Heidelberger Druckmaschinen Aktiengesellschaft (HDD) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to HEIDELBERG's conference call on our fiscal year results 2024-'25. I will be guiding you through today's presentation as Mr. Otto is unfortunately unable to attend due to personal reasons. Let me start by outlining the agenda. First, I will provide a brief overview of our key achievements over the past fiscal year, share insights from our participation in the China Print trade fair held 1 month ago and present our outlook for the upcoming fiscal year. Next, I will review the performance of our business segments and highlight regional developments. Finally, Volker Herdin, our Head of Finance, will take you through the financial results in greater detail. Let's begin by taking a closer look at our incoming orders, where we delivered a strong performance last fiscal year. The key driver of this success was our global footprint, which enabled us to capitalize on growth dynamics across key markets, even in the face of a challenging economic environment. The numbers speak for themselves. Orders were up by solid 6.4% year-over-year, increasing from EUR 2.28 billion to EUR 2.43 billion in fiscal year 2024-'25 with a book-to-bill ratio well above 1. This clearly outpaces and stands in sharp contrast to the broader German engineering sector, which saw a 7.2% decline over the same period. Looking at the quarterly trend, Q4 showed a positive momentum, too. Orders came in at EUR 611 million and were up both quarter-on-quarter and year-over-year. Our backlog is up 11% year-over-year, gives us a solid foundation as we enter fiscal year '25-'26. This slide clearly shows the strong operational improvements we achieved over the course of the last fiscal year. Following a first -- difficult first quarter with sales falling below prior negative EBITDA margin and free cash flow, mainly due to market hesitation ahead of drupa, we saw a clear turnaround starting in Q2. With the new management team that took over in Q2, we placed a strong focus on reducing the cost base and efficiently working through the high order backlog. We successfully managed to steadily increase production output, improve efficiency and reduce expenses across the company. As a result, we achieved consistent quarter-on-quarter growth in both sales and profitability. In quarter 3, the EBITDA margin was twice as high as in the previous year, with sales roughly on par with prior year level. In quarter 4, we reached an impressive EBITDA margin of 10%. This clearly contributed to turning free cash flow positive, but it was also driven by disciplined working capital management and strong cash collection. Today, we are proud to say that we achieved our targets despite a challenging environment and in contrast to the broader mechanical engineering sector. Thanks to our focused efforts, sales remained broadly in line with the previous year, coming in only slightly lower at around minus 4.6%. Nevertheless, we resiliently managed to maintain our profitability level. Next to this, we were also able to compensate for significant margin pressure resulting from higher collectively bargained wages, which proposed a substantial headwind of EUR 25 million. Free cash flow also continued to show a positive trend. At EUR 51 million, we again delivered a clearly positive figure in the double-digit million range, this time without any one-off effect as seen in previous years. Considering the challenging start to the fiscal year and the demanding environment throughout, these tangible results clearly demonstrate a new level of resilience. Let me take a moment to highlight our successful participation at China Print 2025 held in Beijing from May 15 to 19. HEIDELBERG had a very strong presence at the event, making an excellent start to the new fiscal year. We exceeded expectations by selling nearly 350 printing units, driven largely by robust demand in the packaging segment. This will result in high utilization at our local production facility. A major highlight was the first sale of our Jetfire 50 digital press in China following its debut at the show. Overall, we secured a slightly triple-digit number of hard and soft orders, providing solid momentum for fiscal year 2025-'26 and confirming our strategic focus on packaging and digital solutions. And this brings me to our outlook for fiscal year '25-'26. We are projecting moderate sales growth with net sales expected to increase from EUR 2.28 billion to EUR 2.35 billion. This is particularly notable given that the VDMA forecast a decline in sector-wide sales. On the profitability side, we expect our adjusted EBITDA margin to improve from 7.1% to up to 8%. This would represent our highest profitability level since 2008. Key drivers behind this outlook include the positive momentum from China Print, the impact of our ongoing strategic initiatives and personnel cost measures that are already delivering quick payback. Together, these factors position us well for a strong and profitable year ahead. Now I will take you through a deep dive into our segments and regional performance. Let's start with a breakdown of our segment performance for fiscal year 2024-'25. Packaging Solutions achieved a new all-time high with orders up by 7% to EUR 1.27 billion, continuing to serve as a key growth driver for HEIDELBERG. Net sales declined slightly from EUR 1.24 billion to EUR 1.18 billion with adjusted EBITDA margin coming in at around 9%, showing a slight improvement compared to the previous year. In the print segment, we also saw solid growth in order intake, which rose by 6.3% to EUR 1.15 billion. This increase was primarily driven by strong demand for new equipment. However, net sales amounted to EUR 1.1 billion, reflecting a year-over-year decline of 4.1%, largely due to the wait-and-see attitude in the market ahead of drupa. In terms of profitability, the adjusted EBITDA margin declined over the course of the year, mainly as a result of the lower sales volume. In the Technology segment, net sales showed a moderate development and have not yet reflected the improved positioning of Amperfied. However, the adjusted EBITDA margin showed a significant year-over-year improvement, highlighting operational progress in this area. Let's move on to the next chart to look at the regional breakdown of orders received. HEIDELBERG continues to benefit from its global footprint, which supports stable demand across regions despite differing market dynamics. In EMEA, orders received increased by 10.3%, driven by strong investment activities in Italy and robust demand in Eastern Europe. However, net sales declined by 6.4% year-over-year, mainly due to a weak first quarter. Growth in Eastern Europe was not sufficient to offset declines in other parts of the region. In Asia Pacific, orders received remained stable at EUR 643 million, largely due to a predictable dip in Q4 ahead of China Print in May. Net sales in the region increased by 7.4%, driven by strong performance in the packaging business. In the Americas region, orders received rose by 5.4%, supported by strong growth in Mexico, where orders surged by 23%. However, net sales declined significantly by nearly 40%, primarily due to a weak start to the fiscal year and ongoing investment reluctance. And now I will hand it over to Volker, who will walk us through the financial details of the past fiscal year.

