Part 2 Heidelberg's Need For Money

Corona and cash flow were probably two of the most used words at Heidelberg's recent Annual General Meeting. Corona, obviously, influences almost every human on earth, but can it really affect a company like Heidelberg so rapidly? 

The short answer is 'no,' and this story will try to describe why the corona isn't responsible for Heidelberg's 2019/2020 results. I will try substantiating why I believe I am right - but read on, and I hope you will enjoy the story. 

Before starting, I also have to come clean about a few things. I believe this is my fifth article about Heidelberg, where I have tried to analyze their saying and doings. During these five articles, quite a few people have reached out to me: some supporting the stories and others asking me if I have something against Heidelberg. I don't have anything against Heidelberg, and I have many good friends who work or have worked for Heidelberg. When large companies make announcements that potentially influence a large number of printing companies, I feel obligated to investigate, research, and create a platform for debate - that is my only intention when writing. Heidelberg is a complex organization with countless companies owned by them, so it's not easy to get a clear picture. Since Heidelberg has never responded to the articles I wrote, I was maybe a bit biased when I started writing these three new articles. The three articles are initiated by Heidelberg's sale of Gallus. It has been almost two weeks of research, reading financial reports, countless articles, and well -google has been on 'fast-dial' here, helping me understand words, expressions, and a lot of other things. I have interviewed numerous people mostly for background, but here we are, and I am pretty happy - and surprised about the outcome of my work.

I hope you will enjoy the article as much as I have enjoyed writing it. 

The Corona

During the pandemic, Heidelberg presented their "Print Media Industry Climate" and used the performance index to explain how corona affected global print production. Of course, great to understand how the pandemic influences Heidelberg customers, but unfortunately, the measures are not really representative - not only for Heidelberg but also for the entire industry - and to use them as an excuse for Heidelberg's sales of equipment and services doesn't make sense at all. It is, however, interesting to see how IoT can be used to give us performance data that will play a massive role in the printing industry in the future. 

The "Print Media Industry Climate" gives you data from Heidelberg connected printing machines. Where printing companies have an immediate effect from the COVID-19, the situation is entirely different for vendors like Heidelberg. Selling cycles are long, and when contracts with printers are agreed, it's not like shopping your daily grocery where you 'just' add your new Speedmaster to your shopping cart, check out, and then deliver it to your premises. When an agreement is signed, the machine is built, and production and delivery can easily take months. So an important question is how soon the COVID-19 can be used as an excuse for all bad things coming. 

WHO reported about COVID-19 end of January 2020 - at the time, the outbreak was regional in China and Southern Asia, and hardly something that significantly influenced the global economy. At the time in January, there was also optimism from the entire global printing industry. No-one at this time even considered FESPA and drupa to be postponed or even canceled. The pandemic was first announced March 11th, and it was only at this time, countries started to take steps towards lockdown, travel bans, etc. and at this time, companies seriously could start talking about an effect because of the COVID-19. 

Since Heidelberg's fiscal year is from April 1st to March 31st, the COVID-19 can only be related to the last month of their Q4. Heidelberg even substantiates this themself since they in a press release for Q3 dated February 11th, 2020 report all in all everything on par with 2018/2019. The situation is actually slightly better since incoming orders and EBITDA are somewhat better for Q3 compared to Q3 the previous year.

The press release dated February 11th, 2020 - also states that the rest of the fiscal 2019/2020 year's expectations are un-changed and on par with 2018/2019. Only two months later delivering a result of -343 million euros is, by all means, surprising.

Something changed from mid-March to the end of March. The answer to this wasn't revealed in the 'comprehensive package of measures' announced March 17th. Though the "package" predicts a loss in the range of 300 million euros, the reasons why the comprehensive package is needed can't be because of the COVID-19. 

The Need For Money

Any operation, of course, needs money. Money is required for long-term obligations, like leasing contracts, operational loans and credits, bonds, and of course, pensions. One of the things that have been a headache for Heidelberg is their subscriptions. These have been discussed widely - also on INKISH - but the issue for Heidelberg is mainly the financing of these. In the interview I did with CEO Rainer Hundsdörfer, at the Online Print Symposium, he said that external funding wasn't in place. Still, he expected solutions to be presented at drupa. This was less than a month before the closing of the 2019/2020 fiscal year. The financing partners have not been found - and secondly, the Heidelberg financed machines are booked as assets under the headline "property, plant & equipment (operating leases)." 

Not the first place to look, and you have to look into the notes to get an idea about the value of these obligations. As far as we can see, the machines have a gross amount of approx. 55 million euros. Why are these machines not already externally financed? Are the customers dubious and impossible to get funded? Is the subscription model not such a good idea as presented? Or has the COVID-19 impacted this opportunity more than Heidelberg expected? All questions, difficult to find answers on. It's easy to point fingers at Heidelberg for the subscriptions that have been tooted for a long time - but sales is a sale. When I wrote about the subscriptions at first, I claimed that the subscriptions merely was another way of financing the machines. If Heidelberg were able to sell the contract to an external financing partner, the sales would be booked as revenue rather than an asset with a smaller but recurring revenue. By financing the subscriptions themselves, Heidelberg has a risk if the customers can't pay!

