ahead with the expansion of the production of standard models in China, especially for the Asian and the local Chinese market. The establishment of a joint venture with our established partner, MK Masterwork, for parts production also goes in its strategic direction. I will now hand over to Marcus Wassenberg, our COO, who will present to you further milestones in our transformation, our financial stabilization, in addition to our key financial to our key financial figures. Marcus, please.

Thank you, Rainer. Good afternoon to all of you. Very pleased now to present to you the further details of the status of implementation on the package of measures and its financial impact. Actually, the first key milestone here is a drastic reduction in net debt, which provides a sound basis for our future net debt reduced from EUR 391 million to EUR 122 million at the end of first quarter. And therefore, Heidelberger is in a financially stable position to successfully drive the transformation forward. Obviously, our task is now to substantially improve profitability, thereby successively strengthen equity and significantly lowering our breakeven point. Looking very hard on this right now, and I think the results of this very hard work are increasingly to be seen. Thanks to the use of short-term work and working time accounts and the reorganization of the company pension scheme and decided jointly actually with the employee representative, we have succeeded in achieving very respectable result at the beginning of this year. With the help of the income of the reorganization of the company pension scheme amounting to EUR 73 million, we were able to report a clearly positive EBITDA, excluding restructuring result of EUR 60 million. In the previous year, this figure was only like EUR 40 million. As a result, earnings after taxes for the first quarter were also positive at EUR 5 million. With respect to the portfolio, we will, as announced, discontinue our loss-making activities relating to Primefire on the digital sector and large-format on the sheetfed offset printing at the end of the financial year at latest, actually. Very clear objective for us remains unchanged, that we want to improve our profitability by around EUR 100 million in the course of the next 3 years by improving structures and organization and by separating loss-making and perishable areas. This will lower our operational breakeven point to sales volume between EUR 2 billion and EUR 2.1 billion. In addition, we have been able to announce 2 further success stories in recent weeks. By the end of this calendar year 2020, we will be parting company with our specialists to our narrow-web printing for labels, the Gallus Group, which we have sold to the Swiss Packaging Group, benpac holding, for a price of EUR 120 million. And on the other hand, related to that, we have partnered with our Belgian subsidiary, CERM, as part of management buyout. Firm focuses on management information software for a narrow-web label market, which obviously will be no longer an active part of this group after the separation from Gallus. With these 2 portfolio measures, Heidelberger is continuing its consistent focus on profitable core business on sheetfed printing. And at the same time, this will lead to further financial and balance sheet strengthening, which we will be directly benefiting from in the current market crisis as well. Overall, we expect from this transaction to generate earnings in the mid-double-digit million euro range. And this obviously helps us in the current economic crisis, as well as in the sustainable financial stabilization and long-term strategy for Heidelberg. In addition to safeguarding the future of our company pension system and streamlining our portfolio, we have also worked on improving our financing profile. As Rainer just said in the beginning, the early redemption of the existing high-yield bond is one of the highlights of the current financial year and of crucial importance for long-term development. As you know, the bond runs until mid-2022. However, as announced last week, we will repay the bond at full, including accrued interest as early as September 9 this year. The bond have a coupon of 8 percentage points PA as the most expensive instrument in our financing. We pay around EUR 12 million interest per year, which we will face in the future. As you also know, we announced in March that we retransferred the majority of the pension assets of Heidelberg Pension Trust and that we -- with those funds, we intended to repay the remaining EUR 150 million of the high-yield from before the end of this current year. Because obviously, it will free us from the higher interest burden in the long term, the pension fund has then, therefore, agreed to the use of those funds. As Rainer just said, we keep our word and now we take it step-by-step. We do this, by the way, in a very strong team effort, not only in the financial team, but actually everybody who contributed and delivered to the transformation program has helped tremendously in this transaction. And we're very glad to announce the repayment of this fund. Following the repayment of the high-yield bond, we no longer have to make any significant repayments in the short term, accordingly. We are now finally freeing ourselves from the block at our feet and will have considerably more freedom to invest in our business in the future, and we will continue to have a stable financial framework of around EUR 425 million. If we now turn to the key figures of the quarter. Then obviously, and again, Rainer has stated that before, as expected and already announced in our annual press conference, first quarter was massively affected by COVID-19 crisis. And let's start with the order intake, we felt the effects of the pandemic in all regions of the world, particularly in April and May, both the machine business and our customer groups and service business, which has suffered considerably from the lockdown effects. The bottom line was a decline of around 44% in the quarter. However, this high figure is also due to a base effect because in previous year, there was a major trade fair in China at which we recovered quite good income of orders. But there are already some ways of hope. June already showed significant improvements in orders compared to previous months, and we too can confirm that the general trend in the mechanical engineering industry that has shown to have recorded an approximately 27% improvement, holds true for us in order intake in June as compared to May. This trend is continuing with July also showing further improvements. As forecasted, sales in the quarter were down by around 1/3 of the previous year. Here too, we are feeling the effects of a recovery, however, still at a very low level. And we're confident because the curve in July has continued to point upwards. Overall, we continue to expect a rather gradual recovery. More on this later in the outlook. In terms of the operating earnings, we are already seeing the first positive effects of our transformation step by step. We are working through a patch of measures and are accelerating the concentration -- in our concentration of our core business. Reorganization of our company pension scheme, as just described, led to an income of around EUR 73 million in the quarter. In addition, we have also made intensive use of the option in using short-term work. This will be now gradually reduced in line with the improved order intake. At the same time, we are working intensively on adjusting our personal structure as described above, in order to reduce personnel costs in the long term. The restructuring result includes the announced cost of job cuts primarily abroad. For the year as a whole, we expect total charges of around EUR 50 million to EUR 60 million. Bottom line is that despite sharp drop in sales, a small increase in earnings after taxes was achieved. Free cash flow remained negative in the quarter, but improved year-on-year, mainly due to the release of funds from net working capital. The leverage ratio, nevertheless, remained at a low level of 0.8. Now a very quick look at the balance sheet. As just mentioned, net working capital side of EUR 670 million, previous year was EUR 710 million, particularly due to lower receivables. Cash and cash equivalents decreased mainly because of the negative cash flow, but we're still comfortable overall at around EUR 340 million. We are still expecting a substantial cash inflow from the sale of Gallus Group in the current calendar year, which is why we have now decided to, as explained above, to use the free funds to redeem the high-yield bond early. This will leave sufficient liquidity to finance the planned job cuts and further transformation. The only downer actually remains equity. This has been heavily reduced in recent years to the persistently low interest rates environment and the restructuring costs also put a considerable strain on equity last year. Although the restructuring of the company pension system enabled us to partially cushion the burdens, the further reduction in the discount rate resulted in a further burden. At around 6%, the equity ratio remains unsatisfactory, but it's expected to improve to an adequate region in the coming years as a result of the effects of the transformation. However, situation is not threatening us due to the comfortable liquidity position and a significantly higher equity ratio at the German parent company. Finally, let us take a look at net debt. This falls significantly year-on-year from around EUR 390 million to around EUR 120 million. I'd now like to hand it over back to Rainer, again for the outlook of the current fiscal year. Thank you.