Thank you, David, and good afternoon from my side. First of all, let's turn to our EBITDA bridge, which illustrates the year-over-year changes in our operating profitability, which stood at EUR 172 million in fiscal year 2023-'24. Given our catch-up efforts, the decline in sales volumes had only a minor impact of EUR 7 million year-over-year as our gross margin benefited significantly from higher capacity utilization compared to the previous year. Also, product margins remained broadly stable despite somewhat higher tariff wages, energy prices and material costs as positive pricing effects helped to partially offset these increases. Next to this, and thanks to our focused cost control measures, we achieved a notable EUR 17 million improvement in other operating costs, such as reducing external services and increasing efficiency across all functions. This is also attributable to agreements reached with the Works Council and trade unions to reduce personnel costs, of which initial positive effects were already seen during the past fiscal year. In total, adjusted EBITDA reached EUR 162 million, representing a margin of 7.1%. As previously mentioned, we built a provision of EUR 25 million for future transformation measures, which was excluded from the reported EBITDA. Let's continue with the cash flow section, starting with our operating cash flow. Operating cash flow strongly improved to EUR 113 million, up from EUR 90 million in the prior year. This was enabled by a stable adjusted EBITDA margin of 7.1%, which laid the foundation for this positive development. While tax and interest cash-outs remained at the prior year's level, the improvement in operating cash flow was mainly driven by favorable net working capital performance. In particular, higher customer prepayments and the effective use of working capital financing tools reduced net working capital by EUR 70 million, representing EUR 29 million more improvement than in the prior year. Overall, HEIDELBERG has been very successful in reducing its net working capital over the past quarters. Relative to net sales, net working capital now stands at only 17.6% compared to almost 30% 5 years ago. Other operating cash-out such as pensions, which amounted to EUR 36 million, remained at prior year levels and included EUR 21 million related to restructuring initiatives. Let's conclude the cash flow section by taking a closer look at our free cash flow development. While the change in operating cash flow was already shown on the previous slide, it's worth noting that investments increased to EUR 88 million in the reporting period, EUR 23 million higher than the previous year, primarily due to cash outflows for new demo machines. Divestments totaled EUR 26 million, including proceeds from the sale of older demo machines, resulting in a figure slightly below last year level. In total, the net investments were EUR 62 million. After 12 months, free cash flow stood at a resilient EUR 51 million compared to EUR 56 million in the previous year. So let's go have a look to our balance sheet for fiscal year 2024-'25. Our equity ratio increased slightly to 25.1%, primarily supported by a higher pension discount rate that reduced the present value of pensions obligations to EUR 650 million, supported by the EUR 36 million payout. Additionally, net income of EUR 5 million, including the restructuring provision of EUR 25 million contributed modestly to equity. Our net financial position improved to positive EUR 91 million based on the free cash flow development. Next to this, our financial headroom remains strong. We have extended our revolving credit facility to EUR 370 million with a new maturity in 2028, providing us with the flexibility to pursue future investments and growth initiatives with confidence. Overall, this balance sheet reflects a sound financial foundation and positions us well for the strategic steps ahead. Well, thanks for listening. And now I'm giving back -- handing back to David to round up the presentation.

