Heidelberger Druckmaschinen Aktiengesellschaft (HDD) Earnings Call Transcript & Summary

Ladies and gentlemen, I'd like to welcome you to our call on the publication of our key figures for the financial year this morning. Together with my colleague, Marcus Wassenberg, I will, as usual, present to you Heidelberg's most important developments and key financial figures. Once again, the topic of the outlook for the current fiscal year and beyond is sure to be particularly exciting for you. Afterwards, we will be happy to answer any questions you may have. Heidelberg is back, ladies and gentlemen. What some of you and many capital market participants did not think possible, we have a perspective again and even a really promising one for sustainable profitability and structural growth. Thanks to an enormous effort with numerous improvement measures, we successfully defied the corona pandemic in the past fiscal year and initiated strategic cost setting measures that allow us to look forward with confidence to the coming quarters. For example, thanks to a strong final spurt at the end of the year, we closed 2020/'21 with an EBITDA margin well above our forecast, Marcus Wassenberg will present in details here in a moment. Heidelberg has massively reduced the breakeven point. In 2 years at the latest, it should be around EUR 1.9 billion. And we are back on a solid financial footing. Free cash flow was positive, and we continue to keep net financial debt at the low level. We also helped, of course, by the significant recovery in demand due to the economic situation. Just last week, for example, the German Engineering Federation, the VDMA announced that orders in the machinery and planned construction sector has risen by an exceptional 72% and the upturn was gaining momentum worldwide. This, of course, also applies for Heidelberg. Thanks also to consistent portfolio streamlining and structural improvements, we are succeeding in mobilizing our unique technology expertise for future growth in our profitable core business, but also in new business areas. One highlight is certainly our booming e-mobility business, which has already doubled in the past year and promises further enormous growth potential. More on this and the outlook for Heidelberg later. Before that, my colleague and CFO on the Management Board of Heidelberg, Marcus Wassenberg will now explain the details of the last financial year. Marcus, please.

Thanks, Rainer, and hi, everybody. Basically, let me summarize last financial year in 3 topics, basically. Markets are picking up again, and we are benefiting from our market offensive. We see an increase -- continuous increase in order intakes in our key markets since May 2020. And with our sales push and our new operating model, we actually can utilize this to the best. Secondly, our transformation program is effective and that's successful and sustainable. Our structural cost and our operating breakeven point has been sustainably reduced. And we have positioned ourselves better and more efficiently. Financially, and that's the third topic, we are stabilized. We have actually expanded our headroom. Our net debt is maintained at a low level, and we have reduced our interest payments. When it comes to our financial KPIs for last year. Basically, you see that sales have been significantly lower year-on-year, mainly due to the global shutdown that Rainer has already alluded to in the first quarter and then obviously with surge in customer travel in excess. We reacted with short-term measures such as working time measures -- short-term working budget costs, investment freezes. And on the other hand, sustainable structural measures since we catch up, focused on our core business and disposed some of the noncore assets, and we negotiated the company pension plan. EBITDA margin, therefore, has significantly improved as a result. After tax result also benefited from improved interest results because the early repayment of the high-yield bond and the debt reduction. We have a positive free cash flow, mainly driven through net working capital optimization and that basically has maintained at a low level. The good news for us is basically that the order intake has significantly increased in the course of last year. We started really low with an average of EUR 115 million in Q1, but brought it up by 68% to a level of EUR 193 million in the last quarter. And we have to tell you, this continues to be the case, for the first 2 quarters of this financial year has been really promising, and we look forward with real confidence that we'll meet our numbers for this year. When you asked like how have the single markets performed by the region, basically. The good news is China, as the largest single market, has bounced back in the course of the second quarter of last financial year. And then next was Europe, Eastern Europe, mainly and then Germany took over in the third quarter. And finally, even the U.S. saw a significant upward trend in order intake at the end of the fourth quarter. And again, we're glad to tell you we see this happening in the last 2 months of this financial year as well. All regions basically and all ranges of products are increasing, and that gives us a lot of confidence. At the same time, we managed our cost. We have exceeded our target for financial year '21 by EUR 5 million and have realized EUR 85 million in cost savings in last financial year. We look forward to at least achieve EUR 140 million in this financial year and exceed this number by another EUR 30 million to an average of EUR 170 million at least, in financial year '22/'23. This will then result in us lowering breakeven point to around EUR 1.9 billion in financial year '23. Obviously, the transformation has had an effect on Heidelberg and you can roughly say that the pandemic has cost us like EUR 220 million in earnings. And we compensated that by basically short-term work and similar programs that are basically driven internationally to the degree of EUR 100 million. We restructured the company pension scheme by EUR 73 million, and then obviously, we disposed some assets like CERM, the BluePrint Products and Hi-Tech Chemicals, which resulted in EUR 19 million. However, savings from our transformation program resulted in EUR 85 million, and that basically drove our EBITDA result, excluding restructuring, by 25%, increasing the number from EUR 106 million in the last financial year, to EUR 146 million in financial year '21. At the same time, we have repaid the high-yield bond EUR 150 million, basically saved EUR 6 million in interest because basically did that in the half year. So the good