The company is systematically continuing its digital transformation and expanding its digital business models with a view to significantly reducing its exposure to economic fluctuations and increasing the share of recurring business in the medium to long term. Demand for the contract and subscription offerings that are the main focus of this strategy continued to grow in the first quarter of financial year 2019-2020.
The medium-term goal is to increase the share of recurring sales – primarily from contract and subscription business – to around one-third of total sales. With customer demand rising, Heidelberg is expanding its subscription portfolio and is now offering additional contract options. At present, customers are offered a fully inclusive package that combines equipment, services, consumables, and software in one usage-based contract that runs over several years. In the future, however, they will also be able to combine and utilize individual components from this offering over a defined period of time and in line with set standards.
Toward the end of the first quarter, in particular, the need for further strategic development of the company was highlighted by the increasing reluctance to invest, especially in Western Europe, and associated shifts in sales due to the economic slowdown.
Quarterly sales, EBITDA excluding restructuring result, and the net result after taxes, for example, were all down on the corresponding figures for the previous year. In mid-July, Heidelberg adapted its outlook for financial year 2019-2020 as a whole to reflect the changed business expectations.
Despite an improving order situation at the beginning of the second quarter and continuing positive effects from the successful Print China 2019 trade show, Heidelberg has immediately introduced measures to boost results. These include strategies to make working hours more flexible in the short term – such as working-time accounts and short-time working – and structural projects to achieve a sustained increase in profitability.
Heidelberg has also initiated a program to significantly improve the net working capital and free cash flow. This involves closely scrutinizing many of the investments planned for the current financial year and the next, with a view to cutting planned investments by some € 20 million. Optimized lead times and inventory levels, as well as better accounts receivable management, are also envisaged to reduce the tied-up capital by around € 50 million. In addition, Heidelberg is considering portfolio adjustments, which will involve selling some smaller areas of the company, together with further structural optimizations. Overall, the liquidity potential identified totals some € 100 million.
“The good start to the second quarter means we’re confident of achieving our planned business volume for the financial year. What’s more, the positive impact of the numerous measures we’ve introduced to improve our results and free cash flow will be felt in the second half of the financial year,” says Heidelberg CEO Rainer Hundsdörfer. “In the years ahead, the digital transformation is set to lessen our future exposure to economic fluctuations by increasing the share of recurring business to around one-third of our group sales. We’ve already made significant progress in this respect. Additionally, we are continuously expanding our market share by investing in our core business."
In the face of growing economic uncertainty, above all in Central Europe, sales at Heidelberg fell from € 541 million to € 502 million in the first quarter of 2019-2020 (April 1, to June 30, 2019). Despite far higher demand in China following the successful Print China trade show, incoming orders of € 615 million as at June 30, 2019 were down on the previous year’s figure (€ 665 million). The order backlog increased by around 12%, from € 654 million at the end of the previous financial year on March 31, 2019 to € 730 million as at June 30, 2019. This is partly due to the new subscription contracts, which will be reflected in the sales figures over their respective terms.
Heidelberg is expecting sales for financial year 2019-2020 as a whole to match the previous year’s level. The company anticipates that further stable expansion of its contract business will compensate for the economic slowdown and the associated reluctance to invest in equipment. In the current financial year, Heidelberg is targeting EBITDA excluding restructuring result of between 6.5 and 7% of sales, and is expecting to break even after taxes.