Heidelberger Druckmaschinen Aktiengesellschaft (HDD) Earnings Call Transcript & Summary

Good day, and welcome to Heidelberger Druckmaschinen AG conference call for the propagation of half year results. Today's call is being recorded. I will now hand over to Dr. Ludwin Monz, CEO. Please go ahead.

Yes. Good afternoon, ladies and gentlemen, and welcome to Heidelberg's analyst call on our half year results for fiscal year '22, '23. So let's have a look at the agenda of today's call. I will start our presentation with a summary on the first half year results. And after that, my colleague, Marcus Wassenberg, will continue with an in-depth discussion of the financials. In our highlights section, I'm going to talk about a new product, which is called Gallus, which is our first fully digital label printing system. And finally, we will update our outlook for the remainder of the fiscal year. Okay. So before we look at our numbers, let me just highlight a few things. Heidelberg had a really successful second quarter with sales and EBITDA, both up year-on-year. Q2, therefore, built on the momentum of our first quarter and provides a good basis for achieving our targets also for the full year. Considering all the macroeconomic challenges, we are quite happy with the Q2 results and also with the first half of the fiscal year. However, as you all know, the economic environment remains really tough. In the second half of the year, we expect costs to increase as inflation remains on a high level, unfortunately. Personnel costs will likely increase substantially. We do not know the exact extent yet as negotiations between the employers' association and the union is still ongoing. Yes, with these thoughts, let's have a look at the numbers. So orders came in at about EUR 1.2 billion, which is roughly the same level as in prior year. Please note that last year, there was a trade fair in the first quarter. So we reached the same level this year, even without such a onetime effect. After 6 months, orders continue to clearly exceed sales. This is a good sign as sales grew by 14% year-over-year and reached more than EUR 1.1 billion. We benefited from some positive currency effects. However, at constant currencies, this increase still would have been 9%. In both Central Europe and North America as well as in the Packaging segment, growth was particularly strong, mainly due to sales of new machines. Compared to the first quarter, China was also somewhat stronger as COVID related production restrictions, which we saw before the East once again. EBITDA increased year-over-year by EUR 30 million and reached EUR 104 million after 6 months. This represents an EBITDA margin of 9.2%. The improvement in EBITDA was mainly driven by the operating leverage effect due to a higher sales volume and were supported by our ongoing price calibration efforts, in other words, by our price increases. My colleague, Marcus Wassenberg, will go into more detail on the EBITDA development later. Let me finally comment on our net income. We already exceeded the full year result of last fiscal year '22 after 6 months of the current fiscal year we are quite happy about that development as well. Yes, so much about the overview. So I now would like to hand over to my colleague, Marcus Wassenberg, who will give you more details. Marcus?

