Heidelberger Druckmaschinen Aktiengesellschaft (HDD) Earnings Call Transcript & Summary

Yes. Good afternoon, ladies and gentlemen, and welcome to Heidelberg conference call on the Q1 2024-'25 results, which is the first one for us as a new management team of Heidelberg. We're quite happy to give you a first glance of our ideas today and, of course, insights to the numbers for Q1. However, let's start with the first slide, which outlines today's agenda. First, we would like to introduce our new Board structure and ourselves as team members. After that, I will provide an update on how the first quarter of fiscal year 2024, '25 went, particularly discussing the impact of drupa our key figures. Then my colleague and CFO, Tania von der Goltz, will take you through the financials in more detail, and I will conclude with our outlook and first insights into our strategic road map. So let's start with our introduction. I'm very pleased to take on the role as CEO at Heidelberg since July 1, so almost 4 weeks ago. Heidelberg is a company with a truly great tradition, well known for its technological excellence and innovation as well as its industry-leading sales and service network. The company has made in the last year's serious efforts recording a positive trend in earnings and cash flows and improving its business outlook. Nevertheless, Heidelberg continues to face challenges from market trends in some of its core business and in addition, the current cost structure limits investments. This situation is well known to me as I made many similar challenges throughout my whole career. I want to bring in my experience of more than 25 years in the automotive supplier industry mainly at Brose, which is certainly a challenging area -- business area. And the longest part of my career are spent with Brose, including 12 years as CEO. During this time, Brose recorded continuous top line growth with sales rising from EUR 2.3 billion to over EUR 6 billion, mostly through organic growth. My teams and I succeeded in finding solutions for production sites, especially in Germany, but also for generating growth in existing and new business fields and further developing our strengths, particularly in global markets. In my career, the key has always been to take the path together with employees to bring them along, but also to challenge them. Together with employees, worker's council and Union, we have repeatedly developed solutions to stay competitive, especially by reducing personnel costs compared to business development. These initiatives are precisely what Heidelberg needs and what my clear focus will be over the next months. I will come back later to that. But first, I would like to hand over to Tania.

Thank you very much, Jurgen, and a warm welcome to everyone on this conference call from my side, too. I am the CFO of Heidelberg, and I've been in this role for 1.5 years now. So I'm hopefully well known to you. My clear focus continues to be on the financial stability of Heidelberg, where we made progress in the past year. However, my ambition goes beyond just numbers and balance sheet. I aim to make a meaningful impact on the business itself by driving strategic initiatives that enhance our operational efficiency, fostering innovation and ensuring that our financial strategies support our long-term growth objectives. I believe that a CFO should not only safeguard financial health, but also actively contribute to the broader vision and success of the company. I really look forward to collaborating closely with [ Jurgen Otto ] as well as with our new Chief Sales Officer, Dr. David Schmedding, who is unfortunately not with us on this call today. So I will hand it back to Jurgen, who will provide you a brief introduction on behalf of David.

