Heidelberger Druckmaschinen Aktiengesellschaft (HDD) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the conference call for the publication of the Q3 results 2024-'25. [Operator Instructions] Let me now turn the floor over to Jurgen Otto.

Yes. Good afternoon, ladies and gentlemen. Welcome to Heidelberg's conference call on our Q3 results. Let's start with our first slide, which outlines today's agenda. First, I'll give you a brief summary of where we stand after 9 months in this fiscal year, including some highlights from our strategic road map. After that, my colleague, David Schmedding, will give you some insights into the performance of our segments and regions. And afterwards, Tania von der Goltz, our CFO, will take you through the financials in more detail. Finally, I will conclude with our outlook. Let's take a look at incoming orders first. Heidelberg delivered an impressive performance over the first 9 months, marking a significant contrast to the broader trends in Germany, corporate order books and the overall GDP development. Our total orders reached EUR 1.82 billion for the 9-month period, representing a 7.7% increase compared to the prior year. This growth highlights the advantage of Heidelberg's global footprint with over 85% of its business generated outside Germany and in total, more than EUR 900 million of resilient life cycle business generated annually. Particularly noteworthy is the Asia Pacific region, where orders rose more than 10% on a currency-neutral basis. Overall, we have a comfortable order backlog that positions us well to achieve robust sales in Q4 and meet our guidance targets. Another key highlight is the substantial improvement in our adjusted EBITDA margin as anticipated and guided to you at the beginning of the fiscal year. After a weak start of the year, the margin rose to 9.2% in the third quarter, up from 7.8% in the second quarter and the minus 2.3% in the first. Year-over-year, the adjusted EBITDA margin improved by an impressive 350 basis points in the third quarter, even though sales remained at prior year's level. Overall, the new management team has worked hard and successfully to improve profitability, which clearly reflects our commitment to cost management and margin control. Looking ahead, we anticipate this trend to continue into Q4, where we are forecasting an EBITDA margin of approximately 10%, marking an all-time high in recent years. Next slide. Thanks to our focused efforts, we have achieved over EUR 25 million in savings by enhancing efficiency and reducing spending. This improvement reflects a disciplined management approach that challenges every aspect of our day-to-day operations. Importantly, this progress does not yet account for the structural cost adjustments we have agreed on with the unions in December, which are expected to yield nearly EUR 100 million cumulative personnel cost savings over the coming years until fiscal year 2027, '28. Already next fiscal year, these efforts will have a tangible margin impact, so we expect the adjusted EBITDA margin to improve from 7.2% this fiscal year to up to around 8% next fiscal year. Looking ahead, we plan to build on this momentum, and we will extend the agreement from December to other production sites while we continuously implement our ambitious growth strategy. Let's continue with our strategy and allow me to provide a broader perspective on our ambitions. Heidelberg possesses strong capabilities and, of course, existing capacities in software automation, power electronics as well as high-precision manufacturing. Currently, these progressive competencies are valued with trading multiples typical for mechanical engineering companies. In their respective sectors, such competencies would command significantly higher multiples. To unlock this hidden shareholder value, we want to translate these marketable assets into new opportunities. A clear example of our potential is showcased in our successful entry into the electric vehicle charging market. Currently, we are performing the transition to a business model from a hardware-focused business towards a full-service approach, which allows to generate sustainable earnings while operating and servicing the charging infrastructure of corporate fleets over many years. This innovative ventures will not only create shareholder value in a stand-alone perspective, but also act as incubators for our core business, fostering the development of new technologies and accelerating our R&D operations. Looking ahead, we will intensify our M&A activities to strengthen both our venture entities and our core business activities. In the core business, we are focused on several key priorities that will shape the future of Heidelberg. First, we aim to become the integrator and system supplier of a fragmented packaging process, delivering end-to-end solutions that optimize efficiency and consistency for our customers. Additionally, we are leveraging the global shift from plastics to paper-based solutions, driving innovation in a sustainable packaging application. We are also scaling our inkjet printing offering, building on our partnership with Canon to unlock the full potential of this technology, which has shown impressive growth since 2010. Finally, we are growing our Lifecycle and software solutions, where we have significant potential to increase our market share. Overall, we would like to give you our commitment that these initiatives will yield at least EUR 300 million in 4 years. Heidelberg is evolving, ladies and gentlemen. Let's continue now with our segments, David, please.

