Good day and welcome to Heidelberger Druckmaschinen AG conference call for the publication of half year results. Today's call is being recorded. I will now hand over to Dr. Ludwin Monz, CEO. Please go ahead.
Yeah, good afternoon, ladies and gentlemen, and welcome to Heidelberg's analyst call on our half year results for fiscal year 2022, 2023. Let's have a look at the agenda of today's call. I will start our presentation with a summary on the first half year results, and after that, my colleague, Marcus Wassenberg, will continue with an in-depth discussion of the financials. In our highlights section, I'm going to talk about a new product, which is called Gallus One, which is our first fully digital label printing system. Finally, we will update our outlook for the remainder of the fiscal year. Okay, before we look at our numbers, let me just highlight a few things. Heidelberg had a really successful Q2 with sales and EBITDA both up year-on-year.
Q2 therefore built on the momentum of our Q1 and provides a good basis for achieving our targets also for the full year. Considering all the macroeconomic challenges, we're quite happy with the Q2 results and also with the first half of the fiscal year. However, as you all know, the economic environment remains really tough. In the second half of the year, we expect costs to increase as inflation remains on a high level, unfortunately. Personnel costs will likely increase substantially. We do not know the exact extent yet as negotiations between the employers association and the union is still ongoing. Yeah, with these thoughts, let's have a look at the numbers. Orders came in at about EUR 1.2 billion, which is roughly the same level as in prior year.
Please note that last year there was a trade fair in the Q1 . We reached the same level this year, even without such a one-time effect. After 6 months, orders continued to clearly exceed sales. This is a good sign as sales grew by 14% year-over-year and reached more than EUR 1 billion. We benefited from some positive currency effects. However, at constant currencies, this increase still would have been 9%. In both Central Europe and North America, as well as in the packaging segment, growth was particularly strong, mainly due to sales of new machines. Compared to the Q1 , China was also somewhat stronger as COVID-related production restrictions, which we saw before, they eased once again.
EBITDA increased year-over-year by EUR 30 million and reached EUR 104 million after six months. This represents an EBITDA margin of 9.2%. The improvement in EBITDA was mainly driven by the operating leverage effect due to a higher sales volume and was supported by our ongoing price calibration efforts, in other words, by our price increases. Now, my colleague, Marcus Wassenberg, will go into more detail on the EBITDA development later. Let me finally comment on our net income. We already exceeded the full year result of last fiscal year 2022 after six months of the current fiscal year, so we're quite happy about that development as well. Now, so much about the overview. I now would like to hand over to my colleague, Marcus Wassenberg, who will give you more details. Markus?
Thanks, Ludwin, and warm welcome, ladies and gentlemen, from my side as well. Let's start with the current order trend, and we're really happy and pleased that we don't see a weakening on the demand side yet. If we take a closer look on the order intake, we actually see that the Q2 lines up pretty well as a very solid quarter as compared to the previous ones, and September showed to be the strongest month of this quarter. Compared to the previous year, our price increases as well as effect had a supporting effect to this. Our book-to-bill ratio remains at a level of above 1, which is a really good sign for the quarters to come.
You can also see that our backlog grew to more than EUR 1 billion, which is the strongest backlog for many, many years. If you look into the segments, then basically for our core business, you can see that both segments are following the group in tendency. Both Print Solutions and Packaging Solutions were able to maintain the good level of the previous year, in which, as you know, a trade fair show in China supported the order intake. In terms of sales, you can clearly see that Packaging was the main growth driver for the first six months as the segment grew by 30% following a weaker previous year, as one might add. On the other hand, sales in the Print Solutions segment grew by more than 3%, but starting from an already higher level.
The Technology Solutions segment was not able to match the exceptional growth of the prior year. Both order sales were below 25% as compared to the previous year. The end of the subsidy was the main driving factor for the normalization of growth in this expanding market. It was also influenced by a sinking number of registrations for new electric cars, material shortages with a high demand at the same time, which are increasing delivery time significantly. In addition to that, shortages in supply of semiconductors are also continuing to limit our own production. Coming now to the earnings bridge, it shows a significant improvement in operating earnings again. On a clean basis, we have recorded the best half year for many, many years. In terms of one-time effects, we've seen a decrease compared to previous years.