news here is no major maturities in the near future. We have basically utilized our RCF to slightly -- the half actually, therefore, look forward to meeting our obligations in full and bringing down our financial debt according to schedule. When we look at the balance sheet, then basically, we have freed up a lot of liquidity by reducing net working capital. We have significantly reduced financial liabilities. And the only thing that really has suffered is equity, basically from the lower discount rate used to value pension obligations. But again, we have been able to compensate for this in part for the reorganization of the company pension scheme. Recently, again, the interest rate has risen, which helped, obviously, the equity in the group, most important is that Heidelberg AG, according to German GAAP shows an equity rate of 28%, which is very solid level. General conditions in the mechanical engineering sector continue to broaden. VDMA is confident, especially for the important markets in Asia and the U.S., and that's basically the basis for our forecast. Positive trend that in addition to the industry association, VDMA, we are already recording in our books gives us confidence that we meet our guidance for next year. Overall, we expect sales to increase to at least EUR 2 billion in the current fiscal year, although the consequence of the pandemic will always -- will still be clearly heard here. Our strategic initiatives, in particular, are helping us on this path, which, coupled with the market recovery evident and the order intake, from a solid foundation and have allowed us to start the year with a tailwind. The first 2 months, as I said already, of the financial year -- of this financial year have confirmed the trends so far. When it comes to EBITDA margin, then basically, we see a range of 6% to 7% despite the challenges we're meeting in the marketplace. Most importantly is that we no longer will report restructuring result as subsequent expenses from the transformation program are no longer expected to be significant for, in future, we only report 1 EBITDA number. The challenge for operating profit in the current year will be to compensate for the significant extraordinary income from the reorganization from pension, significant lower utilization of short-term working and the absence of nonrecurring income from disposal of subsidiaries. Rising sales and a further reduction in the cost base as a result of our transformation program will, to a large extent, already replace these effects of operating income, although extraordinary income is also expected once again in the current year from ongoing, in some cases, are very well advanced asset management project aimed at focusing on the core business. This is mainly expected income from the sales of land at our national and international locations. However, compared with the nonrecurring income of previous years, these are rather of subordinate scale. We will, therefore, be able to demonstrate a significantly improved earnings quality in the current year. Overall, as I said, we expect the EBITDA margin, resulting in the range of 6% to 7% despite these challenges. And let me be very clear. That means that we will show an EBITDA of EUR 146 million this financial year. No change in guidance. This is a conservative guidance we know, but actually, this has not changed at all. This is what we always told you, and most importantly, this is only a step towards the financial year '23, which is the most significant year for us, where we'll demonstrate an EBITDA of 10% margin. Coming back to this financial year, we expect a small after-tax profit for the first time in -- after 3 years of losses, and more importantly, for us, is to look even further ahead. The transformation program is designed to last 3 years, only one of which is behind us. In the coming fiscal year, we will be able to realize the full savings of the program. Here, we have set ourselves a goal of having improved our profitability to such an extent that we can only again generate significant annual net profits and significantly positive free cash flow. As I said, we already have the cost side under control. In order to seize our market opportunities in the attractive areas of industry even more successfully, we have repositioned ourselves internally, which will also have an impact on our external reporting. In order to also make our ambitions and progress measurable, we will report in the new segmentation starting in this current fiscal year. This is derived from our strategy, focus on end markets and is intended to represent a long-term trust. Print solutions and packaging solutions represent our core business. Under technology solutions, we include new businesses, but based on existing core competencies in the company. All segments have a clearly defined mission and value proposition. Through this separation into customer groups, the new segmentation is intended to realize an increase in our profitability and competitiveness and above all, to make this measurable. For this alignment, on the one hand and clear -- for this alignment on the one hand and clear transparency on the other, we aim to create sustainable value for our shareholders. The fact that the capital market is already rewarding our transformation and our market prospects is also reflected in the share price since the beginning of the year, the share value has increased around 2.5x. To this end, we are giving the individual segments clear targets. Print solutions: market recovery offers great potential for Heidelberg. Our leadership in this segment offers us, as a central enabler, good starting position for recovery. Focus is clearly on sustainable profitability. Growth and profitability will be driven primarily by software in addition to recovery. Target is an EBITDA margin in the upper single-digit percentage range. Packaging solutions: strong growth potential for Heidelberg due to steadily increasing environmental awareness and e-commerce. These trends will be addressed by tailored new solutions specifically for packaging printing. Target is an annual growth of around 8% and an increase in the EBITDA margin into a double-digit percentage range. Technology solutions: here, we're focused on a technological competency. Staffs are being developed here with a clear plan and limited financial risk. One pearl in this portfolio is e-mobility as a proof point for technological excellence and development capabilities. This segment represents a potential in markets with higher growth. Rainer Hundsdörfer will now explain in detail the strategic initiatives in the above segments. Rainer?