To wrap up, this slide summarize the key takeaways from our presentation. First, we have demonstrated that HEIDELBERG remains resilient despite a challenging market environment. Second, our operational improvements throughout the fiscal year have translated into solid financial results and positive free cash flow. We have implemented the right strategic initiatives to further enhance our profitability and navigate macroeconomic challenges. Third, this progress will become evident next year. With an expected margin increase of up to 8%, we anticipate achieving our best profitability level since 2008. Thanks for listening. And now we are ready for your questions.

[Operator Instructions] And first up is Stefan Augustin from Warburg Research.

First question is actually on, let's say, Q4 development and Q1 development a little bit. Even though you had a very strong Q4 with respect to sales, it has been a little bit lower than you had initially anticipated because we were looking for, let's say, something rather to the level of EUR 2.4 million sales. What is very good is that we kept the margin up. But I was wondering if there simply is some spillover of sales from Q4 into Q1 or what has been the reason that finally, let's say, the sales level you reached in last year was a bit below what you had expected before because the orders were at hand. That would be my first question.

So the first quarter of the last fiscal year was indeed very challenging. And yes, we had to manage these challenges very cautiously. We managed to increase both sales and profitability quarter-by-quarter, ending the year on a strong note. And overall, and this is also a fact we saw in quarter 4, record sales volume with a high capacity utilization nearing its maximum. So there was almost nothing more what we could do in the last quarter out of the factory and in addition, revenue recognition for certain deals had to be rescheduled into Q1 of the new fiscal year. So at the end, yes, there's a shift this year we see from last fiscal year into this fiscal year due to revenue recognition topics. And last fiscal year before drupa was really challenging. We produced the capacity to the needs, and this was the reason for the low momentum. But starting with Q2, we steadily increased the sales and profitability over the year and ended up close to EUR 2.3 billion.

So would it be correct to expect a, let's say, especially strong Q1 this year as we have the revenue recognition from the past? We have a good order intake from China Print right now, and we had a sizable backlog when we moved into the start of this year. So could you give us, let's say, a [ ball range ] where you would foresee sales level in Q1 possibly and order level?

Yes, of course. So for the time being, as of today, we expect a significantly higher sales in our first quarter. We estimate approximately 20% above prior year in the Q1. So this is now the estimation. At the beginning of the year before China Print, yes, there was also somehow a momentum in the market, adapting a little bit of capacity. But nevertheless, now, and this is a good message also to you, yes, level will be significantly higher in the first quarter.

So orders in Q1 should also be then above EUR 600 million.

Let's see. There will be -- I would not say that for the quarter is still running. So at the end, we are still having some time. Overall, we have a stable order development. China Print made a solid contribution to this. So with a good order momentum and order intake will be clearly below the strong prior year. This is also definitely true because last year with drupa, we had an order intake of more than EUR 700 million last year. So -- but at the end, it will be on a good level.