Yes. Thank you, Tania. In addition to myself, Heidelberg appointed David a new CSO in July as a new Board member for technology and sales who is completing our team by bringing the perspective of customers and markets into our discussions. David joined Heidelberg back in 2017 and previously served as the Head of Sales at our company. In his new role, he will be responsible for our segments print and packaging solutions, service and research and development. with David, we promoted an internal top talent and a true sales expert. Together with him, I think we have a good combination of internal and external managers on our Board. Yes, so much about us. Let's continue with the second item on today's agenda to give you a summary of where we stand after the 3 months in this fiscal year. The first quarter fiscal year 2024, '25 was truly impacted by our successful trade presence at drupa, which took place a couple of weeks ago. Heidelberg showcased numbers, new solutions to the market proving its innovation leadership and strong market position. Consequently, and in contrast to the general trend in the German mechanical engineering sector, Heidelberg was able to significantly increase orders received in the first quarter to slightly more than EUR 700 million. This was the best quarterly value recorded since 2016 and about 19% higher than the previous year's period, which also included the successful Print China trade fair. Due to seasonal effects and the customer wait-and-see approach ahead of drupa, sales were down as expected and communicated to you 2 months ago at EUR 403 million. According to that, the adjusted EBITDA margin was also down compared to prior year being slightly negative at minus 2.3%. In addition to the decline in sales, adjusted EBITDA was impacted by some expenses for drupa totaling EUR 10 million in this quarter. Based on the negative margin, free cash flow was at minus EUR 103 million, basically affected by a significant upswing in inventories. As you can imagine, we are preparing for the increase in factory output in the second half of the year, which will turn profitability and free cash flow to the expected values again. In total, we are confident for our guidance. So before Tania continues with more details on our financials, let's take a closer look at the latest order trend, highlighting why we are confident in achieving our guidance for this fiscal year. After experiencing a dip in orders received in the third quarter of the last fiscal year, we have seen a continuous upward trend over the past months. With a book-to-bill ratio of 1.7 in the first quarter, our order backlog reached EUR 923 million, and we expect this solid order trend to continue into the second quarter, also not at the level of the first quarter. Overall, we have been able to cover a large part of our sales ambition with firm orders, making our guidance, to some extent, also insulated from major market risks. Our current challenge is to ensure that deliveries are on time and production runs effectively without any interruptions in the supply chains. This is an area where Heidelberg has a strong track record. So much about the overview. I hand it over to Tania now.