Marcus, thank you. Ladies and gentlemen, the capital market has responded very positively to what we have achieved so far in recent months. Although this had set high expectations, we are convinced that we'll live up to them. I will show you why with the help of the following charts. The core element of my following remarks is our strategy for the future, which involves a gradual change from a restructuring story to a growth story and a profitable one on that. You can literally feel the spirit of optimism in our company and not just since the incidents figures have been falling and the weather has improved again. Because Heidelberg has changed, finally. And I'd like to repeat that word because in the past for various reasons, we have not succeeded in cutting the Gordian knot to real change and leading Heidelberg to real prospects. As Marcus Wassenberg has just described to you, we are not only confident about the current financial year, but also increasingly optimistic about the subsequent years. Subject to solid economic development, we see good potential for continuation of the profitable upward trend. Following the successful implementation of the realignment measures, the basis for this above is all the consistent use of our market and technology leadership. And this, above all, is part of the already advanced focus on our profitable core business and the expansion of growth areas and regions. Heidelberg sees clear potential for sustainable growth and value enhancement in the future, particularly in the packaging industry, in the world's largest single market for us, China, in digital business models and with new technology applications, for example, as we've shown already in e-mobility. We are developing from a printing press supplier into a technology company step by step. Unlike in previous years, we do not want to leave it at the mere qualitative statements in this regard, but we will be measured concretely against growth and sales targets in the 4 growth areas mentioned. I'll start with our potential in packaging, printing in packaging solutions. Here, Heidelberg is already the world market leader in sheetfed offset prices for folding carton and label printing, with a market share of almost 50%. We are the only supplier to offer the entire production chain end to end. Accordingly, we want to grow faster than the market, which is expected to grow by around 2% per annum for folding cartons, for example. To achieve this, we will, on one hand, push to end-to-end automation, touch point reduction, further integration in OE, increase of our processes, for example, also from web to the finished packaging. And even I don't want to disclose in detail, we're developing some new probably game-changing solutions for the packaging industry. On the other hand, we will significantly expand our data-driven service offerings. Here too, we are significantly further ahead than our competitors, thanks to our large and growing installed bases and our early entry into the cloud data business. And we are significantly expanding our portfolio to include tailored offerings, specifically for the growing Asian market. All this will help us to increase our sales and packaging from around EUR 860 million today to over EUR 1 billion. In China, too, ladies and gentlemen, we are the clear #1 with around 50% market share for the sheetfed offset press market. Here, we are helped by our strong local presence at the long-established plant near Shanghai. On the one hand, this enables us to cover the largest single, fastest-growing market with, today, about 15% share of the world market. But we also serve the Asian growth countries from there. Just about 20% of the machine produced in Shanghai are already exported mostly to Asia. So what will we do in China? Firstly, we will continue to expand our site. Secondly, we will increase the share of parts produced locally in China to over 80%, which will be achieved through partnership, respectively, the joint venture with Masterwork, among many other things. And with that, we'll increase the competitiveness of our Chinese plan. And we will also increasingly rely in China on the life cycle business already successfully established in the rest of the world. There is already promising demand there. Because of these measures, we expect to increase our China sales from around EUR 300 million today to over EUR 360 million by 2026. Now to our next growth driver, our digital business models. Crucial to our success in this regard is our unique positioning in the industry for cloud and database software and the corresponding range of different products and services tailored to our customers' needs. Ideally, our services cover the entire life cycle of the press, modular for consumables and services are extended to include the Prinect software offering. In addition, more than 70 customers are already using the subscription model, where payment is no longer made for the individual components, but based on the number of sheets printed, depending on performance which guarantees Heidelberg a steady, predictable revenue stream over a long period of time and higher profitability and competitiveness for our customers. Overall, we have already been able to increase our share of total sales with digital business models from 5% to 11% since 2018. And Heidelberg already generates 26% of life cycle sales with contract business, and this is growing fast. Here, as already mentioned, we can build on our unique data expertise. As a global market leader, Heidelberg has connected more than 13,000 presses to the Heidelberg Cloud and around 25,000 Heidelberg software modules, software Prinect modules, which also supply valuable data to serve our customers better. It should also be emphasized that around half of Prinect sales, this is the Heidelberg software to operate the smart print shop, are already reoccurring, are already Software-as-a-Service. We bundle our digital customer interfaces under the central Heidelberg Plus customer platform. Heidelberg is also the first provider to develop a central open industry platform for automated supplier and customer management based on modern cloud technologies under the name of Zaikio. Using these spaces will greatly expand the usage-based contract models in the coming years, convert our Prinect offerings to cloud-based contract models, expand Zaikio to include further applications and serve, in future, also the Chinese market with specific Software-as-a-Service offerings. This will allow, at the end, even to do business with software in China. Today, this is rather difficult because you can sell a license-only once for the whole country. We experienced that in the past, and that will change. And this all should help us to expand our sales from contract offerings from around EUR 200 million today to over EUR 450 million in the next 5 years. I come to extremely exciting part of our business. We've recently documented this with several press releases. E-mobility is very successful and Heidelberg is fully committed to grow that business. In just a few years, we have become the leading provider in the charging infrastructure sector. In 2020/'21, for example, we were able to more than double revenue from various offerings to over EUR 20 million with Wallbox revenue even to quadrupling. The Wallbox is the Heidelberg branded part of that business. Heidelberg has increased its market share in private charging systems to 20% at present. And we want to at least maintain this in the fast-growing market of e-mobility infrastructure. As you know, we won the ADAC and ÖATMC test with our Home Eco Wallbox. The demand is rising so dynamically, that we will have doubled our production capacity by beginning of 2021 and plan to add more by the end of the year, probably double it again. In terms of homework for this area of work, the focus is on spinning off the business into an own GMBH, limited liability company, own a separate legal entity, which I can announce was just completed as of today. Production capacity -- the name of the company is HEI Charge, HEI like Heidelberg and Charge like charging. Production capacity is to be doubled again this fiscal year. As I mentioned, we'll push ahead strongly with our portfolio of products and service as well as with Europe-wide sales. And we're aiming for strategic partnerships in the field of charging systems. Here, too, we hope to be able to communicate more details to you by the end of 2021, and let you know where this business is going. The prospects for e-mobility make me almost -- sorry sales expected to increase annually at least by mid-double digit percentage, maybe even more. And this field of activity serves, for us, and that's the other exciting part, as blueprint for us to bring further innovative technologies to the market and to serial maturity. One example we are working on, and it looks very good, is printed electronics. Ladies and gentlemen, I hope that I have been able to make clear to you that the new spirit, the new momentum and, above all, the new perspectives of Heidelberg. I would, therefore, like to conclude my remarks with a clear commitment. We want to, and we will do everything in our power to create added value for our customers, our shareholders and our employees. And we will do so sustainably. Accordingly, I would like to conclude by briefly reviewing the highlights of our presentation today. The key points and milestones that you should ideally take with you when you leave this call. First, Heidelberg is close to achieving its financial turnaround despite pandemic, thanks to significant improvements in results and the ability to generate substantial cash flows, we are confident that we will soon be able to announce the completion of the turnaround. Moreover, this is a very good basis for the planned future growth. Thanks to the successfully completed homework and the focusing of our business, Heidelberg will become more profitable- in the future. The basis for this is a significantly lower breakeven point, which is continuing to fall and our ability to profit strongly from the very fast recovering markets. We will grow profitable in our core markets in the future, particularly in packaging, printing in China and with our digital business models. In addition, we are only at the beginning of an enormous growth spurt from new innovative offerings. For example, as you can already see in e--mobility and we will expand more strongly outside in core activities -- outside of our core activities in the future. Heidelberg's well-known technological excellence will be a strong driver of growth in the megatrends of automation and the platform economy. Last but not least, we will devote more attention to the topic of sustainability and the ESG criteria in this financial year and beyond. Environment, social and governance: accordingly, we will significantly sharpen our sustainability strategy and define clear comprehensive ESG metrics, against, we will also be measured. Thank you very much for your attention. My colleague, Marcus and I are now looking forward for your questions. Thank you.