And then a question respectively to the Jetfire. You had a very high number of, let's say, soft orders in LOI back at drupa. Where are we with the hard orders right now? Do you have a number of what has been ordered so far since the machine then finally is available to the customers?

Yes, of course. So we are -- first of all, we are on track with our plans agreed with our partner here in terms of numbers. And for the time being, we've ordered 13 presses here from Canon under this cooperation. And this is exactly in the same level we anticipated. So perfectly on track. First machines are already delivered to customers in Switzerland, in Germany and last week to the first Chinese customer. So a good message here is we are on track. The first machines are up and running, and our story seems to be working.

All right. And the final question from my side would be a little bit on cash flow expectations for this year. So obviously, we have a little bit higher earnings input or at least that's the expectation from the guidance. We -- can we also expect a higher free cash flow? So could you be able to keep the net working capital stable roughly? Or shall be prepared for a net working capital step-up?

Volker will answer this question.

Yes. Thank you. Yes. This is Volker. Thanks for this question. So since we have a new Board, the new Board, they restated the strategy for the future. We have in the midterm, EUR 300 million net sales growing to expect. This is what our strategy basically turns out to be. This is our plan. With this additional growth, especially in digital narrow web, wide web webfed and the very large format we just announced this week, we have to invest bigger amounts of money in order to gain this additional sales. So we cannot expect to have the same cash flow level like we have this year. We have clearly, clearly less to expect. But we have to say from this side, growth needs to be invested. And we invest the generated cash we did in the last year and 2 years ago, we utilize this in order to raise our EBITDA level and EBIT level in the future and at the same time, our sales. That gives us further cash out in the upcoming years on the middle level, but not this year and most likely not next year.

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

I have just one on the quarterly development on the EBITDA margin this fiscal year. Just wondering if we are going to be returning to normal seasonality. I understand last year, Q4 was the strongest quarter on the margin side due to drupa and the efficiency measures. And if I look at the past years, normally, Q2 and Q3, I think, were the strongest years on the margin side -- the strongest quarters on the margin side. I was just wondering if you could give some color on the expectations for this fiscal year.

So at the end, our ambition is to achieve an EBITDA margin of up to 8% in total. And this year, just looking into the first quarter, EBITDA should improve accordingly. So as I mentioned before, with the sales, so we're expecting higher sales in the first quarter compared to previous year. So EBITDA margin will even -- will also be better and some one-off costs we had last year in the first quarter will not impact or will have no impact this year. So we expect a higher margin in the first quarter.

Maybe I add something. I think we have to anticipate from the seasonal one, a similar picture like last year. However, a bit more leveled out.

And next up is Peter Rothenaicher from Baader Bank.

Firstly, a question on restructuring. So you had booked in the third quarter, the restructuring expenses for your Wiesloch-Walldorf site. In the fourth quarter, you had a positive impact. So obviously, the build provisions were not fully needed. And on the other hand, obviously, you have not booked any provisions for restructuring in other sites. Can you give us here more -- some insight what was the reason for the positive effect in the fourth quarter? And what do you expect here regarding restructuring for the current year?

Yes. Yes, we can. I mean the whole restructuring is basically focusing -- reducing complexity, basically having our negotiations successfully finished with our worker council and basically avoiding any increases in salary and wages. This is one part of that. The second part of that is to, let's say, restructure the amount of our employees better to the total outcome of our -- the total performance of the company. So that means we have a plan in order to reduce employees by approximately 450 people. In the third -- in the fourth quarter, we were -- we started with all that. So we had to put restructuring obligations in our P&L, which amounts to EUR 25 million, which basically has to be paid out as soon as the employees leaving the company in the year 2006 and 2007. That is when the cash goes out for that. Additionally, we restart basically or we put a new program in place because we are not long, we are not finished at this point of time because the complexity is still too much and too high. And since I'm here since April 1 and have with the Board a clear commitment that we are focusing furthermore on that and getting additional restructuring level and then helping and supporting a growing EBITDA margin. Is that -- was that answer to your question? Or did I miss something?