Thank you, Jurgen. Before we get into our figures in detail, let me briefly comment on Chart 9. Actually, for those who are familiar with our quarterly presentation, let me comment, we typically explore the quarterly aspects of the performance of the single quarter on this slide, while also providing insights into the latest trends we have observed at this point. However, since the year-to-date figures, just presented by Jurgen are actually the same as the single quarters. I only want to highlight here that we haven't encountered any significant currency had not tailwind, neither in orders received nor net sales as we did it in previous years. This fiscal year, we experienced only minor currency headwinds, primarily from the Japanese yen. For the sake of completeness, we have not included this chart -- for the sake of completeness, we have included this chart in our presentation. Let's continue with the performance of our segments. Essentially, packaging as well as Print Solutions recorded a significant increase in orders received, driven by a strong equipment business, while sales were down year-over-year in both segments as expected. At EUR 364 million, Packaging Solutions accounted for the largest share in the group's orders received growing by 17%, while Print Solutions at EUR 336 million was slightly below the figure, but it grew even more strongly at 21% year-over-year. Sales & Packaging Solutions were down 28% year-over-year at EUR 190 million. While the corresponding figure for the Print Solutions was slightly higher due to a higher proportion of less volatile aftermarket business in this segment. Overall, the segment's net sales were down by 23% to EUR 211 million. These developments reflect the aforementioned wait-and-see approach of our customers ahead of the drupa in both segments, which caused the backlog to decline at the end of last fiscal year. Adjusted EBITDA in both Packaging and Print Solutions was down year-over-year to mainly due to the decline in net sales. Let's move on to the Technology Solutions segment, where both orders received and net sales remained on a low level as in prior year. However, the segment's adjusted EBITDA showed an improvement moving from minus EUR 5 million in the previous year's quarter to minus EUR 3 million this quarter, reflecting the discontinuation of loss-making entities, namely SAIC and printed electronics. The next slide shows our regional breakdown on the left-hand side. In summary, we saw an increase in orders received in all regions, led by EMEA, talking about absolute figures. Sales were down in all 3 regions, reflecting the weak pre-drupa backlog. In EMEA, orders received totaled EUR 339 million and were up 25% compared to previous year with strong contributions from the U.K., Benelux and France. In contrast, net sales of EUR 205 million were down 28% compared to the previous year's first quarter. But our store order backlog following our successful [ Mupa ] presence supports strong sequential growth potential in the upcoming quarters. In Asia Pacific, we achieved a slight increase in orders received despite a very strong prior year quarter that included orders from the Print China. Orders increased by 2.5% to EUR 197 million being impacted by some currency headwinds from the Japanese yen. At constant currencies, the growth rate was actually at 5.8%. However, net sales in Asia Pacific decreased by around 21% to EUR 99 million, reflecting the impact of the previous order weakness. Moving on to America, recording the highest increase in orders received, talking in relative terms, rising by almost 30% to EUR 160 million are primarily driven by the South American market. However, net sales decreased by almost 27% to EUR 98 million for the same reason as in the other regions, as for mentioned. Now let's turn to our EBITDA bridge on Page 12, showing the changes in our operating profitability in the first quarter compared to last year. Last year's first quarter adjusted EBITDA was at EUR 42 million. Unsurprisingly, the decline in sales was the main reason for adjusted EUR 8 million in the year-over-year comparison. Gross margin slightly improved due to [Technical Difficulty] year-over-year. Adjusted EBITDA was at minus EUR 9 million after 3 months with no items adjusted in EBITDA in this quarter. On the next 2 charts, I will show you the transition from reported EBITDA to earnings per share. With this chart focusing on our financial expenses, which were slightly higher than in prior year, totaling minus EUR 8.6 million with 2/3 relating to interest expenses on our pension provision. However, interest expenses on financial debt were 1 million higher than in prior year, reflecting the increased utilization of our revolving credit facility due to our negative free cash flow. Correspondingly, earnings before taxes amounted to minus EUR 36.5 million. Now let's proceed with the transition from earnings before tax to earnings per year. Despite a negative earnings before taxes, the net tax expenses were on prior year's level due to withholding taxes paid on dividends and income tax paid in China. Net income was minus EUR 41.9 million compared to EUR 9.8 million in the previous year. The year-over-year difference mainly reflects the temporary change in adjusted EBITDA, which we expect to be reversed in the second half of the year. Correspondingly, earnings per share amounted to minus EUR 0.13 in the first quarter of this fiscal year. Let's continue with our cash flow, starting with the operating cash flow, which was at minus EUR 101 million compared to minus EUR 20 million in prior year's first quarter. The year-over-year change reflects the even stronger Q1 seasonality in sales and adjusted EBITDA, as already communicated with our Q4 release and was impacted by an increase in inventories anticipating on our strong order backlog. In addition, the operating cash flow was negatively impacted by higher utilization of provisions and liabilities as well as other temporary effects. For the full year, we expect the operating cash flow to turn positive again based on the expected improvement in sales and adjusted EBITDA in the second half of this year. Let's finish the cash flow section by looking at our free cash flow. While the change in operating cash flow was carried over from the prior slide, one can see that investments were at EUR 10 million in the report period, which was basically the same level as in prior year's first quarter. Inflows from divestments were at EUR 8 million compared to EUR 4 million last year, reflecting higher inflows from the sale of machines from our demo center. In total, free cash flow after the month stood at minus EUR 103 million, whereas it was at minus EUR 27 million in the previous year. Due to the explained stronger seasonality in sales and adjusted EBITDA as well as an increase in inventories participating the high order backlog. However, let me emphasize we really remain confident to report a positive free cash flow for the fiscal year 2022. Let's conclude the financial section with a view of some balance sheet figures as presented on Page 17 now. First, our equity remained on a solid level at EUR 499 million, representing an equity ratio of 22.7%. In absolute terms, it slightly declined by EUR 28 million due to the reported temporary loss of EUR 42 million in the first quarter, which was actually cushioned by a decrease in the present value of our pension provision as discount rates were 20 basis points up compared to year-end. This is also reflected in the pension provision, which amounted to EUR 671 million after EUR 688 million at the end of the last fiscal year. Moving to the right side of this chart. Our net financial position temporarily decreased to minus EUR 34 million due to the cash outflows in the first quarter with financial liabilities only slightly exceeding liquid assets. However, we have still sufficient wet room in our RCF, which was utilized only 50% of its volume, totaling EUR 350 million. At this point, I would like to inform you that our banks have extended our RCF based on the overall solid situation also considering last year's performance and our positive outlook for the years until 2028. And now I'd like to hand over to you, Jurgen.

