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June 9th, Heidelberger Druckmaschinen AG held their annual Analyst Conference. The conference must, by all means, have been terrible for CEO Rainer Hundsdörfer and CFO Marcus Wassenberg. Not only did the duo have to take the beatings for the entire company. They also had to deliver a result so devastating that the survival of Heidelberg by some are questioned. 

So what can you expect from an Analyst Conference?I would assume that you will get honest answers, insights in operation, a well explained balance sheet, cash flow analysis, and in Heidelberger's case, a quite detailed explanation how restructuring cost is assumed to reach 275 million euros, and finally an outlook, not just on the short-term but also a bit longer.

A 343 million euro loss is by all measures a vast number; however, sometimes you have to dig into the details to understand what this number represents. When you read the statement and listened to the presentation, you could be fooled to believe that the 68 million euro in the operational loss was one thing and that the remaining 275 million euro was accounted for. This is, however, not the case. The 275 million euro is provisioned in 2019/20 books, but further 50 million euros is added for expected "restructuring" cost in 20/21. During the Q&A, Marcus Wassenberg couldn't give details into how these numbers occurred. He might be right that it's very difficult to figure out, but firstly, that's his job. Secondly, if you don't have an idea of the 275 million euros, it could easily be both higher, or lower?

The question is, what to believe? In the 'IR reports and presentation' on page four, the executive board says that "Earnings were also impacted by expenses of € 300 million in connection with the strategic reorientation." - According to an answer in the Q&A session, Wassenberg has not spent the money yet. It would stretch over 2 years.

"The majority of the measures forming part of this reorientation will be implemented in the new financial year 2020 / 2021, meaning that another substantial net loss is anticipated in this transitional year depending on the as yet unquantifiable consequences of the pandemic." 

What the f... does this mean? If the loss accounted for in 2019/2020, is implemented, it will influence the 2020/2021 result positively. It will affect cash flow, but not the result. The entire idea of taking a huge loss in a restructuring is to influence the operation of the following years - and here, Marcus Wassenberg predicts a further loss in the 50 million euros range.

Heidelberger Druckmaschinen AG continues to see themselves as a market leader - and yes, Heidelberg is dominant in some markets. It's a huge company, but it's also a company that has lost so much money in the past decades that 343 million euros only looks like a glitch. During the financial crisis back in 2008/2009, Heidelberg was also struck - and according to Heidelberg, they wouldn't have survived if it wasn't because of loans and securities for wobbling 850 million euros. The loan (bond) and securities may not be so important for now; however, they are. Wassenberg was asked why Heidelberg has moved their repayment of a bond till the end of the fiscal year instead of the calendar year. The answer is, obviously, to secure cash flow.

The interesting question is why Heidelberg is so terrible at getting the company aligned to the market? In 2008/2009, the work-force was about 20.000 people - now the expected restructuring will leave Heidelberg globally with "well under 10.000 employees." But when a company, like Heidelberg, is not able to position themselves right, the question is whether the product mix is right. That leads to an evenly important question. Is Heidelberg aligned with their customers and the market? 

By dismissing the small format machines, Heidelberg throws their existing small-format customers in the arms of competitors who have an interest in smaller format machines, and digital print suppliers. When dismissing the VLF, Heidelberg may have a short-term interest in doing so, but packaging was one of the business objectives pushed at drupa 2012. In the IR report, it's even difficult to understand the move 100%. The primefire was a centerpiece at Heidelberg's drupa 2016 presence, and the first delivery was in 2017. So less than three years it took to judge a new platform out. In my opinion, it seems that Heidelberg isn't aligned with the market. When looking at the profile of CEO Rainer Hundsdörfer and CFO Marcus Wassenberg, regardless of how good or bad leaders they may be, maybe decisions are made more based on excel sheets?

Stephan Plenz from drupa 2016

Downsizing Heidelberg obviously costs money. When laying off people, they will still need salaries in a period - and according to the financial report, the cost of reducing the Executive Board, also release severance payment to the board members stepping down. This is normal; however, i.e., Dr. Ulrich Hermann received 250% of his 'normal' compensation, reaching a total of 2 million euro in personal compensation. 