Yes. Not completely. So on the one hand, what was the reason for the reduction of restructuring charges in the fourth quarter by EUR 3 million? And what are your expectations regarding additional restructuring expenses for the current fiscal year?

Peter, this is Max speaking. So there was a change in assumptions for the provision that has been built. So there is basically a higher share of early retirement program participants. And this is the reason for the EUR 4 million reduction in the provision. I guess this was the question you were pointing out to.

Yes. And for the current year?

And for the current year, we expect EUR 10 million.

EUR 10 million. Then another question regarding your Technology Solutions segment. So last year was still extremely low level regarding revenues. You now have given some positive aspects with the SAP project. Can you give us here some more insight what do you expect for this segment in the current year? Can we expect here a further significant loss reduction?

Yes, of course. So at the end, we are working a lot in the Technology segment. We have a clear focus in our strategy here to bring new companies to us. We are already having a lot of orders here in this segment. Our ambition for this year is a sales of EUR 60 million in the Technology segment. And at the end, our clear strategy is also that the segment pays itself. So at the end, that there's no, let's say, investment from the company needed. So this is our target, to turn it into a positive number at the end of the day. And we have, at the end, a lot of ideas on the one hand side, but also a clear strategy, which industries we are approaching, where to do that, what kind of capabilities we are using. So we're not just talking about our foundry in Amstetten, we are also talking about our electronic assembly here. So we have competencies, and we see an increasing demand for this. And the topic you're just mentioning, the SAP is just the first big, let's say, order here in this direction. But at the end, it's part of our transformation story in the e-mobility business coming from a pure assembly of e-charging points for Wallbox to a full system integrator and managing the whole infrastructure and SAP is one of the biggest users of vehicle fleet operators in Germany is, I think, the first step into that direction, but it clearly underlines our way that we are just more than just the manufacturer of single devices. So strategy is there. We've hired certain experts from outside here in this segment. So to underline also that, that is a clear way moving forward.

Then one technical question regarding tax expenses. So last year, you had definitely high tax payments. I know this has to do that you are earning good money in China and therefore, have to pay taxes there and cannot use too much of your tax loss carryforward. Now with cost reductions in Germany, I think the profitability of your German enterprises should improve massively. And this should, in my point of view, have a positive impact on tax payments as well. So what is your view on this? What can we expect for taxes for the current year?

Yes. Last business year, we still had a negative number in our German company. So we increased the loss forward amount. And now we are in the middle of a restructuring project and bringing even more value add into our China facilities in order to increase the profitability overall. However, it counters the efforts to increase the profitability in Germany. However, in general, we are now starting a bigger project, basically facing all angles and trying to get the German companies at least back to a normal number, let's say it this way. How far we come with that, we have to see with our strong target to minimize the losses in Germany. But this is a permanent effort to increase the overall performance of the company, and we cannot avoid in order to basically to utilize our low-cost locations for more value add.

So does this mean that your tax rate will remain also extremely high in the current fiscal year?

On the current planning, yes, until we have a breakthrough because our transfer price system is stable. And to touch a transfer price system is, as you may know, a critical topic. So we need to gain the advantages we need to focus on from a different angle. And that's what we are trying to do. And it's too early to, let's say, inform about the sites at this time at this point of time.

And my last question is on free cash flow again. So you explained that CapEx spending will be definitely higher, therefore, some negative impact on free cash flow. On the other hand, there might be also some first payouts for restructuring. So can you give us an indication, will free cash flow be positive in the current year? Or might it be possible that we see negative free cash flow?

I can say it this way. We have to -- our expenses and CapEx investments will support this business case. So we need -- so we get a raise in our top line to a level we need to achieve. It's too early to say because there's a lot of things we didn't have in our plan, which basically was secret projects we now announced. And the cash out we need for that, it's not, let's say, at this level, I cannot pinpoint down to an exact level. However, it will be less -- definitely much less than last year. And it's too early to say, really.

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

Yes. Thank you all for your participation. Wish you a good day. Thank you very much for listening.