Thanks, Ludwin, and warm welcome, ladies and gentlemen, from my side as well. Let's start with the current order trend, and we're really happy and pleased that we don't see weakening on the demand side yet. If you take a closer look on the order intake, we actually see that the second quarter lines are pretty well as a very solid quarter as compared to the previous ones. And September showed to be the strongest month of this quarter. Compared to the previous year, our price increases, a price increase as well as FX effect had a supporting effect to this, our book-to-bill ratio remains at a level of above 1, which is a really good sign for the quarters to come. You can also see that our backlog grew to more than EUR 1 billion, which is the strongest backlog for many, many years. If you look into the segments then basically for our core business, you can see that both segments are following the group in tendency. So both Print Solutions and Packaging Solutions, we're able to maintain a good level of the previous year, in which, as you know, a trade fair show in China supported the order intake. In terms of our sales, you can clearly see that packaging was the main growth driver for the first 6 months, SD segment grew by 30%, following a weaker previous year as one might add. On the other hand, sales in the Printing Solutions segment grew by more than 3%, but starting from an already higher level. The Technology Solutions segment was not able to match the exceptional growth of the prior year. Both orders and sales were below 25% as compared to the previous year. The end of the subsidy was the main driving factor for the normalization of growth in this expanding market. But it was also influenced by a thinking number of registrations for new electrical cars, material shortages with a high demand on the same time, there increasing delivery time significantly. In addition to that, shortages in supply of semiconductors are also continued to limit our own production. Now coming to the earnings bridge. Coming now to the earnings bridge, it shows a significant improvement in operating earnings again. On a clean basis, we have recorded the best half year for many, many years. In terms of onetime effects, we've seen a decrease compared to previous year. We were able to more than compensate for the one-off effects of the previous year by operational improvement. Last year, we called non-operating income of EUR 37 million, mainly from asset management projects, but also short-term work. This year, we called only EUR 9 million income from the sale of a property in Switzerland. So you see the EUR 28 million [ and we did show ] the difference between the non-operating effects last year and this year. Coming now to the main driver of the earnings improvement, which was a volume and margin related increase of EBITDA of EUR 53 million. Included in these figures are both sales, price and material cost increases that were mostly balanced in the first 6 months. In addition to that, we saved further EUR 12 million in EBITDA by personnel cost savings in connection with our transformation program. Finally, we've seen EUR 7 million in other effects in relation to the increased sales volume. To put this very clearly, FX effects had no material impact on this earnings but as sales and costs were equally affected. All in all, we see that the EBITDA in the first half year provides a very good basis for the full year enters. Coming to the balance sheet, you can see that the equity increased significantly compared with the end of the last fiscal year. The main reason here was an increase in the interest rate for pensions and a positive after-tax level. Our equity ratio is now at 20% of EUR 457 million in absolute terms, which is again something we haven't seen for a long time. We also saw that net working capital increased year-on-year due to higher inventories, which is the main reason for slightly negative free cash flow. I will go into more detail in next second, but this also led to a small increase in net financial debt. This is still on a very low level of EUR 23 million. Finally, a few statements on the debt side. Financial debt decreased compared to the pre year prior year by EUR 50 million, and of course, also had a positive effect on our financial results. Let me look at the cash flow statement, we basically see 3 things. First one, a strong improvement of our cash conversion. When we exclude net working capital effects, our operating cash flow is up by more than EUR 50 million. The main reasons for this are that our net income included many operational effects, as stated before, and grew by more than EUR 30 million year-on-year. Second, in terms the operating cash flow then into negative. It is production-related build-up in net working capital of EUR 70 million. Third point is that the investment cash flow was EUR 25 million below last year, mainly due to lower proceeds from asset management. Reported figures include cash in from disposal of property in Switzerland of EUR 30 million in the liquidation of a financial investment. For the full year, we continue to expect cash in from asset management projects around EUR 90 million. But all in all, this results in a negative free cash flow of EUR 13 million after 6 months. So let's take a closer look now on the net working capital. As you can clearly see the main reasons for that is the inventories grew by around EUR 100 million. On the one hand, we have increased raw material stocks for the continued high production volume a bit. On the other hand, work in progress increased due to full utilization of production. However, we expect that the stock decrease towards the end of the financial year. Still, our net working capital stands around 22% of sales, and therefore, remains at a historically very low level. And with that said, I hand over back to Ludwin.