Yes. Thank you, Tania. Let's move on to the last item on our agenda today before we welcome your questions. I would like to start this section by showing you a slide that we introduced a couple of weeks ago during our last analyst call. This slide compares the usual seasonality in our fiscal year with the expected even stronger patterns of fiscal year '24, '25 driven by drupa. According to this, the soft start to the fiscal year, we sell significantly down year-over-year and adjusted EBITDA being negative as part of our guidance and came in as expected. Looking ahead, we anticipate a sequential improvement in the second quarter compared to the first quarter. Also sales will remain below the prior year. In the second half of the fiscal year, sales were expected to trend above the prior year based on a strong order backlog, which will positively impact profitability and cash flow too. However, we would like to highlight that we are working on pulling some sales from quarter 4 into quarter 3 to proactively reduce cut-off risks at the end of this year. As you can imagine, this will not be our single focus for this fiscal year. We are taking a proactive and holistic approach to ensure that we meet our targets and improve our future prospects. I would therefore like to highlight several issues that we consider to be the highest priority. First, we are continuing to concentrate on an effective cost and margin management, which is essential for achieving our margin guidance for the fiscal year. While our robust order backlog and pipeline largely covers our sales guidance, we will prioritize protecting margins, maintaining cost control and securing a reliable supply chain throughout the next quarters. In this context, we also want to address our personnel costs. which remain structurally too high relative to our current size of business. Our aim is to establish a future fund to which everyone will contribute, improving operating profitability and enabling us to invest more into our business. In this regard, we also had some good discussions with the unions and the workers' council. Secondly, it is essential to secure our cash conversion. This will require continued improvements in net working capital to meet our free cash flow targets for this year. In particular, we will focus on reducing inventory levels across the value chain and improving receivables management to achieve this. As you can imagine, this is a key competence that I bring with me from the automotive business. Finally, and this brings me to the next slide. We are developing a strategic growth plan for Heidelberg. Therefore, we continue to build on our better financial position, which remains the primary target in all our considerations. With our structurally higher profitability and lower leverage, we enjoy a more flexible financial framework than our competitors, giving us a significant competitive edge. To fully capitalize on this advantage and expand our investment budgets, it is essential that we further enhance our profitability. And this can be the basis for our growth plan. So we set 3 strategic guidelines. First one, print and packaging will remain our core business. Heidelberg is the biggest player in this market with a unique and a strong market position, both technologically and regionally. We have the largest installed base of our industry and the most extensive and international sales and service network, which is an important competitive advantage. In addition, Heidelberg has the strongest position in the most attractive region, Asia and there, China, we are also the market leader in China. Second, in packaging printing. Heidelberg shapes the benchmark in terms of productivity -- in this growing market, our focus will be on leveraging our strong position in existing growth areas while expanding the addressable market to new applications such as flexible packaging. And in our Print Solutions segment, we have created new perspectives through our cooperation with Canon. You know this from drupa for the digital inter printing market. And this will also play a key role in the segment's future. And this future will be hybrid, combining offset and inkjet printing into one world. Heidelberg is the only supplier to offer both technologies seamlessly integrated in one software ecosystem. Also, a key role for the future will be played by the Prinect touch fee that will be launched in 2025, which is an AI-driven software that further automates production processes and print shops, increasing efficiency and productivity in the shop. So we look for further internalization. Heidelberg already operates with the largest global sales and service network in the pending industry with 250 locations in 170 countries. We will enhance this network, particularly in growth markets such as Asia, the U.S.A. and other emerging economies, offering a comprehensive portfolio, including new tailored for this market tailored machines and services. Additionally, we've structured our sales and service units into a single holding to enable faster decisions and standardization, which also paves the way for new partnerships. And the third driver for future growth is our industrial capability. So beyond the printing industry, we want to leverage our position, engineering and automation capabilities to enter new sectors and other industries. Our facilities in Germany known for high precision, quality and delivery on time are well positioned to meet the growing demand for this even more reliable and high-quality industrial solutions. Reliability in the supply chain will become a decisive factor of the higher value -- entire value in times of geopolitical instability and crisis. So we are convinced that these boundaries will be strongly beneficial for Heidelberg's future, balancing growth and profitability and will enable Heidelberg to navigate challenges and capitalize on opportunities, ensuring our financial stability and success for fiscal year 2024, '25 and beyond. We are looking forward to giving you some more details in the next months. Thank you. Coming back to the financials.