[Operator Instructions] So our first question comes from Daniel Gleim from Stifel.

Actually, 3 of them. The first 1 is on the current order momentum. You kindly provided the sequential evolution on Chart #7, and I'm wondering now that the first quarter of this fiscal is almost completed, whether you could give us an indication how the sequential evolution in terms of order momentum was in the current fiscal? Do we see a step-up over the EUR 579 million that you saw in the last quarter? That is my first question.

We are actually quite happy with the order intake, actually, in our region and overall product line. So basically, you can assume that at least we are able to maintain the momentum on the levels that we have last demonstrated in March.

I'd like to add, we are also very happy with the mix of the product because it's right in the core of Heidelberg, 50 x 100 format. On the one hand, the high-performance machines made in Germany. But also our new products just launched in China, both very good products for Heidelberg and, of course, for our customers.

Very clear. Could you comment, please, on your ability to raise prices in the current environment? What is the pricing momentum? That is the first part of the question. Secondly, if you could please comment on cost inflation. I mean this seems to be the key concern of the market at the moment. Where do we stand with regards to your existing supplier contracts? When are they going to be renegotiated? And to what extent do you expect higher input costs potentially then in the second half of this fiscal?

May I start with the second question. Of course, we see on the supplier side, development, which we don't like. The prices are increasing. The demand is growing. So availability is, of course, also limited, and it's quite a challenge to get all the components and the material we need. But we are very optimistic that we will manage that. And also, we are optimistic that we will not pay more than the actual material cost increases are. We have a very long-standing and good relation with our suppliers. However, there will be cost increases, and that triggered the price increase we just recently announced. We are well underway to realize these price increases in the market. Very simple thing. If you can't raise prices, not now whenever you will, the world knows the material supply is -- the demand is increasingly, everybody, our customers, but even more so, our salespeople understand that the price increase is realistic, fair, and we are very optimistic that we can get it done. Interesting is also that our competitors in the market, just on a blink of an eye followed with the same need. They face similar situation. So I am not worried that we cannot realize the necessary price increases to secure the margin quality. Does that answer your question?

Just to clarify. So the net assertion that you expect will be sufficient to fully cover any cost inflation?

Of course, that's how we calculated that we are on the safe side.

And customers...

We're quite comfortable that -- yes, you see, basically, order intake is good. We are able to protect our margins. So therefore, we don't think we can take -- we will take a hit here.

Perfectly clear. My last point was already partially addressed, but maybe you can elaborate a little bit more on your supply chain and how you monitor this. Have you built any safety stocks? What kind of components create the largest headaches for you at the moment? I mean we have some suspicions, but maybe you can confirm. So if you could provide a little bit more color around your statement that you're quite confident that you can manage.

Sometimes a disadvantage turns into an advantage. Heidelberg was and is always criticized because it's very high manufacturing depth. And that's, of course, one of the advantages today, because we have a lot more of our supply chain in our own control than many other companies who basically only assemble machinery and equipment. So that helps a lot. On the other hand, there are components, which we have also to buy and one, like everywhere in the world and with everybody, it is mainly electronic components, which are scarce and need some really effort to make sure to get them, and sometimes you have even to pay significant price increases, which, from a percentage of the total manufacturing costs of the machines are small for the individual component is rather high. We managed to do that. Then, of course, also, plastic materials are in high demand, but it's also a small part what we need in Heidelberg. And then it's, all across the board, a little bit here, a little bit there, sheet metal components steel components are in high demand. But as we start with many things, with scratch. So we start with the raw iron and with scrap. This is still available. And we have, everywhere where it's needed, long-term supply contracts, which are as of today, and I think also for future fully respected by our suppliers. So we have challenges, but no challenges, which really need to worry us. Its operational business to make sure that we get everything and all on time.

Very clear.

Our next question comes from Peter Rothenaicher from Baader Bank.

Firstly, is there a specific reason why you have not included in written form your target for 2022, 2023 of at least 10% EBITDA margin? And on the other hand, what is your sales volume, which is necessary to achieve this target?

So basically, we have just given a 1-year guidance and 1 year guidance is basically what we set out, and there was no change, EUR 146 million in EBITDA and at least EUR 2 billion in revenues. When it comes to next year, we remain [ strong ] in our, I wouldn't call it, the guidance yet, but it's basically what we promised you. There will be a 10% EBITDA margin at least, and we look at a number of EUR 2.3 billion in revenue. And again we're talking recovery here, okay? That is us being slowly but steadily back to normal. Nothing more.

Okay. Then a second question regarding your contract model. You mentioned you are now doing 11% of your sales with contract models. On the other hand, I think you have stopped including new machines in the contract model. What is the status quo? Are you able to refinance this? Will you be able to include machines in the future as well? And what about these machines on the balance sheet?

Basically, the strategy is not to include both machines in our balance sheet. I still think we have to stabilize our balance sheet and taking those on board would not really do the trick here. So therefore, we're looking -- we're still looking and we'll keep on looking to externalize those products. And as you know, we're basically teaming up with a partner to basically generate sales in adequate formats world over, and that's going to be additional boost for recurring revenue. The idea is to basically increase the number from EUR 200 million to EUR 450 million by the end of financial year '26, so more than double it up in 5 years.

Okay. And then regarding financing, currently, you have some room with the RCF. I think the contract is until the year 2022/2023. Are you still in negotiations about further lines about extension of RCF? Or eventually in -- with other refinancing measures?

So basically, as you rightly say, we are utilizing the RCF to add around about 50%. So at the present time, we have room enough. We don't see any problems in getting a new revolver, and therefore, will start negotiations by the end of this calendar year, end of this financial year, so basically in wintertime. We don't expect any problem here to basically bring it back to the same volume. If there will be partly new players, I don't know, as of now, because we haven't even started to talk about this. But honestly, I don't expect any difficulties here because the numbers make perfect sense. I think everybody has seen that the turnaround measures work so therefore, this doesn't give me any headache here.