Thank you. Yes. Great, Marcus. Thank you for the comments on our financials. As I said before in the highlights section, I would like to share an update on our label printing business with you. Today, the label printing market is extremely interesting for Heidelberg. The market segment is pretty attractive as the growth rate is relatively high and the segment is less volatile due to the robust end markets of the label industry, which are in the food and consumer goods industry. It is important to note that this market is undergoing a major technological shift price. While label printing used traditional printing processes like flexo print and offset in the past, digital printing volumes are growing rapidly now. Digital printing accounts for around 30% of label printing already. This share is growing by 8% year-by-year. As we all know from the consumer world, the business model in digital printing has 2 elements. The one is the sale of the hardware and the other is the sale of the consumable, which is inked in the case of an inkjet printer. The ink business is growing with each installed printer and provides an attractive source of recurring revenue for Heidelberg. The consumption of ink depends on the use of the printer and is largely independent of economic cycles, and this is why we are so much interested in it. In order to participate in this market and to be competitive, we have developed our own fully digital label printer, which is called Gallus One. The product was presented to the market for the first time just a few weeks ago. The system aims to reduce the total cost of ownership to ensure a cost-efficient and sustainable production of high-quality labels. Thereby, the Gallus One addresses 3 main pain points of our customers. So the first pain point is a lack of qualified workers. The Gallus One is highly automated and does not need many operators. And this allows our customers to run their production with less people, which is crucial due to the significant shortage of forecasts in the printing industry. The second pain point of our customers is the cost of energy. The Gallus One has been designed to consume significantly less energy, as energy has become a major cost driver in printing, this helps to reduce the cost of operation of the printer. And the third pain point, which we are addressing is sustainability. Traditional printing needs printing plates as well as a large amount of substrate for setup and alignment of the machine for a certain print shop. Digital printing on the other hand, reduces waste as no printing plates are needed and less waste is produced. Now finally, I would like to mention that we have developed our own ink, which matches the printing system and ensures excellent printing results. We, at Heidelberg are convinced that Gallus One is a win-win for both our customers and for Heidelberger Yes, so much about that, as I find really interesting new product, which brings me now to the next agenda point our outlook. So let's first look at chances and risks of the second half of the fiscal year. Compared to our previous report, there are no fundamental changes in our assessment not least given by the high order backlog, we expect a high sales volume also in the second half of the year, provided the supply chain situation does not worsen. We will continue to increase prices, which will support our margins also in the second half of the year. On the other side, we expect further cost increases in the second half of the year. We assume that Union and Employers Association will agree on a new collective wage agreement as a result, personnel costs will likely increase. But also material and energy costs are expected to rise again in the second half of the year. However, despite of all these headwinds, the encouraging half year results are a good starting point also for the 6 months ahead of us. Yes, so much about the chances and risks that we see. So let's have a look at the guidance itself. We confirm the outlook but would like to emphasize that the economic uncertainties remain high. So far, we have not seen a slowdown of the business as a whole, as also Marcus mentioned, but we need to stay cautious. Therefore, we will direct our attention at securing our supply chain, absorbing the cost increases that we are expecting in the second half of the year, improving our gross margin by adequate pricing. This will then provide the basis for achieving the full year forecast of EUR 2.3 billion in sales and an EBITDA margin of over 8%. Yes. Dear, ladies and gentlemen, before we end our presentation, let me say a few words about the change in our management board. As you will have heard, my colleague, Marcus Wassenberg, is leaving Heidelberg by the end of the calendar year in order to join the KION management. I personally very much regret Marcus Wassenberg departure as I really enjoyed working with him after I joined Heidelberg half a year ago. Over the past 3 years, Marcus has done a highly effective work both in restructuring the company and in driving forward the transformation Marcus, I would like to thank you sincerely for your excellent work and would like to wish you the very best for the future. Yes, we are quite happy that we were able to fill the vacancy quickly. Tania von der Goltz will succeed Marcus Wassenberg 1st of January next year. Tania joins us from Fresenius Medical Care. She's an internationally experienced and recognized financial expert. Together with her, we will continue to drive forward the strategic realignment, the financial strengthening and the cultural transformation of Heidelberg. I'm really looking forward to working with Tania here at Heidelberg. So ladies and gentlemen, this concludes our presentation, and we are now happy to take your questions. So I hand back for the operator to explain the procedures.

[Operator Instructions] We will take our first question from Daniel Gleim with Stifel.

There are actually 3 of them. I'll take them one by one. The first one is on your comment that you haven't seen a slowdown. I would like to ask you whether you were speaking about the business overall or specifically about the order intake momentum in the ongoing quarter. Maybe you can share with what you see on the current trading with regards to clients placing orders with you as we speak. That is my first question.

Why don't you ask your questions, and then we answer one after the other.

The second one is on your outlook for the current year. You mentioned the risks for the second half. I would be interested in why the cost -- the price cost inflation calibration should become more challenging in the second half. So maybe you could comment on that. Also whether this is hypothetically speaking or whether there are any specifics we should be aware of? And lastly, the third question is you're guiding towards more than 8%. And there has been quite some diversity in between the first and the second quarter, maybe you can scale a little bit quantitatively what you mean with the qualitative arguments that you hope to land above 8%? That's my first question.