Thank you, Jurgen. Hello, everyone, and thank you for joining us today. Let's proceed with the segment performance after 9 months. Packaging and Print Solutions saw an increase in orders, primarily driven by strong performance in new equipment business. However, as anticipated, sales in both segments declined year-over-year. Packaging Solutions with orders amounting to EUR 959 million accounted for the largest share of the group's orders received, reflecting a strong growth of 11.3%. Meanwhile, Print Solutions recorded orders of EUR 858 million, marking a 4.4% increase year-over-year. Also, the first half of the year saw an anticipated decline in net sales across both segments given the wait-and-see approach in placing new orders ahead of Drupa. The third quarter was on prior year's level again. However, after 9 months, sales in Packaging Solutions declined by minus 11.4% year-over-year, amounting to EUR 774 million, while Print Solutions was down by minus 9.2%, reaching EUR 730 million. Adjusted EBITDA in both Packaging and Print Solutions was down year-over-year too, mainly as a function of the reported decline in sales. So this is all good, and we are still fine with the results after 9 months for both segments as we expect a strong year-over-year increase in sales in the current fourth quarter. Let's move on to the Technologies segment, where both orders received and sales remained on a low level as in the prior year. However, the segment's adjusted EBITDA showed an improvement, moving from minus EUR 13 million in the previous year quarter to minus EUR 7 million this year, reflecting the discontinuation of 2 loss-making entities, Sako and Printed Electronics. We move to the next chart to see the regional breakdown of orders received. Overall, we saw that all regions were doing well, contributing to the orders growth after 9 months. In EMEA, orders received totaled EUR 929 million, marking an almost 9% increase compared to the previous year, with significant contributions from Eastern Europe as well as Italy. In contrast, sales of EUR 741 million were down 13% compared to the previous year, which is next to the already explained overall seasonality due to some tailwind from a post-COVID subsidy program in the previous year. In the third quarter, the region sales were on prior year's level. In the Asia Pacific regions, orders received climbed to strong EUR 483 million, rising by almost 10% and proving our leading position in this important market. After 9 months, the region's sales were on par with the previous year and even increased by 19% in the third quarter compared to the same quarter last year, what is really good. In the Americas region, orders received were about 4% higher in the first 9 months compared to the same period last year, basically due to a strong first quarter, while the third quarter was 6% below the previous year's figure. Sales in the first 9 months decreased by 16% compared to the strong prior year period. Given the robust growth in orders received observed across all regions, we are confident in our strategic direction and optimistic about our continued success in these markets. Now I would like to hand over to Tania.