Our next question comes from Michael Junghans from Commerzbank.

Yes. A few questions, if I may. Can you hear me?

Yes, sure. Please, ask a question.

So the first is on your global print volume. What you stated in your report is you do not expect that global print volume would fully return to pre-COVID levels in the foreseeable future. Could you please explain what this new assessment means for your current subscription contract model going forward?

I'm not quite sure we got you right here. Can you -- sorry, can you kind of rephrase your question? Because we're really -- we didn't get you, honestly, sorry.

Yes. My question was relating to what you said in your statements that you expect global print volumes not to fully return to pre-COVID levels in the foreseeable future. And I'm wondering whether this might now trigger some changes with regards to your subscription contract model. Because if I remember correctly, you would benefit only if these print volumes would, apparently, rise in the future. So have you made any kind of changes in your mind with this revenue contract model from subscription or not?

Thank you for the question, Mr. Junghans. Now I understand. So we have to differentiate in between, and that's why we have chosen this different segmentation. We have to differentiate the business in print solutions. That's all the print -- the printers who do the general print products from books to business cards and brochures. And the second group is packaging solutions which is label and folding carton mostly. The area of packaging and folding carton didn't suffer during the pandemic. Actually, they had boom and they will grow, driven by several facts. One, they always grow because the world population is growing. And second, after the pandemic, I think the issue avoiding and replacing plastic packaging will gain further momentum. That will grow. So we see there, a growth of, on the one hand, print production volume of our customers, but we see also our strong customers grow further. In the area of print solutions, we expect that we will see a further consolidation of the business. And there, it could very well be that the print production volume will not reach the pre-corona level. However, that will not mean the individual customer will print less. We see here a consolidation. And we see already now the good customers and the ones we have already under subscriptions are the ones who benefit, who are the consolidators. That means, yes, the overall print production volume might stay below pre-corona level. But our customers and the potential customers for subscription are growing, and they're probably growing over proportional because they are consolidating. So this just supports our strategy in this field that in order to compensate for the decline of the overall volume, we can increase the share of wallet at our customers and increase this contract business, our overall business in the area of print solutions as well. Does that answer your question?

Yes. Yes. Understood. The next question is a quite similar one with regard to your midterm revenue guidance. So you're targeting to achieve a midterm revenue CAGR of about 5% on -- in the aggregate. So about 4% for print solutions or about 8% for packaging solutions, yes? Even though you have noted in the presentation that packaging market for folding boxes is only growing by about 2% each year. Against this backdrop, could you give us a recap about the initiatives that are still necessary for you to achieve this growth target of about 5% in the midterm.

This has several aspects. The -- on the one aspect, I -- remember, I presented 4 growth areas. And 2 of them are basically helpful in that area. And in packaging, it is, on the one hand, that we increase and improve our portfolio. For instance, we are just, in these days, presenting a new machine from China, for China and also, to a certain extent, for the rest of the world, addressing specifically the packaging market. This machine already sells even before it's officially presented extremely well in China and in some other parts of the world. So new portfolio. Then on top of that, we are on the verge of presenting a highly automated system for packaging production, which could even be, if you will, for some parts of packaging, a game changer, a new solution beyond what Heidelberg has offered so far, and we will present that also in the next 6 months. We are close to sign up with the first 2 or 3 customers. And as soon as that is completed, we will probably go a bit more public with that. So portfolio expansion is the one big thing. And the second is to focus stronger on the market where packaging is growing over-proportional and that is China, for instance. And last, not least, offerings in the area of label, offerings in the area of folding carton, replacing plastic packaging could be an additional driver over the overall packaging growth industry itself.

Yes. Okay, fully understood. So many points which are addressing the intact drivers in the packaging market. But what has now changed in terms of advertising or in terms of commercial printing solutions? Because here, you also are guiding for 4% midterm revenue CAGR even though you have previously said that customers are still in a consolidation mode in this area.

Yes. There, I would call this rebound. This industry was hit very hard. So even if you look at our stars in this industry, the online printers, some of them had a decline of their business of 50% and more, or at least the better ones, 30%. And of course, in an environment like that, nobody is investing, except maybe a few exceptions. So we don't see a growth of that business in total, but we will see a rebound where at least, to a certain extent, this business is going to come back. And we see already today in our order entry, that customers in that field, in the classical print solutions, investing. So we announced just a few days ago a really mega deal for Heidelberg were a book printer. A book printer invested in a large number of new Heidelberg machines. Restructuring this business, the mindset, "I want to be ready when the business picks up again in the next month." So to give you an idea of this customer now will operate with all new Heidelberg equipment with 61 printing units replacing all other machines we had and is running with a shop equipped with the latest, highly automated Heidelberg printing equipment. And so it is a very mixed bag. Overall, yes, it goes sideways, but there is a lot of rebound and pickup and demand. And also this customer not only buys the machinery from Heidelberg, he also -- we have also print side contract where we supply all the necessary consumables, the necessary services to him in a contract. He's not going shop around with this supplier, that supplier, that supplier. He takes it all from Heidelberg. And that's where the growth potential is for Heidelberg, even in the stagnating print solutions market segment.

Okay. I'll go back to the queue for now.

Our next question comes from Stefan Augustin from Warburg Research.

Actually, rather a couple of follow-ups here. So the first one is probably a very easy one. The [indiscernible] orders, have they been -- or will they've been shown in the first quarter of the running fiscal year? Or have they been already included in last year's order intake?

No. This year, first quarter.

Okay. And the next one is the -- you have been talking about partnering up with different entities in -- for the subscription contracts. And let's say, on a time line, when do you think, actually, there could be possibly a successful signing or a solution that you could go? Let's say, more aggressively with these kind of products into the market?

I mean, it's a negotiation. Therefore, I have to be careful what I say right now, but hopefully, in autumn latest.