So let me start, and then Marcus, you can fill in a little bit. So first, the we do not see a slowdown and you asked is that the business overall or order intake. Well, it's both. We do have a pretty good order book, obviously, sales depends on our ability to manufacture and ship. And that is on a very high level. You can see that from the high level of sales. But when we say we do not see a weakening. What we mean is the order flow remains stable. And there's no sign of a decline. This when we say that, we mean the business overall, obviously, there are differences region by region. But if you look at the total, it's really remarkably stable. Yes. Regarding the outlook, well, it's just a sum of different factors we are looking at. So we are looking at wages, so personnel cost, which will, for sure, increase. That's an effect which we did not have the first half of the year. So that's now happening. We don't know the extent yet. Same is true for energy. Energy will also increase. So it's just factors, which now just come in. and this is why we remain a little bit cautious here. And we believe that we will end up above 8% in EBITDA margin as we said. But given all the uncertainty we have and all the costs and increase also material costs, of course, that we see we remain cautious and say, okay, from what we know, we believe that we will end up higher than 8%. But it's very difficult to give more specifics on that because it's just a very high degree of uncertainty, Marcus. I don't know how you see it.

Yes. Absolutely agree. And Daniel, allow me to just add some remarks here. First of all, speaking of order intake, we have seen very strong September and actually the number for October is exactly around the same ballpark, which is actually a very good indication and it's something actually that proves that it's a very stable order intake situation. And as we said, out of backlog is on an all-time high. It's almost de had the highest order book that we have, the way and that has to add best price quality. That speaking, you asked about inflation. We expect like EUR 30 million to EUR 35 million in material cost increases for the full year. For the first half of the year, we recorded 15 leave us with around EUR 205 million of which we expect just for energy. So that is one factor. The other factor is, as you know, there's a huge negotiation ongoing. We had actually in front of our premises today strike from the unions. And as you know, they are demanding an increase of 8%. And every percent point in Germany is for us an increase in personnel costs of EUR 3 million to EUR 4 million for the full year. So that obviously, if we come and we don't know when it comes and how much comes will increase not only personnel cost, but actually cost of a product significantly. And that all adds up. So as there are a lot of variables, it is very tough for us to predict what will happen, when it will happen and what the outcome will be. So therefore, to give a better guidance right now, a more specific guidance, I find very, very tough. If you ask me like how sure are you of those cost inflation. I would say we have high visibility. But timing is obviously something that particularly in personnel cost is something we cannot manage. We have to see and wait. So therefore, there is a bit of uncertainty when it comes to our numbers. But I'd say so much and I think just yet again, underlining what Ludwin said. -weave a work solid basis from which we start. And then we have to manage.

Very clear, Marcus. Thank you for the elaboration. But let me try to ask the question maybe a little bit differently. If you compare the current order backlog, gross margin to current sales, gross margin, is there a material difference? Or do you expect any in the coming months?

When it comes to gross margin, I would say not until so far, what we see is that we have to keep up with price increases in order to compensate for the material cost. And then what we see in the current order book, we managed so far. Question will be wellness there a tipping point. There will be a tipping point. As we all know, where our customers are not ready to accept additional price increases. And then obviously, we are left as other parts of not maybe the industry, but the Italian electric industry at least, we are hit by those cost effects. So until so far, I would say our margin if we have managed to keep our margin stable question is how long this will remain.

Very clear. And Marcus, good luck with your future endeavors.

Our next question comes from Peter Rothenaicher with Baader-Helvea.

Firstly, I'd like to continue with the questions on the quality of the order backlog. So your order backlog results in, I would say, significant delivery times maybe 6 to 9 months or something like that. So I think you have already considered when taking in order the upcoming wage increases. So isn't there really the chance to compensate here for a large extent by the then already higher prices kicking in and also in terms of material costs. So material costs for many areas, steel and so on has come back. You tell us that you will see a further increase in the second half of the year. Don't you see any contrary effect.