Thank you, David. Good afternoon, and welcome also from my side. Before discussing our financial performance after 9 months, let me briefly summarize the key developments of the third quarter. The results were in line with the anticipated and communicated strong seasonality of this fiscal year, while being positively impacted by the implemented cost and margin management strategies. From a market perspective, Heidelberg was doing well given the increase in orders received of 8.3% to EUR 550 million in the third quarter, which contrasts against the general trend in the German mechanical engineering sector, where the VDMA observed a continuous cooling of investment demand. Geographically, the EMEA region contributed significantly to Heidelberg's orders received. While on the product side, the Packaging Solutions segment played a key role. Net sales were at EUR 594 million, which is on prior year's third quarter level, in line with our expectations and up to 16% compared to the second quarter. Together with the initiated cost reduction measures, the high utilization of our production capacities led to a strong improved adjusted EBITDA margin of 9.2% in the third quarter. Please note that in the reported quarter, we built a provision totaling EUR 29 million for the measures announced in December. This amount was excluded from adjusted EBITDA in line with our steering concept. No similar adjustments were made in the prior year's quarter. Let's conclude this section with a look at our free cash flow, which was positive in the third quarter and significantly improved by almost EUR 30 million compared to prior year, driven by a tighter net working capital management and higher operating profitability. Let's turn to our 9 months financial performance, looking at our EBITDA bridge, which reflects the changes in our operating profitability compared to the previous year, which stood at EUR 135 million. Unsurprisingly, the decline in sales volumes temporarily affected adjusted EBITDA by EUR 59 million year-over-year. Product margins were in line with prior year with positive pricing effects compensating for higher tariff wages. Based on our consistent cost control measures, we achieved a notable reduction in operating costs, amounting to an improvement of EUR 16 million year-over-year. Additionally, other cost effects such as the Drupa trade fair had a minor impact of minus EUR 2 million. In total, adjusted EBITDA was at EUR 86 million after 9 months, representing a margin of 5.7% -- as mentioned before, we built a provision totaling EUR 29 million for the future plan measures, which was excluded from adjusted EBITDA. Please note that we didn't adjust for any other items neither in this year nor in the prior year. Let's proceed with our cash flow analysis, beginning with the operating cash flow, which stood at minus EUR 66 million compared to minus EUR 37 million in the previous year's reporting period due to a weaker adjusted EBITDA figure compared to prior year, given the anticipated extraordinary strong seasonality in this year's sales and EBITDA. This effect was almost compensated by a tighter net working capital management. which limited cash outflows to EUR 35 million and was thus EUR 40 million better compared to prior year due to improved inventory control, enhanced receivables management and increased down payments from our customers. However, while noncash effects included in EBITDA temporarily offset this gain in the year-over-year comparison, tax and interest cash out were matching prior year's levels. For the full year, we are confident that operating cash flow will turn positive again, driven by the anticipated improvement in sales, adjusted EBITDA and net working capital in the final fourth quarter. 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 minus EUR 51 million in the reporting period, which were EUR 17 million higher due to cash outflows for new demo machines in this fiscal year compared to prior year. Given divestments of EUR 90 million, which conversely include the sale of old demo machines, net investments were around EUR 30 million after 9 months and thus slightly higher compared to prior year. After 9 months, free cash flow was minus EUR 97 million compared to minus EUR 53 million in the previous year due to the explained and expected seasonality in sales and adjusted EBITDA and slightly higher investments. Nonetheless, we are very confident in achieving a positive free cash flow by the end of this fiscal year, given the projected increase in sales and adjusted EBITDA in the upcoming fourth quarter. Let's conclude this section with a view of some balance sheet figures. First, our equity remained on a solid level at EUR 469 million, representing an equity ratio of 21.6% but declined compared to the end of last fiscal year by EUR 58 million due to the reported temporary loss of EUR 42 million after 9 months and an increase in the present value of the pension provision as discount rates were 10 basis points down compared to year-end. In total, the pension provision amounted to EUR 698 million, which is a slight increase compared to 9 months ago. Moving to the right side of this chart, our net financial position temporarily decreased to minus EUR 51 million, primarily due to the negative free cash flow and a noncash increase in lease liabilities. At the reporting date, still -- there was still more than sufficient headroom in our credit line, which we were able to increase to EUR 370 million in order to diversify the bank consortium by gaining an additional lender, proving the trust of the capital markets into Heidelberg. As we conclude this section, I'd like to highlight some key messages. Heidelberg delivered a strong market performance in Q3 with orders received increasing by an impressive 8.3%, reflecting robust customer demand. In addition, we delivered on our guidance that we gave to you at the beginning of this fiscal year with effective cost control measures, yielding a significant year-over-year improvement in adjusted EBITDA in Q3, also resulting in a positive free cash flow. Overall, the 9 months figures are well in line with the expected and communicated development, providing a strong basis for achieving our full year guidance. Having said this, let me hand over to Jurgen again, who will give you further insights on this. Yes.