In March, Heidelberg expected to layoff 2.000 employees later they adjusted the number to 1.400. Heidelberg is downsizing to become profitable, but also to ensure their cash flow. Cash flow was one of the maybe most essential mentions in the conference call. Marcus Wassenberg spent a good time assuring that cash flow was under control. But how can that be? You may be able to forecast a cash flow based on the known, but when both Hundsdörfer and Wassenberg several times stated that they could not really foresee the future due to - well COVID-19 - and the actual restructuring cost?

That is simply not possible, and that leads me to the first expectation from my side - "open and honest answers." 

Heidelberg is a public company, and it's a company in deep troubles, so the least you would expect is serious considerations about the future. As you most likely know, Bobst had their conference also June 9th. Though the companies aren't comparable, the interview I did with François Martin from Bobst was at least indicating measures like "our sales develop closely with the development in GDP." We are close to the end of Heidelberg's Q1, so it would be appropriate to announce order intake, and orders in Q1 and use this to create an outlook for 2020/2021. Another thing that also puts the entire presentation in perspective is the understanding of sales. From the initial sales process starts to a machine is signed off, takes mostly 12-months. SO. Heidelberg may not have been influenced by the COVID-19 at the current time. Maybe even worse statements can be expected?

Hundsdörfer and Wassenberg have taken the lead, but here is what Wassenberg stated: "Heidelberg is a healthy company at the operational core."

That is by almost all measures not true. A break-even close to turnover is not a healthy operation. An operational loss, regardless of COVID-19, and other excuses at 68 million euros, is not healthy. A company that has no view of the future is not healthy. A company that has no clear strategy is not healthy. A company that tries to fool its stakeholders with this kind of information is not open, honest, or healthy. 

However, the 325 million euro provisioned were under the Q&A placed into a new perspective. Marcus Wassenberg said it was impossible to predict the restructuring cost and that the 325 million euro was money to be spent over three years - remember that on page four, they already signed that the money was a known size. You can, of course, ask how Heidelberg came to this figure if it's "impossible" to predict the actual cost?

In the Q&A session, Marcus Wassenberg, also in VERY vague comments, said that the money could also be used to buy back printing-machines. Did this imply certain buy-back guarantees? Also, a very vague comment was about Heidelberg's subscription services. This we will get back to shortly, but the most costly of the four models includes hardware. 

Hundsdörfer and Wassenberg didn't touch upon this in their presentations but directly asked they said that 75 subscriptions (out of 300) are with equipment and influencing Heidelberg's balance sheet. Even worse is that they still haven't got a financing partner for current and future subscriptions.
I would have thought that such important information would influence Heidelberg's balance with as much as up to 150-180 million euros, but I haven't been able to find any mentions of this on the 196 pages report. 

Heidelberg also stated during the presentation that the subscription is attractive since it will give them recurring revenue. I take this doesn't apply to the hardware (except for the ones they finance themselves, and which initially will pose a negative cash flow for the company). Still, the apparent move for Heidelberg to focus on Prinect (software), Saphira (consumables), and their consultancy business is, of course, recurring revenue.

In the Q&A session, Heidelberg's Marcus Wasserberg spoke about market developments. Three slides to be more precisely was used to underscore the serious situation. Nobody really asked into the slides, and it was only later it stroke me how strange these were.

PDF Presentation

Let me explain. Heidelberg's situation is multi-faceted; they have an extremely high break-even. We evaluated this (before the Analyst conference) to be in the range of 1.3 billion euros (based on 2.4 billion euros and a gross margin of 49%). It was confirmed during the analyst call to be in the range between 2-2.1 billion euros. Break-even is the turnover you must have before you start making any money, and indicate how fragile you are. The break-even also indicates what percentage of your cost is variable. 

If the market shifts just a few percent, Heidelberg goes from a positive result to a negative result. With a decrease in sales of 6% in the fourth quarter of their fiscal year, it influenced their profit by 40 %. 

Heidelberg must cut costs and become more efficient. They must become more agile, and since the market most likely won't accept price increases, the initial step is to lower cost. Therefore, it makes sense to reduce the labor force, which will improve Heidelberg's cash flow and lower operational cost.
Heidelberg is, however, also moving production to China. Machines specifically for the Chinese market are produced there, but some spare-parts will be built in China. A question that wasn't raised at the conference is the well-known issue working with Chinese based companies - what level of technology-transfers are to be expected? And how will that influence Heidelberg's future? Remember that Masterwork is a significant shareholder (8%), and no Chinese companies can be sure not to be under firm governmental control!