So look, when we take an order, right, we can only negotiate a price at that point in time. Then it goes into our order books, and it takes, as you say, half a year or even longer until we can start shipping. And then, of course, that agreed upon price is the basis for the revenue and also for the corresponding gross margin. So this delay. And what we, of course, know is and what we see is that the price quality of the orders in our order book is improving over time as we have increased prices multiple times already, and we continue to do so. So we know that this will help us with the gross margin. However, what we cannot foresee when we agree on price with a customer, what the cost the actual cost will be at the point in time when this product is shipped. Nevertheless, we know that price levels are increasing. So we have some buffer, if you like, but the cost base is also growth. So that's basically the mechanics behind it. And it's very difficult to put that in quantitative measures.

Okay. Then another question, though, in the first half of the year, clearly, your inventory increased having the impact on net working capital. You already indicated that by the year-end, this will improve as always at Heidelberg. What would be your best guess for free cash flow for the full year? And what benefit from property sales would you calculate in here?

So thanks, Peter. It's Marcus speaking. So I'll take that. Basically, what we've seen is in the whole set of inventories, inventories we have basically raised our level. And that has obviously to do with delivery times to secure component availability. So between all of us, I would just say this is us being prudent. This is not a significant issue. And as you rightly said, we're ramping up for production. We will release sales, obviously, later on. We don't see customers stepping out just to sort of avoid the question on that base we actually see that we can deliver products and products are well taken by we see. So even when we talk about good finish, it's just sitting at our regional hubs in our countries ready to be shipped to the customers, and we don't see customers rejecting product. So nobody is stepping out of any contracts, nothing like that anyhow. So this will be declining. And this will be obviously a good effect on the free cash flow, which I predict to be at a mid 2-digit numbers for something, I would say, around about EUR 40 million, EUR 50 million, maybe EUR 30 million, depending on parts availability and how we plan to secure for next year. That is obviously something we have to manage on an almost daily basis. We have to really balance things in a different way. But truth, 22% in net working capital is still a very good number for this company. When I started out, it was 27%, 28%. So this is a rock solid number, and I would just say free cash flow is around that ballpark. When it comes to sessions from the sale of property is around about EUR 90 million, I think EUR 30 million coming from U.K., EUR 30 million coming from Atlantic and the other one, I forgot gardens. And that would be Switzerland. And I think that is something we have actually Yes, we have actually cashed in already. So that would be at SEK10 million.

So I'm a little bit wondering why it would be only EUR 40 million to EUR 50 million free cash flow if in total, EUR 90 million is coming from property sales and thereof, I think, the biggest part in the second half of the year and you see in the second half of the support from inventory reduction.

So part of the EUR 90 million are already cashed in. So the Switzerland property sale was done and therefore, cash has been transferred. So it's only EUR 60 million that you have to take into account. And then again, we feel like we're more hit by increasing costs. So therefore, we feel that the net profit -- net profit after tax will maybe not as high as we can adjust prolong the number of EUR 44 million and double it up. So therefore, we have to be more prudent so but just as a caveat here, we want to be prudent. We don't want to hide something here, but we have to be prudent in a time where we have so many variables in our predictions. It's not a normal for us. So bear with us that we don't want to over promise. We have to manage things on a daily basis. And I think that Ludwin and Tania will be the first to let you know when there is an upside. But right now, we have to be prudent here.

Okay. And then if we look into the segments. So in the first half of the year, you had a very good performance in packaging. Do you expect packaging also to outperform the commercial area in the second half of the year? And then also with regard to the wall box business, do you see here in the second half of the year some recovery?