With no external financing partner, Heidelberg has essentially made the sales without any to send the invoice to.

What challenges me is how much you have to search in the 200 pages financial report to find any answer on subscriptions. It would have been great if this was stated separately in the balance sheet. 

I believe the board has had long discussions about where these machines should be booked. I am also convinced that Heidelberg's subscription-business has been a hot and recurring topic at the board meetings - and who knows, maybe one of the reasons the board was slimmed down to only CEO Rainer Hundsdörfer and CFO Marcus Wassenberg?

Heidelberg is not a leasing company, nor do I believe they ever had the intentions of being such - now they effectively are.

I totally understand why Heidelberg is so focused on cash flow. They need the money, but they equally need to improve the balance sheet. CFO Marcus Wassenberg has worked less than a year with Heidelberg, and to be honest, when we started writing about Heidelberg, I couldn't understand all the changes they presented. Discontinuing VLF and Primefire seems unlogical in a market where the focus on packaging and digital seems the only way forward. I have, however, during the past week's research, changed my mind. I believe Marcus Wassenberg is the first CFO that, for the first time ever in Heidelberg's recent history, really clean up the mess that Heidelberg is in.

I have never met him, never spoken to him, and therefore the following is pure speculations. Marcus Wassenberg is maybe the first person in the top-management of Heidelberg who has the balls to do what should have been done years ago. Disconnected from an emotional passion for the products, and services, and opinions from reporters and so-called analysts (like myself), he takes an in-depth look into the fundamental needs of a renewed Heidelberg. Stronger balance sheet, cheaper financing, a slimmer organization with a considerably reduced overhead, and a new starting point for making Heidelberg great again - Speculations - yes!

When Q3 was announced, and everything looked pretty much aligned with previous years, Heidelberg most likely COULD have continued, and maybe even deliver a result on par with 2018/2019 - as promised. 

However, remember Marcus Wassenberg only started working with Heidelberg in September 2019, so how long time does it take to get the necessary insight to understand the complex financial structure of a company like Heidelberg? 

I believe Heidelberg, have actively decided to use the Coronavirus as an excuse. I am 100% certain that the COVID-19 is not even close to being the reason for the changes already set in motion. The dates mentioned clearly indicate that Heidelberg COULD have delivered a result almost on track with the 2018/2019 result. I believe Marcus Wassenberg concluded that Heidelberg needs to be better fit for the future, and he, therefore, initially starts looking into the low-hanging fruits for how to optimize Heidelberg.

Debt, Operation, and Cash are the three most important tools in the toolbox. 

The devastating result for 2019/2020 has almost nothing to do with the operation itself. 

Two tracks to get Heidelberg in better shape

The March 17th announcement had multiple messages, but it was only the first part of a plan. Discontinuing the VLF and Primefire took the headlines, but when you look at the financial report of 2019/2020, Heidelberg reports sales almost on a level with the previous years. The discontinue of VLF and Primefire gives Heidelberg an improved EBITDA of 100 million euros - a result that will support the future, Heidelberg, considerably. What impacted the result we will revert to in a moment, but before doing that, let's get back to the announcement from March 17th.

Re-transferring the pension fund was way more critical for Heidelberg and Wassenberg's plan to bring Heidelberg back on track.
The 375 million euros not only influenced the cash flow but allowed Wassenberg to get rid of expensive debt. At the same time, Heidelberg announced restructuring costs in the range of 300 million euros. 

Three significant announcements - and I believe most of the trade-press initially focused on the discontinuation of the VLF and the Primefire. I wrote about this, along with several trade-media. While most of us were surprised about this and found the decision stupid, I believe Heidelberg wasn't that unpleased with the two other announcements having less media coverage. The 375 million euros part of the pension fund returned, is of course, significant. I, however, believe that the 300 million euros in restructuring cost announced is the real game-changer. The restructuring is part of the new strategy sold under the headlines 'Profitability,' 'Competitiveness,' and 'Safeguarding the future.'

Most likely, not headlines that can upset any, and hardly words that in itself promise customers and market any revolutionary new products, and services. A strategy 'set' by financial people rather than marketing people.

The Balance Sheet 

When Heidelberg May 23rd announced their preliminary result of a gigantic minus of 343 million euros, March 17th was way forgotten. With massive down writings, and what to me looks like a thorough look at all accounts, the VLF and Primefire became the opportunity to get rid of loss activities, employees, business areas, and getting a new balance sheet with better up-to-date and maybe more representative numbers. 