Okay. Let me take you to the final chart, which is on the guidance before going into the summary of the call. Based on the strong order backlog, we are confident in achieving our full year guidance. The sales guidance, which aims at prior year's level of around EUR 2.4 billion is already largely backed by our firm orders. We expect sequential improvement in sales in the next quarters and a strong year-over-year improvement in the second half of the year. Accordingly, the adjusted EBITDA margin is projected to improve to around 7.2% for the full year. And now let me hand it over to Jurgen again with the conclusions and key takeaways.

So you see it's a perfect teamwork between Tania and myself. So Tania is having the guidance for the fiscal year, and I will bring you the key takeaways from today. So with this final slide, I would like to conclude our presentation for today. And we anticipated and communicated a soft start to the fiscal year 2024, '25, but we expect to see sequential improvements in the coming quarters. The success of the drupa event confirms that Heidelberg has the right solutions and offerings in place and our robust order backlog is set to support us in meeting our guidance. Heidelberg is charting a clear path for the future and maintaining a steadfast commitment to financial discipline. Thank you very much. And now I hand it back to the operator.

Thank you very much. [Operator Instructions] And the first question is coming from Peter Rothenaicher from Baader Bank.

I have one question on the P&L structure. So I was a little bit surprised about relatively high personnel costs in the first quarter, given the aspect that you did short-time work in this quarter. I'm aware that the drupa had definitely some impact on additional personnel costs. But nevertheless, can you a little bit comment on that what was behind that? And how big was the saving effect from short time work?

Mr. Rothenaicher, I'm happy to comment on your question. And thank you for your question. As you pointed out, personnel costs were on prior year's level in absolute terms, actually for 2 effects, being positively impacted by the short time work measures as you hinted to, but also, at the same time, being negatively impacted by higher tariff wages. And then in addition, in relation to net sales, they were higher as the net sales declined for the explained reasons while personnel costs are, to a large extent, pretty fixed. So therefore, the proportion of personnel cost is relatively spoken a bit higher. And as for mentioned, the short-time work measures were counterbalanced by the tariff increases in wages.

And what was the savings of short term work? Can you…

It's around a mid-single-million-digit figure...

Not more.

For the single quarter, yes.

Okay. And then for material costs, I know it's a little bit different -- difficult to compare. You had a strong increase in your stock. And therefore, I think this explains part of the percentage increase in material expenses. But how would you comment on that comparing like-for-like? Do you think here personnel material expenses would have been largely stable? Or how is it developing?

Shortly said, it actually relates to the total cost format we used for the external reporting. So as you said, material costs in relation to sales were higher than in prior year. And actually, currently, we are ramping up our factory output, which can be seen in the high change in inventories reported within the total cost format. And this position was higher than in prior year and does not include the margin that we will realize when recognizing the according net sales.

Then on order intake. -- though just before you call, we had the clinic and power call and say mentioned interestingly that only a smaller part of the orders written at drupa was included in their order intake in the quarter under review. How does this compare to you? So I have the impression that here a bigger share is already included in the order intake of the first quarter. And yes, how big is still the share of, let's say, soft orders that will put into fixed orders in the second quarter?

Actually, Mr. Rothenaicher here, there's already a huge share of orders from drupa are included already in the order intake in Q1.

And how much is left for the second quarter?

So it's for the second quarter, I expect a low triple-digit number [ value ] from drupa.

And the next question is coming from Florian Sager from Stifel.

I just also have a question in relation to drupa because I've seen that your Print Solutions order intake was quite good for Q1, I think. Is that only due to drupa -- or do you expect this to continue going forward? And then I have a follow-up.

Yes Sager, we see a positive trend on that and a stable trend. But also for the second quarter, it will not reach that level from the Q1. This is what our expectation is.