And the next one would be on your prospects, let's say, for the China print fair, which is in the end of June. So you already mentioned you have a new product, especially for China. So I assume that you're referring already to get a good indication on this product for the fair. So let's say, this should support Q2 orders in a meaningfully way. Is that right?

Definitely, not only Q2. I think it's an excellent product, with top-notch performance at a very, very competitive pricing. By the way, we will not only present this machine at the China print. It is already in our showrooms here, and we will parallel to the China print. Also present this new product offering to the rest of the world as well because not everyone in the world wants to have the high-end, high-performance solutions. There are enough people also in the world outside of China and Asia who prefer value products. And we are quite proud of this new product's very, very good capabilities at a very, very competitive pricing.

And can I conclude from the statements that your parts joint venture with Masterworks is then also set up and let's say, an important step to be able to offer that product at such a price that you're making from the profit?

It improves it further. Let's say this way, the GB has started, the first parts coming from Tianjin to Qingpu. And remember, the GB is producing high-quality parts for Heidelberg and for Masterwork. So it has started. The first machine tools are in operation. The first, I think, total 100-plus parts are being produced there and increase the local content of our Chinese machines. Even though the Chinese machines already today are highly competitive and the increase of local content basically has 2 effects. One, it will reduce net working capital because we eliminate the transportation of those parts which takes, today, up to 6, 8, sometimes 12 weeks. So that networking capital component will be gone. And of course, freight duty is also cost and manufacturing cost still is a whole lot lower in China than in Germany.

Okay. And then my last question would be actually on the organic cash flow development. So you had a lot of, let's say, one-off and asset sale-related cash elements in last year. And there will also be a few in this year. And if you strip all these out, and we would also take out the, let's say, the restructuring payments, which I expect to be around EUR 70 million, EUR 75 million this year, will you say that despite the increase in the business load, you can improve the organic operating cash flow development?

Yes. So basically, let me put it in a different way. What -- my statement would be, for this year, is that the extraordinary inflows will basically be compensating the extraordinary outflows. So therefore, what you see is what you get in terms of operating cash flow. And if you know that, basically, obviously, last year, there were some extra effects in there due to asset sales and so on. And I'd say basically, what you see right now this time in this financial year, it's going to be level to the normal operating cash flow since the extra effect just compensate and kill each other. And that will then result in an improvement. And that's not -- that's only the starting point. So then, obviously, for the year after, it's going to be, hopefully, further improvement. And we're looking at a mid-double digit figure as we told you, I think, for this year.

[Operator Instructions] Our next question comes from Stefan Maichl from LBBW.

Stefan Maichl from LBBW in Stuttgart. Some questions from my side, if I may, first one or the first two ones are more housekeeping. I've seen that you have cut your R&D spend costs to EUR 87 million in last fiscal year. That's only about 4.5% of sales. Would you expect a higher ratio in the upcoming years? Maybe this year, probably in the ballpark of around 5%, which we have seen in the last couple of years? Or is this a sustainable level, 5% to 4%. That's the first one.

Yes, we will increase it, tiny bit. It will be in the range of EUR 95 million plus/minus. So we are still a little below the 5%. It will be 4.7% or so. And I think that's a very much sustainable level where we -- with, of course, the support of portfolio management, focus on what is really important. And we focus our resources maybe just a bit different in the past where we see the highest potential for growth. And that's, of course, primarily in the segment of packaging solutions and, of course, also in the growth areas, in e-mobility and other areas where we will probably spend a little more money than 5%.

And CapEx Ratio, is it linked to your expansion in e-mobility? Is this a big issue?

No.

Or should we see more or less the level -- the average level before corona crisis, again, for the group?

No. I think we will be below that -- significantly below that. We will be, of course, not even at the maximum in the range of depreciation, which is, of course, at least for my understanding, a sound number, so in the range of about EUR 50 million. To expand in e-mobility in regards of CapEx is not that big of a deal. The cost there is rather R&D and of course, building up structures for sales and market development. This is not so much in CapEx because it's basically only assembly. Expensive, it always gets in CapEx if you manufacture. If you need big machine tools, expensive high-precision machine tools, that's the big part. And I guess, we have enough of that.

And in e-mobility, you are currently more or less focused on Germany market-leading position. Which countries you want to conquer next? Is it just in Europe or international -- more international?

First of all, it's true. We started in Germany, and we will defend our position, of course. And I think we have a good chance to defend. But now we are reaching out in the surrounding countries. And from our strategy, we go there first when the demand starts, where we can capture the biggest share. So we reached out to Poland, to Hungary, but we also care about France and Italy and other countries. And this is, of course, the next step, Europe, where we will -- with all the expertise Heidelberg has captured these markets, because from an overall requirements and demands, they are very close to the German demand. We're, of course, also evaluating markets in overseas. So of course, we look to China and to Asia, and we look to North America, but the demand in regards of loading infrastructure is different. Just consider that you have, in a typical American household, 110 volts single line. You cannot simply use our solutions and technologies. You need to find different solutions in order to manage that. And except maybe California, the U.S. is not that far into e-mobility. And China is a totally different field. We know it. We evaluate it. And when the time is right, we will enter those markets. Heidelberg has the expertise, the knowledge and also the footprint to do so. But we go for the low-hanging fruits first, and that is, of course, Europe. And the expansion is not only in markets. It's, of course, also in product portfolio expansion, it is in expanded business models as well. Think about operation of larger systems, the parking garage in companies or the parking lots or apartment houses with several parking spots in the basement or, which is a very interesting field, we are looking into solutions for the ecosystem of the single-family home with solar technology on the roof, with battery storage in the basement. The car and the Wallbox in the garage and basically integrated into a smart home. There are many areas we will -- we could develop into, and we are in the phase of designing out where to go next, and with whom to team up with so we can do it without long development times.

But product portfolio enlargement does not imply that you want to enter the market of fast charging stations?