Thank you, Tania. Let's conclude this conference call and take a look at the way to go in our fiscal year. Ladies and gentlemen, we are on track to meet our financial guidance for the current fiscal year. Our strong order backlog, combined with a consistent focus on margin and cost efficiency provides a solid foundation for achieving these targets. We have successfully turned profitability around and expect further improvements in Q4. Despite significant challenges, we have navigated them effectively, demonstrating the resilience and adaptability of our business. We, therefore, continue to anticipate sales for the 2024, '25 financial year to be in line with the previous year at approximately EUR 2.395 billion. Likewise, the adjusted EBITDA margin is expected to remain at last year's level of around 7.2% to successfully compensating substantial cost increases this year. Next slide. Having shared a first outlook to fiscal year 2025, '26 at the beginning of this call, we are confident achieving a solid progress in our operating profitability. To give you some insights beyond, we are delighted to invite you to our Capital Markets Day on June 2, taking place at our headquarter here in Wiesloch near Heidelberg. Therefore, we will send you an invite with all details soon and are looking forward to meet you here in Wiesloch. As we conclude, I'd like to highlight some key messages. Heidelberg has shown a strong quarter, making decisive steps to further improve profitability. In addition, the initiated personnel cost reduction and the financial discipline have been pivotal in laying a sound foundation for profitable growth. And our guidance remains confirmed. Heidelberg demonstrates resilience and clear performance improvements. Thank you for your attention. I hand it back to the operator.

[Operator Instructions] The first question comes from Stefan Augustin, Warburg Research.

I start with actually 2. And the first one would be, you shared with us your expectations about next year's margin and the development and also that the cost savings will bring the margin from this year to next year up a bit. I guess that is not absolutely agnostic of an idea what the sales will be. So could you comment a little bit on what your expectations, what the market will be doing or in what kind of sales range you would expect this margin improvement to be? So that would be the first question. And the second is actually on the rollout of the Jetfire as a product. I've seen that the first installations have been reported. You still have a large backlog here from the Drupa trade fair, but I would be interested if you can share some more. Is it still well received? Are there additional letters of intent coming up? What is the sales force saying, things like that?

Okay. I will take this question. It's both questions, Mr. Augustin. First question about the expectation for next fiscal year. Overall, we expect the sales figure that will not trend below the current year. So at the end of this fiscal year will be around the previous year level. So at the end of next year, we do not expect a trend below the current year. While we expect more or less stable development in our core business, we build on additional sales growth from our strategic initiatives in the digital ecosystem. as for instance, the cooperation with Kennon with the jet, I will come to that question in a second. And of course, also the industry topic Jurgen was just mentioning a total on this year's level as based on your question. And by the way, and this is, I think, also important to know, Americas this year was somehow struggling. So expected -- was below our expectations. So now at the end next fiscal year is heavily also depending on Americas. So let's see how this will develop. Let's see what we can get out of U.S. Second question about the -- can business. So we are quite happy with the market feedback, first of all. So we concluded some customer days here also in January. The feedback overall was really positive. So we can confirm that we will deliver the first system in the first quarter of this calendar year already to Switzerland and Germany. So we will start with the shipments next week. The first machine will be shown in Switzerland during the Her days. It's a small trade fair in Luthan. And afterwards, this machine goes to a Swiss customer. And yes, we are also very satisfied with the current level of firm orders. And next year, we are planning to generate a double-digit million euro business with the digital ecosystem around the Jetfire 50. So we are confident... To meet our targets here.

The next question comes from Stefan Maichl, LBBW.

Stefan Maichl from LBW. Actually, I have 2 questions from my side. The first one, can you give us an update on the negotiations with your employee representatives regarding the job cuts at sites outside your headquarter with Waldorf? And the second one, have you already been able to acquire new industrial customers? And can you provide us with a current and expected sales level for the industrial business in the coming fiscal year?

Michael, first of all, we finalized also the agreement with [Indsicernible] and we are still in negotiation with Brandenburg and the other plants. But Amstadten, the second big one is finalized. Regarding new business with industrial customers, yes, the actual surroundings are not so good for acquiring new customers, as you can imagine. But yes, we are still finding some interest on a more resilient supply chain and people coming back from China and also the resources and capacities, for example, for the casting in Germany and in Europe are limited for the future through some bankruptcies. And therefore, we are quite confident to reach agreements also with new customers on that.

Maybe one follow-up to the mentioned Amstaden plant. Can you provide maybe a savings figure from this final from this agreement?

