Business News

Heidelberg Predicts Difficult Market Conditions and Adopts Comprehensive Package of Measures to Enhance the Cost Structure

Thursday 10. July 2008 - Heidelberg predicts less favorable economic and structural market conditions in the medium term

Successful drupa a key factor in preliminary incoming orders of 1.1 to 1.15 billion Euro for the first quarter
Preliminary results (sales, operating result, and free cash flow) for the first quarter of 2008/2009 significantly down on equivalent figures for the previous year
Package of measures put forward to stabilize sales and earnings in the short and medium term
Savings amounting to 100 million Euro planned by financial year 2010/2011, 75 percent of these over the next 18 months

Like most industry experts, Heidelberger Druckmaschinen AG (Heidelberg) has come away from drupa with the impression that the printing press industry is facing a prolonged period of sluggishness. Although there are still some growth segments and dynamic markets – such as packaging printing – it is negative factors that predominate. Heidelberg does not expect to see any significant upturn in the industry for the time being. In addition to difficult cyclical parameters and problematic exchange rate movements, the current market situation faced by Heidelberg is also being affected by the rapidly increasing prices of raw materials – in particular steel and energy – and this is having a sustained negative effect on the economic situation of all market players in the industry.

Preliminary results for the first quarter
The difficult underlying conditions have also affected the preliminary results for the first quarter of the 2008/2009 financial year (April 1 to June 30). Preliminary sales achieved by Heidelberg in the first quarter amounted to between 640 and 660 million Euro (previous year: 742 million Euro). As already announced, the fall-off in sales compared to the previous year coupled with higher costs will produce a negative quarterly result for Heidelberg. Based on preliminary calculations, the operating result will be minus 35 to minus 40 million Euro. Due to the purchase of Hi-Tech Coatings, the cost of drupa and lower sales, the free cash flow will be clearly below the previous year’s level at minus 200 to minus 220 million Euro (previous year: minus 81 million Euro).

Incoming orders received at drupa exceed expectations
The news on preliminary incoming orders for the first quarter is more positive. Heidelberg received orders amounting to between 1.1 and 1.15 billion Euro (previous year: 934 million Euro). This is satisfactory in the context of the leading industry trade show drupa, which made a major contribution to this good order intake. Heidelberg successfully established itself on the packaging printing market and as a full-service provider, including consumables, at drupa. There was also a huge amount of interest in the launch of the new very large format. Most of the contracts concluded at the trade show will be reflected in the sales figures for the second and third quarters.

Based on the orders placed at drupa, Heidelberg predicts that sales and the results for the second and third quarters of 2008/2009 will be up on the first quarter.

For the 2008/2009 financial year as a whole the company does not expect to match the previous year’s sales and operating result.

Due to the uncertain economic situation worldwide and the volatile market environment, it will not be possible to provide a reliable forecast of the key figures for the 2008/2009 financial year as a whole until later in the year. This outlook will be published no later than with the half-yearly results at the beginning of November.

Comprehensive package of measures with four key components
The Management Board confirms the growth strategy that has been embarked upon, which focuses on packaging printing and services for the print media industry. Any reduction in manufacturing capacity over the coming months will not extend beyond the flexibility agreements entered into.

In order to counter rising costs, the Heidelberg Management Board has prepared a comprehensive package of cost-cutting measures to be implemented with immediate effect. The package’s four main focal points are reducing R&D expenditures, restructuring postpress packaging activities, significantly increasing the proportion of purchases made outside the euro zone, strengthening international production sites, and achieving a substantial reduction in structural costs.

Overall, these measures are intended to result in savings of around 100 million Euro by financial year 2010/2011. The aim is to achieve a large proportion of this – 75 million Euro – within the next 18 months. This package of measures will initially increase costs to the tune of a further about 70 million Euro in the current financial year 2008/2009 and another 30 million Euro until financial year 2010/2011.

“In addition to the drupa trade show, which can be deemed satisfactory overall, we have also been putting a great deal of work into our medium- to long-term strategy. This has made it clear that the all in all increasing costs call for a further significant adjustment to our cost structures. The package of measures adopted takes into account all key areas,” says Heidelberg CEO Bernhard Schreier, stressing the urgency of the measures.

Reducing R&D expenditure
Heidelberg will be making immediate changes to its R&D strategy. Improving efficiency and pooling development activities should result in short term savings of at least 25 million Euro. This will lower R&D expenditures from their current level by a good ten percent. Consolidating R&D locations will also help cut costs. In the medium term, R&D expenditures are to be cut to less than five percent of total sales.

Restructuring postpress packaging activities
Over the next three years, Heidelberg will be restructuring its postpress packaging business. In the entire Postpress sector the operating result is to be increased by 20 million Euro until 2010/2011. This is to be achieved by consolidating production capacities, transferring certain operations to Slovakia, and restructuring R&D activities within this product area. The packaging market segment – and expanding services and consumables activities – still represents a growth driver on a struggling market. Unlocking this potential should further reduce the cyclicity of the Heidelberg business model while also boosting sales and results.

Increasing purchasing and production outside the euro zone
Intensifying purchasing activities outside the euro zone and expanding production in other countries will have positive effects. Overall, the purchasing volume outside the euro area is to be increased from the current level of around 40 million Euro to almost 200 million Euro in financial year 2010/2011. Heidelberg will also continue to push ahead with production in other countries. The plants in China and Slovakia are to be expanded, and it is also intended to transfer production of a small-format press to the site in the U.S., which has the largest sales market for this product. Overall, these measures will result in cost savings of around 15 million Euro.

Lowering structural costs
In addition, Heidelberg is planning to cut structural costs. Over the next 24 months, the company intends to save indirect costs of 40 million Euro, around ten million Euro of this in the current financial year.

The entire package of cost-cutting measures will also impact on the Heidelberg Group’s workforce. Honoring the agreement on safeguarding the future, which runs until 2012, and subject to meetings with employee representatives, around 500 jobs are to be shed worldwide by the end of financial year 2010/2011. As of March 31, 2008, the Heidelberg Group employed 19,596 staff worldwide.