No, no, no. Not at all. First of all, it is a market where it seems to be difficult to make money. And second, if you have ever tried electrical car, the only convenient place to charge is at home or at work. Anything else is very inconvenient.

I agree with you. Coming back to housekeeping questions. I mean, I've seen, in the fourth quarter, the margin in the life cycle solution business, the EBITDA margin was only about 7%. What is the reason for that low -- exceptional low margin in the last quarter?

Basically, the last addition at the very last moment.

In the life cycle solution? Technology segment wasn't a life cycle solution business, EUR 15 million, if I do calculation right, which implies a margin of 7.3% only in the fourth quarter?

No. But basically, it was the other way around. We have taken a hit in profitability when it comes to OEM product. I don't think we have taken a hit there, but maybe we can take this offline and go for numbers. So I would be surprised if that's correct.

Okay. Just do calculation, again. And maybe last question, more strategic one. Two years ago, you have targeted for the contract business, 1/3 of group sales in '24/'25. If I do calculation right, now the target is only around 20% with sales of over EUR 450 million. Group sales might be over EUR 2 billion. So which assumptions have been changed leading to that lower percent of share of contract business?

Nothing actually. The only thing which came in between was the pandemia, where everything developed slower. So basically, we lost the year roughly to achieve this goal. The strategy is the same. The target is actually the same, but nobody had corona expected and that has pushed out quite a few things.

The corona has really inhibited your clients to enter that subscription models you offered.

Yes. And 1 part is, of course, that we have not, as of today, a solution to finance those machines. That, of course, has also reduced this -- the possibility as we hope -- as I expect from my CFO to manage to find a way to finance those machines, we can raise the target very quickly, I'm certain.

Our next question comes from Jean-Marc Mueller from JMS Invest.

More housekeeping stuff, I'm afraid. And you mentioned most of it, but still for me just to get a better understanding of the size of magnitude. I understand that you will still have cash out for restructuring this year and probably next year. Can you quantify that?

Yes. For this year, it's going to be around about EUR 70, 7-0, million, to EUR 75 million. And roughly half of it then, so EUR 35 million, is going to be the year after, and then it's done.

Okay. And what you said is that by asset management, I mean, selling real estate, et cetera, you would expect to compensate for the EUR 75 million in this fiscal year?

Yes. Yes.

Okay. And next year remains to be seen, whether there is more to come. But in any case, you will have this one-off cash out basically for the restructuring.

We're going to have this carried out, but we don't see any extraordinary effects coming in. So this is being taken care of in our guidance and prognosis. So I don't worry about that.

Okay. And then it's also fair to say, probably, that given the top line growth that you assume, I mean, you just said that you expect CapEx of around EUR 95 million and you said that's roughly 4.7% of sales. So that will be something above EUR 2 billion in sales, obviously, around EUR 2.05 billion or so in sales. If you have that sort of top line growth, I mean, we would expect working capital to bounce back somewhat, I would assume.

That's absolutely true. But let me just give you 1 correction. So we're talking about CapEx, if I'm correct, of round about EUR 50 million again. So that's not the number. I think Rainer was alluding to R&D.

Oh, sorry. I must have gotten that totally wrong. Oh, so CapEx...

And then you're right that it's obviously -- yes CapEx is EUR 5-0 million. And R&D is just a bit increasing.

EUR 95 million.

Back to a number closer to 5%. So that's one thing. Second thing, you're right. And basically, ramping up sales from EUR 2 billion to EUR 2.3 billion, obviously, means that we're increasing net working capital at the same time. By having this joint venture in China, we'll be able to sort of manage net working capital yet more efficient again. That will obviously then be a counter movement. So therefore, again, as I said, we're expecting quite positive number for free cash flow the year after. This is going to be a 2-digit number next year then, '23, will be, again, a major improvement as we think so.

But the 2 digit number refers to operating free cash flow, so before CapEx payments?

It's going to be free cash flow and it's including CapEx.

Oh, it's including CapEx. Okay.

Yes.

And then my next question will be -- I mean the CapEx level you just mentioned, the EUR 50 million, it was already fairly low last year also, if I look at, I mean, absolute numbers, but also in terms of percentage of sales. I mean is this just -- would you expect that to increase now then going forward?

Mr. Mueller, allow me. I'm a CFO, and I'm maybe not as driven by the beauty of engineering. We spend a lot of money for product that didn't sell. And this is, I think, what Rainer was alluding to when he said that now we're being more strict and more efficient when it comes to steering our CapEx. And I think, therefore, we have to be fair and say, I think it should do the trick since we have drastically reduced the portfolio, and we only have a portfolio that really makes money.

Okay. Understood. Understood. Now that's quite clear. So that means also net debt levels, et cetera, actually should improve because you expect the free cash flow in the double-digit range in this year that should even improve in next year.

Yes. Yes. Yes.

And just quickly, I mean you mentioned the EUR 146 million EBITDA. I mean, that was quite clear. I mean that's basically the benchmark because that's what you did last fiscal year. You also mentioned the 10% that you would achieve on a sales level of EUR 2.3 billion, that's in the next fiscal year.

Yes.

So I mean it's fair to say, if I take the EUR 146 million and I divide it by the lower end of your margin guidance range, which is 6%, I would get to sales of EUR 2.4 billion, which is then higher than the EUR 2.3 billion that you would expect next year. So basically, by saying that you will have an EBITDA of EUR 146 million, is probably a very clear indication that you expect to be at the upper end of your margin guidance range?

I'm not sure I follow your calculations. But I think I follow your conclusion that we think that we are quite -- I think we're quite optimistic when it comes to our guidance and the market expectation seems to be in the upper range of the EBITDA margin for this year. And we will not contradict this motion, but we cannot go any further at this point in time.

[Operator Instructions] Our next question comes from Stefan Maichl from LBBW.

Yes, Stefan Maichl, again, sorry. Two follow-up questions. The first one is on your M&A for this year. Besides the real estate deal in Wiesloch-Walldorf just already announced or already done, which asset deals could be conceived in the current fiscal year? And as -- and related to this, is the divestment of Gallus is still an opportunity?