Heidelberg's sales are, of course, depending on the printing companies' production, but the three slides Heidelberg used as an excuse to their own weak performance showed sixteen weeks of their customer's production for "Packaging and label," where all sixteen weeks performed 15% higher than the same period last year. The next slide is for the same period but for "Commercial," showing a similar graph indicating a production decrease of 15%. The final slide shows "China's market" (combined commercial, packaging, and label) with production above average. You may ask why is this interesting? Heidelberg has used their connected machines during the past months to indicate the global crisis for printing companies. But as they have said in multiple statements, "only" 13.000 printing machines are connected to Heidelberg's cloud. We are not talking about printing companies - we are talking about printing machines. Firstly, this alone can't be used to evaluate overall print volume. Secondly, in Europe alone, Intergraf represents 100.000+ printing companies who most likely have at least one printing machine (of some sort). Thirdly, can a fluxation in the market over sixteen weeks influence orders on printing machines that fast? 

I have never been in the market for buying a printing machine. Still, I would judge that a selling cycle on a new printing press is according to several industry people typically 6-12 months from the first contact to installed machine. So if sales are down in the last weeks of Heidelberg's Q4, it must be cancellations of already places orders, or to be very frank, a decreased order intake not relating to COVID-19 at all. Actually, a press release about Q3 states the following "At EUR 636 million, incoming orders in the third quarter were up on the previous year's figure of EUR 606 million." In the same press release, Heidelberg continues, "In the first nine months, EBITDA excluding the restructuring result was EUR 117 million, compared to EUR 101 million in the previous year."

If this is the case, we are now three months into the 20/21 fiscal year, and the forecast for sales could be based on current order intake. So to predict such short-term as a fiscal year shouldn't be impossible, but maybe less accurate. Without comparison, when Airbus makes their forecast, they do it as a revision of a ten-year outlook, and here the printing industry, in general, could benefit from having a long-term eye on the development. Hundsdörfer states both in the reports presented at the Analyst Conference, but also in his speech at the Online Print Symposium that the print value relatively constant performs around the 400 billion euros a year, so how will this develop over ten years?

The 400 billion euros prediction is; however, a number often questioned. 

Q3 was even reported on par with the previous year in a press statement issued by Heidelberg. If you look at the graphs presented by Heidelberg in their Analyst Conference on June 9th, sales in China in Q4 decreased significantly. The US is almost even, Europe is still up, and the total net sales of the Heidelberg group is up from previous quarters (still lower on the year to year). The graph for China sales is even higher than in previous years but saw a fall over the entire year compared to development quarter by quarter.

With China as a focus market for Heidelberg, one analyst asks in the Q&A whether Heidelberg is having difficulties maintaining a reasonable gross margin on their products? 

From my understanding, China is a growth market for Heidelberg. With growth from 658 million euros to 683 million euros, the loss to COVID-19 is still mainly blamed for China's lack of orders in Q4, but can this really influence the result so dramatically? Apparently, yes!

The "strange" thing, however, is that one of the previously mentioned slides, where Heidelberg is using the production data to explain their sales, the graph indicates that China only experienced four weeks with lower production in packaging, labels, and commercial print combined. All other of the sixteen weeks outperformed previous years with volume increased between 13-23%.

Conclusion 

I can't conclude anything, to be honest. Reading, watching, analyzing the material publicly available allows you to try understanding Heidelberg. The management's motives are most likely the best, but I can't help sitting with a feeling that something is wrong. Numbers don't compute. Timing is a bit strange, and in some incidents, information missing raises more questions than answers. Why isn't, i.e., Crispy Mountain, mentioned with a word? Why is the financing of the subscriptions not easy to find any information about? Why isn't there at least an attempt to make an outlook for the future? For me, the numbers, the words, the marketing, the communication is inconclusive. When Marcus Wassenberg states that Heidelberg is a healthy company - I am looking into the eyes of a COVID-19 patient in the final stage between death or survival.