I was surprised about the increased spending on salaries - 119 million euros. This is a very high number, even for a company the size of Heidelberg. The amount, of course, relates to the "up to 2.000 people" Heidelberg planned to lay off. This money is booked for expenses associated with laying off people involved with the discontinued products. The massive down writings are also related to these products. My guess is that Marcus Wassenberg has taken the opportunity to strip assets that have no real value in the future - not only related to the discontinued products - regardless, a total of 275 million euros. 

At the virtual investor and analyst conference on June 9th, CFO Marcus Wassenberg was, if not 'toasted,' then at least asked, about how the management came to the restructuring cost. When I listened to the Q&A, I found the answers vague, but after trying to understand where Heidelberg is heading, I believe that sometimes things can be mixed up.

Let me explain:

In the announcement March 17th Heidelberg delivered three messages. The 300 million restructuring-cost also includes the discontinuation cost of the VLF and Primefire. So when you are asked about the restructuring cost, you won't be able to come with a clear answer, since this relates to expenses not even negotiated with employees and their unions. The preliminary salaries are accounted for 119 million euros, but as Heidelberg also states in the announcement, negotiations and the actual cost only occur in the 2020/2021 financial year and can also financially influence 2020/2021.

Should Heidelberg have announced more specifically that they have restructuring cost that involves the financial year of 2020/2021, and cost related to the discontinued products separately specifically associated with 2019/2020?

It would have been easier, of course.

I believe Heidelberg's management has decided to do the following: 2019/2020 cleanup products, and services, inventory, debt, and labor-related costs.
2020/2021 sizing Heidelberg and make the company more profitable.

All this while ensuring better cash flow.

For decades, Heidelberg has not performed very well, and my conclusion is that Marcus Wassenberg is conducting a massive cleanup to ensure a future Heidelberg. 

The Second track

Though Hundsdörfer explains that the global revenue in the printing industry is more or less constant around 400 billion euros annually, it's evident that Heidelberg needs to change course. While I wrote the past articles about Heidelberg, after the Over the Skype interview, with Peter Sommer, quite a few current and former Heidelberg employees reached out to me. Especially one said (free from memory the following): "Discontinuing the VLF and Primefire can seem stupid, but if Heidelberg doesn't have the money to do these products right, it's the only right thing to do." - At that time, I didn't agree. Though I believe it can seem short-sighted to focus on Offset B1 machines, Heidelberg can't be managed like the past ten years - and now is the time for the significant restructuring! 

Does it have a price for Heidelberg all these changes? Yes, of course. In a recent article, Heidelberg even forecasts a drop in sales of as much as 30% for 2020/2021. If that is an over-the-year expectation, we talk about up to 700 million euros in lost revenue. 


have no doubt that Heidelberg must restructure. The company must have a size aligned with sales, and to believe that Heidelberg should return to the "good old times" is simply not an option. The restructuring is a necessity, and cash is one of the VERY important tools in this equation. The 375 million euros from the pension funds ensured Heidelberg a way better debt situation. When Heidelberg re-transferred the money from the pension fund, they continued to have the future pension obligations. In a smart maneuver, Heidelberg convinced both IG Metall and the employees that the future obligations could be secured with less money tight up for investments. The effect of this agreement secured Heidelberg 65 million euros.

Just a few weeks ago, Heidelberg announced the sale of Gallus to Benpac. In my next article, we will look more into this deal. However, with a sales price of 120 million euros, Heidelberg has not only sold Gallus for a premium price, but the cash flow the sales generate is vast. With a booked value of 106 million euros, Marcus Wassenberg has sold a part of Heidelberg that not only has a positive effect on the balance sheet. It will also ensure a fantastic cash flow (if the deal is in cash, of course). Benpac and Heidelberg have agreed to continue collaborating on Labelfire and sales/service, so Heidelberg will not even be affected very much revenue-wise.

The Crisis
Has the Coronavirus not influenced Heidelberg at all? Of course. Like every other company, the COVID-19 pandemic impacts Heidelberg. However, I believe that the COVID-19 has also given Heidelberg some opportunities like canceling drupa, discontinuing products, layoff people, and cleanup Heidelberg for the future, so yes, impacted. In the past week, Koenig & Bauer announced their latest numbers and experienced a drop in sales of 20%. Heidelberg will, for sure, experience similar declines in sales. How Heidelberg and other companies will manage the long-term effects of the COVID-19 depends on how long the pandemic will last, but, of course, also whether this is the start of a recession - and how strong financially they are. With the measures initiated by Marcus Wassenberg, Heidelberg still has many issues to handle, but on a much better foundation. When the fundament is stable, then comes the time for building the future. It's not an easy question to answer what the future will bring, but it's most likely in the direction towards digital in a broad sense.

Link to the Financial Report 2019/2020

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