Yes, it's EUR 20 million over the next 5 years.

And the next question comes from Peter Rothenaicher, Baader Bank AG.

I have a question on the Technology segment. So you mentioned you are still in the phase of transforming from hardware business to systems business. So -- but so far, sales are still declining and you still have significant losses in here. So how is your timetable? What do you expect to come here towards breakeven level? And what are your expectations, let's say, in about 2 to 3 years' time?

Yes, Peter, we are pushing hard on the cost, as you can see also in the figures. So we limit the investment and we limit some resources, and we focus on several projects in this area. And we are looking forward how politics are helping us also, for example, for the hydrogen business to get a clear further policy, we would say, in Germany, what can we expect from the state to run such a project. But we are driving on site, I would say, in this segment. And as you can see, we limit the resources. We are looking on profitability and cost management. And therefore, if there is an interest, we move forward. And if we see a business plan, if not, there is no investment from our side. That's my clear view after 6 months. Yes, we run this business or I'm running this business for 6 months. And therefore, I have a clear picture on profitability and cost management and efficiency.

Okay. Then a question on Tania regarding the P&L for the third quarter. So it's clear you built a lot of inventories in unfinished goods, and that has an impact on the cost structure. But nevertheless, material cost expenses were 50% of total output. This is a little bit surprising. Can you comment on that?

Thank you for your question, Peter. Actually, this is due to the overall operating performance, we could say.

Okay. But overall, you can confirm that there is no additional cost pressure. And so it's more or less a one-off effect in the third quarter and then it should definitely particularly with the high sales volume and invoicing turnaround in the fourth quarter.

Yes, absolutely. Absolutely, Peter. That's our overall...

Yes, you mentioned an outlook for potential sales in next business year. So we will have the situation with the strong revenue generation in the fourth quarter, which should be clearly much more than EUR 800 million that the order backlog would turn back to the level we have seen perhaps end of last year or even somewhat lower. So what makes you then confident considering that next year, we have no drupa effect?

So I will take this question, Peter. So there are 2 main, let's say, impact we are expecting for the next fiscal year. One big topic is our China print. -- trade fair. So every 2 years, we have China Print and Print China. This year, we're having China Print in mid of May, which will heavily support our business in China, but also in Asia and the rest of the world, the fair in China is getting more and more attractive also for foreign visitors. So this is one of the topics for next year the good thing is we take place in our first quarter, so supporting our sales figure for the total year. And second topic is the American business. So due to the fact that the expectation -- so last year was by far below our expectation. Next year, we are expecting here one or the other positive impact. The January order intake from the U.S. was pretty okay, pretty good. So better than expected. So this makes us somehow confident that we are getting here a back wind from U.S.

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

I have 2 as well. And one is also a follow-up on the sales expectation for next year. Is it fair to assume that we should continue the trend of declining volumes, but positive contribution in the pricing that we have seen in the last 2 years?

Yes. So we are planning a price increase. This was already in the systems communicated to the regions, already a clear cutoff date communicated also to customers. So yes, we -- let's say, we will see that next year as well.

Okay. And the second question is regarding your order intake in Q3. You mentioned that it stood in contrast to the overall market. And I was wondering what do you think were the drivers of that? Was there still some Drupa impact from Q3 order intake?

It was no Drupa impact. So overall, a major share of our business, more than 85% depending not on Germany, that's good. So at the end, we have one or the other good running market, especially Asia is performing very well. So still on a good track since Drupa, but not only at Drupa also afterwards. So this is something what is somehow contradictionary compared to the German, let's say, environment. And from a segment point of view and perspective, the packaging business is performing very well for the packaging segment. So we see orders coming in also for our Boardmaster machine. So the Bard master machine, our machine for high-volume packaging, especially for the American market, Asian market. So we saw some order intake as well in the last quarter. So it seems that we are meeting here expectations from our customers worldwide. So this is part of the numbers.

At the moment, there seem to be no further questions. [Operator Instructions] There are no further questions from the audience.

Yes. Thank you very much, and we close the call. See you soon.