Yes. Let me start with packaging. So first of all, the reason why packaging is so strong, it's not only that it's a good market, which is growing. I was referring to that before. It's also that the comparison base of last year was simply relatively low. Nevertheless, we see some good growth here. And I believe that if you compare the 2 segments, commercial print and packaging, certainly, packaging is the one that's growing faster. So that's the better one because there is a fundamental driver behind that, and that's consumption. And as the world population is growing, there's more consumption, and this is why more packaging is needed. So I believe that the underlying factor is positive, and this is why this segment will continue to grow. In the commercial print, we see other trends we see, in particular, also technology shifts. We see that the quantities which are printed are lower. So there is a lot more change in that segment. But these are longer-term developments. So if you just ask for the next quarter or the next half year, I would not expect a significant change here. It's just what it is. And longer term, I believe that packaging has just more potential and will grow faster. Then you were asking about the Wallbox business, yes, I mean, as we said before, the charging business is a future business because as a matter of fact, cars will be electric going forward. It's not quite clear how long it's going to take, but it's going to happen. I'm absolutely convinced. And this is why we continue to believe in this market. Nevertheless, there are ups and downs. And what we are experiencing right now is a down, which has several reasons. The one simply is that subsidies for wall boxes here in Germany simply ended in Germany, the carton. And so that had a huge impact in market size. And people simply stopped buying wall boxes because these subsidies went away. So that's the one factor. The other factor is that if you try to buy an electric vehicle, for example, in Germany, and I guess, it's the same in other countries, the shipment times are just mind boggling. So you simply can't get one. And so shipments of cars are slow, also people do not buy the wall boxes because without an electric car, you don't need it. So that's another factor which slows down the market right now. But again, the underlying trend is positive. And it's going to happen. It's just a matter of time. And this is why we continue to believe in it. And as we explained before, we've introduced new products to the market, which allow us to address new product segments like the multifamily homes, like public parking spaces, charging of large fleets. So it's really expanding, but it's right now a little bit slow. No. So that's all I can say. I believe in this market, and I believe that's a good business for us.

But we won't see some recovery in the next weeks or months. For this year, I think it will be on that level.

[Operator Instructions] We will take our next question from Stefan Augustin with Warburg.

Actually, there are just 2 points left, which I would like to touch. The first one is, could you give us an update on the implementation of the subscription model. I think the U.S. bond bent should have been set up right now. So how they did work on the sales side so far? And the second question is actually digging a little bit deeper into the price component. So when has it been the last time that you have increased prices on a broader base? Or is it simply a very continuous process? And could you give a ballpark range about how high the inflationary component is right now. If you look in the machine, is it over year-over-year, something between 5% or is it now above 10%, something like that.

Marcus speaking. Let's start with subscription. Our recurring revenue sales improved by 12% year-on-year, representing around about EUR 177 million for half year 1 in the financial '23, which represents 14% of total sales following EUR 140 million as compared to last year. So basically, that's the increase here. And we saw basically new contracts kicking in, in the complete spectrum. So a lot of new contracts are fully fledged but as well we saw contracts that are representing service revenue. When it comes to the joint venture with Munich Re, we have a bit of a hiccup with the financial authorities in Munich. We need a factual agreement here, [ Tategastandigon ] in Deutsche. And we are still not there. We're working on it with them, but you cannot sort of hurry financial authorities, as you know. So that is a bit of a delay that we're experiencing, but we are sure to report that we have completed everything pretty much soon. When it comes to pricing, we have basically increased prices feet first half year financial '23 million we increased prices by 5% for the second half year, then we have increased already by 2.5. And for deliveries in financial year '24, we will announce to the market of further 5% for deliveries taking place in financial year '24 to safeguard obviously, our future margin in the light of likely continuing material cost inflation. When it comes to inflation of our costs in our product, what we can say is basically that the 5% I just mentioned, cover the material expense increases until so far. So if you sort of look into just one product, that actually did the trick until so far, question remains to be seen that our calculation for the future will be stable as well as Ludwin have alluded to already.

[Operator Instructions] There are no further questions. So I will turn the call back to our speakers for the closing remarks.

Very good. So thank you, ladies and gentlemen, for your interest in Heidelberg. We are very much looking forward to the second half of the fiscal year, as we said, we have a good basis, but also some uncertainties. So we are looking forward to talking to you again after the next quarter and 3 months from now. Have a good time until then. Bye-bye.

All the best. Bye. Thank you very much.

Thank you for joining today's call. You may now disconnect.