Thank you, Marcus. Heidelberg's future is not primarily about size and growth at any price, but rather a focus on profitability. Our realignment will enable us to benefit directly from a recovery of the markets. Our goals are clear as are our priorities for the coming months. By implementing the realignment, we are making Heidelberg weather-proof, securing liquidity, strengthening equity and consistently increasing our profitability. We are streamlining our structures and aligning our organization efficiently with our customers. These measures are sometimes painful, but some of them were overdue in the indispensable. Above all, they make us more agile and flexible in the market. This then benefits our customers above all. Heidelberg is tackling the right things without the booth and with great consequence. Based on the strong core business, we are positioning ourselves for sustained profitability. We are concentrating on earning money successfully again. In doing so, we are also laying the foundation for making sustainable investments in the market in the future and strategically developing our core business. Our focus is on mastering the entire value chain when it comes to printed sheets. We will continue to focus systematically on digitization, on our core business and expanding our service business. Innovative customer solutions, such as our subscription model, will play also in the future an important role in this regard. We expect the pandemic to have significant impact on our business in the current year. Sales will be significantly lower than in the previous year, and profitability will be burdened by lack of contribution margins. On the other hand, we expect increasing sales at the same time, noticeable profit contributions from the transformation, especially in the second half of the fiscal year. This is currently being helped by the increasing number of incoming orders. With the help of these investments and the income from the package of measures, we continue to aim for an EBITDA margin at least on previous year's level. Our achievements to date support this forecast. Nevertheless, I would like to stress that the current pandemic situation makes an accurate forecast even more difficult. The current trend in our markets makes us confident, but we must remain cautious and continue our program. This should enable us to emerge stable from the crisis and to benefit overproportionately from a sustained and broad-based market recovery. Thank you for your attention, ladies and gentlemen. Marcus Wassenberg, and I will now be available to answer your questions.