That makes sense. And then my second question would be on maybe your position, Mr. Otto on the Technology Solutions segment of Heidelberg. I mean it's been loss-making out for a couple of quarters. What is your position here? Do you intend to spend more money on it? Or maybe are you more likely to maybe sell it? Just wanted to get your take on the segment.

So after 4 weeks, you have to give some additional weeks to look more deeply into. But you're absolutely right. The business has to be profitable. And that's my clear expectation. And I think for this year, we have a new strategy for DC charging, high-voltage solutions, also business parks. So we move our strategy to that segment, which is really a fast-growing segment. And I think we have to give time to that strategy change, at least 3 to 4 months. And then we look again into these results and make up our mind on that.

I will ask again in 3 months.

Absolutely. Is also -- we are challenging this area definitely also every day. So we are keen on that.

And the next question is coming from Stefan Augustin from Warburg Research.

Mr. Otto, I have a bit of question directly to you going into can you, let's say, bring a bit more picture to where you would like to make some changes in the setup. What will be a little bit different than before, where will actually be the slight shift in the strategy because much of what you have explained, as at least to my understanding, being there at some points in the past, also that we look for business outside the print industry supply chain was also there in the past, however, not really profitable that part. So where do you think will be the levers to turn?

Yes. The lever is the utilization of the installed capacity in this new business surroundings because we have the more, we have some geopolitical crisis. And we know that some industrial partners are coming back from China. Okay. China is cheaper, definitely in the main areas also we are providing. But reliability is also a value and some people are looking for this value. And therefore, we see some opportunities not in a wide approach, but some opportunities also to talk with strategic partners to utilize our installed capacity better than before. And we have concrete discussions with some partners. Maybe the surroundings are different to prior years or the analysts are telling different stories. So it's a mixture of, of course, things.

And can you talk a little bit on the future fund you have in mind? How the -- how is this planned to work out?

So with the personnel costs, as you can mention, the ratio is too high. And we are having tariffs over additional tariffs over the [ IG Metall ] tariff. And this is what we are questioning. This is what we are discussing also with the IG Metall and the workers' council to come back to a more normal situation in the tariffs. This is one point. Second is, of course, we have to shift some capacities inside the company because of automation, also automation in the administration. This is what we see. So we have plenty of room of improvement in the administration mainly, but also in the complete footprint. This is also what we say. We have some smaller parts and smaller plants and we are looking for a better utilization of the whole network. And if you look at the global scale, of course, we have a very good setup in China, and the look upfront is, of course, if the crisis coming, also tariff crisis, if you look at the U.S.A., for example, we have to look at the local footprint and a local to local setup. These are the main points. The one is in Germany, looking at the tariffs and on the tariffs we see here at Heidelberg. And the second is on a global scale to utilize our network and our footprint and production footprint.

To my knowledge, there is not, let's say, a larger production facility in North America. Is this a hint that you want to build one up.

This can be an option, why not? If the tariffs or the discussion after the election is ongoing, we have to face some maybe new realities, and we will react on that. Anyway, we have to prepare for some -- we have to simulate some situations that can happen. And this is a simulation we will do.

There is also from the value creation program still outstanding, let's say, some new flow on, let's say, how the production setup will look respectively, what kind of measures to be taken. You give a certain, let's say, estimate on the time line when we expect some news flow here?

Yes. We are in deep discussions. And I think you can expect the first decisions made in the late autumn, I would say, October, latest.

And the next question comes from Sven Sauer from Kepler Cheuvreux.

Miss von der Goltz, Mr. Otto the first one would be on the order intake in Q1, the 700 million. I was wondering if you could provide [Technical Difficulty]

Okay. I think Mr. Sauer just lost the connection unfortunately. And for now, there are no further questions. [Operator Instructions]. Thank you. All right. And he is back. Yes, go ahead. Unfortunately, I think he lost the connection again. Sorry.

Yes. But [ Max ], we call him afterwards...

Right. There are no further questions left right now.

Yes. So thank you very much. Have a great holiday season, and see you next time or hear you next time.