There is more property than this area of Walldorf-Wiesloch, and that's what we're looking at. When it -- so therefore, there is more that we talk about as we speak with potential investors. And for the second part of your question, Gallus remains part of the group. We continue to reflect Gallus. We're making huge progress. Order intake is really satisfactory and with a good product mix. Therefore, we see, at this point in time, no indication of getting rid Gallus, quite the opposite.

Okay. The second one, last one is on cost development. Do you envisage any short-term or cost savings in the current fiscal year. Last year, you had about EUR 100 million. And how should we think about marketing trade fair we have now to -- in China? Traveling costs this year versus last year?

That's a good question. Let me start by saying we're going to bring short-term work to round about 1/3 of the extended amount that we saw last year. So it's not completely gone but basically, we're managing it down since order intake is really showing significant improvement, and therefore, utilization is increasing. When it comes to the future of trade shows, then I have to look at our CEO because, obviously, he's in charge of those things. The only thing I can say is that I'll be as strict as hell when it comes to managing this cost and releasing people to go to shores, but finally and ultimately, [ a cannonball ].

Yes, it's a really good question. I don't think that shows like Drupa, we will have again. The pandemia didn't really change things, but it accelerated things. It's a catalyst. And shows like The Drupa are not really the ones we would have anyhow. So I'm very certain we will never again spend that kind of money for Drupa. It's a bit different in emerging markets where we still sign new customers. Like in India, like in South America, like in Asia, in particular, in China. And there, we might still go for another few years for the trade shows, which are, on the other hand, also highly digital. It's a combination of digital show and presence. So the situation in Asia, and particularly China's completely different. Protection of data is not protection of the source, but of the data itself. So we can utilize it very much in the combination of presence and digital selling, so it's very, very helpful. We find actually new customers we didn't know before, which is not the case on Drupa. It's just a big festival at the cost of EUR 10 million plus. We'll not do this anymore. We learned very much during the pandemic to do these things off-line. And we had a little bit our innovation days in October, more leads than in the Drupa 2016 at a cost, which was only a small fraction of the cost of Drupa '16. Travel also will not come back to the old level anymore. Of course, we need to meet our customers once in a while and even our employees. But where we met 4 times a year, onetime will do. So also travel cost will stay at a much lower level. I think that's certain. We learn to deal with home office. We learn with online negotiations. We're even selling machines online today, which was unheard and unbelieved of just 12 months ago. Nobody thought that would work. So the picture is different.

So would you say that the cost -- the overall cost to get an order will be sustainably lower in the future this year, next year, versus pre-corona crisis level giving you a push in your EBITDA margin as you have a lot of smaller clients, dense sales and service network and all the costs that related to that?

Let's look at it as a bit different. Selling cost is a big part of our restructuring efforts. We are restructuring our sales organization, which includes shows, which includes online. And we will definitely keep selling cost at a low level. I think with increased sales without additional people, selling cost is about -- 70% is people in selling costs. If we can increase and I'm very certain increase in the next fiscal year to EUR 2.3 billion or more with the same personnel cost, the selling cost will go down significantly further. So maybe even below the pandemic level.

Our next question comes from Jean-Marc Mueller from JMS Invest.

Yes. Sorry it's me again. I have a follow-up or basically, I forgot.

I forgot that.

The restructuring of the whole pension thing, how will this affect cash flows? I mean, you probably have continuous cash outflow for pension. You had it in the past, if I remember correctly. How will now the larger size of the pension gap impact that in terms of cash flow statement?

Yes. Basically -- and obviously, it's a long-lasting obligation we're driving here. And what you're basically looking at is over a period until 2050, roughly to 2050 number that right now is around about EUR 30 million, then increases in the 2030 to a level of EUR 40 million a year to then a smaller number in the end of EUR 20 million and below in 2050. So basically, allow me to say it like this. Basically, you're looking into very moderate outflows compared to the cash generation that we are -- I think, will have. So therefore, this is not really worrying. I mean, obviously, it's a huge number when it comes to balance sheet, and it has very much to do with the way those things are calculated, particularly under IFRS. But basically, the cash outflows are really manageable and very .

Okay. But you said it's around EUR 30 million for the years to come?

What I say is basically that each year and years to come around about EUR 30 million, EUR 20 million, EUR 30 million, roundabout, that ballpark figure. It peaks in the 2030s to the degree of EUR 40 million, and then it's again declining.

Yes. But your guidance for double-digit free cash flow includes this EUR 30 million number.

Yes,yes. Of course, of course. This is all included.

Okay, is it hard to calculate that? I mean, I know I'm sitting just in front of my excel sheet, and that obviously has nothing to do with what you do, but it's kind of a hard to calculate a double-digit free cash flow when I include a negative working capital to cash out for the restructuring. Let's say, EUR 30 million for pension provisions, et cetera. And as a starting point, you're guiding for kind of, I think, a low million amount of net profit.

That's correct.

But that means that the one-off this year region has to be substantial.

Yes. So Marc, can we proceed like this? You give Robin a call and he goes through those calculations with you in details to give you more comfort?

Of course. I know it since a long time. So I'm looking forward to being in touch with him again.

It appears there are no further questions at this time. Mr. Hundsdörfer, I will pass the call back over to you for any additional or closing remarks.

Yes. Thank you. Yes, ladies and gentlemen, thank you very much for the interest in Heidelberg. I think we can say we managed quite well to survive the crisis, and at the same time, to manage our transformation program forward, the prospective businesses in front of us in our core business, but also in the growth areas and the technology areas are quite promising. And some of them are really fun and we see that in the motivation of our people already. Heidelberg has changed and is changing further. Thank you for your attention, and we'll talk to you in 3 months when we present our Q1 figures. Thank you very much.

Take care. Bye-bye.

This concludes today's call. Thank you for your participation. You may now disconnect.