And we can now take our first question from Peter Rothenaicher from Baader Bank.

Yes. One question regarding your divestment. So there's the sale of Gallus and now there's a software company. What will be the effect on your sales and on the operating profit for this year? And when will the deconsolidation take part? Will it be from the beginning of the fiscal year or when else?

So basically, we're talking around EUR 150 million, EUR 180 million in sales as a whole for Gallus. We will, I think, keep the company for half a year within our consolidated accounts. And with respect to EBITDA and EBIT, I would say, it's basically breakeven if you count everything in.

Okay. And the software companies, there's no big...

The software company is basically not really big numbers. We're talking around about a 1-digit -- I can give you the number. It's around about EUR 5 million. With EUR 5 million in terms of revenue, and with respect to EBITDA, it is basically -- no, overall figures, it's EUR 8 million. And with respect to EBITDA, it's about EUR 1 million.

And you mentioned at the beginning the breakeven point after the reorganization measures of around EUR 2 billion to EUR 2.1 billion. So this definitely includes Gallus. Can we then expect, excluding Gallus somewhere EUR 1.9 billion or something?

Yes.

Yes, you can. And of course, we are trying to get further down because then we can benefit much stronger when the market recovers, old rules.

Okay. So you mentioned with regard to the restructuring measures, EUR 50 million to EUR 60 million for the full year. How sure are you already that with this amount, you can reach your targets in terms of reduction of employees? And to what extent there are still uncertainties?

Yes. Well, I'd say -- I mean, obviously, a program like this has -- it's only fair share of uncertainties. But when it comes to the measures that we have defined, which is basically the swing that you just defined, then I'd say within a 3- year period, we have already defined all the measures when it comes to the reduction in actually even the cash. So therefore, I think in terms of definition of measures were faced, when it comes to implementing, I would say that for this year, we're looking at a 1/3 of all the measures to be implemented and accounted for in this year. And now you're talking about the EUR 50 million, the basically provision that is mostly driven by the reductions in the subsidiaries abroad. I'd tell you that to the degree of 98%, we have already defined all the reductions and actually given the proper list of all the employees involved. So therefore, I would say, we're on a very, very good path here.

[Operator Instructions] It appears we have no further questions at this time. So I would like to hand it back to the speaker for additional remarks.

Thank you. Ladies and gentlemen, thank you very much for your interest in Heidelberg. I believe Heidelberg is on a very good track to become profitable again. Our transformation program is working exceptionally well. And of course, is despite the corona pandemic, working with even higher speed, which, by the way, helps also to overcome the current crisis. So I'm very confident for the short term that Heidelberg will manage the COVID-19 pandemic without external help. And we also will be successful midterm to return to sustainable profitability. Thank you for your attention and enjoy the summer. Talk to you in 3 months again. Thank you.

Thank you very much. Bye.