We were able to more than compensate for the one-off effect of the previous year by operational improvements. Last year, we called it non-operating income of EUR 37 million, mainly from asset management projects, but also short-term work. This year, we called it only EUR 9 million income from the sale of property in Switzerland. You see the EUR 28 million in red, they show the difference between the non-operating effects last year and this year.
Coming now to the main driver of the earnings improvement, which was a volume and margin-related increase of EBITDA of EUR 53 million. Included in these figures are both sales price and material cost increases that were mostly balanced in the first six months. In addition to that, we saved over EUR 12 million in EBITDA by personnel cost savings in connection with our transformation program.
Finally, we've seen EUR 7 million in other effects in relation to the increased sales volume. To put this very clearly, FX effects had no material impact on this earnings bridge as sales and costs were equally affected. All in all, we see that the EBITDA in the first half year provides a very good basis for the full year ambition. Coming to the balance sheet, you can see that the equity increased significantly compared with the end of the last fiscal year. The main reason here was an increase in the interest rate for pensions and a positive after-tax result. Our equity ratio is now at 20% of EUR 457 million in absolute terms, which is again something we haven't seen for a long time.
We also saw that net working capital increased year-on-year due to higher inventories, which is the main reason for slightly negative free cash flow. I will go into more detail next second, but this also led to a small increase in net financial debt. This is still on a very low level of EUR 23 million. Finally, a few statements on the debt side. Financial debt decreased compared to the prior year by EUR 50 million, and of course, also had a positive effect on our financial results. When we look at a cash flow statement, we basically see three things. First one, a strong improvement of a cash conversion. When we exclude net working capital effects, our operating cash flow is up by more than EUR 50 million.
Two main reasons for this are that our net income included many operational effects, as stated before, and grew by more than EUR 30 million year-over-year. Second thing turns the operating cash flow then into negative. It is production-related buildup in net working capital of EUR 70 million. Third point is that the investment cash flow was EUR 25 million below last year, mainly due to lower proceeds from asset management. Reported figures include cash in from disposal of property in Switzerland of EUR 30 million in the liquidation of a financial investment. For the full year, we continue to expect cash in from asset management projects around EUR 90 million. But all in all, this results in negative free cash flow of EUR 13 million after six months. Let's take a closer look now on our net working capital.
As you can clearly see, the main reasons for that is the inventories grew by around EUR 100 million. On the one hand, we have increased raw material stocks for the continued high production volume a bit. On the other hand, work in progress increased due to full utilization of production. However, we expect that these stocks decrease towards the end of the financial year. Still, our net working capital stands around 22% of sales and therefore remains at a historically very low level. With that said, hand it over back to Ludwin and again. Thank you.
Yeah, great, Marcus. Thank you for the comments on our financials. As I said before in the highlights section, I would like to share an update on our label printing business with you today. The label printing market is extremely interesting for Heidelberg. The market segment is pretty attractive as the growth rate is relatively high and the segment is less volatile due to the robust end markets of the label industry, which are in the food and consumer goods industry. It is important to note that this market is undergoing a major technological shift right now. While label printing used traditional printing processes like flexo print and offset in the past, digital printing volumes are growing rapidly now. Digital printing accounts for around 30% of label printing already.
This share is growing by 8% year by year. As we all know from the consumer world, the business model in digital printing has two elements. The one is the sale of the hardware, and the other is the sale of the consumable, which is ink in the case of an inkjet printer. The ink business is growing with each installed printer and provides an attractive source of recurring revenue for Heidelberg. The consumption of ink depends on the use of the printer and is largely independent of economic cycles, and this is why we are so much interested in it. In order to participate in this market and to be competitive, we have developed our own fully digital label printer, which is called Gallus One.
The product was presented to the markets for the first time just a few weeks ago. The system aims to reduce the total cost of ownership to ensure a cost-efficient and sustainable production of high quality labels. Thereby, the Gallus One addresses three main pain points of our customers. The first pain point is a lack of qualified workers. The Gallus One is highly automated and does not need many operators. This allows our customers to run their production with less people, which is crucial due to the significant shortage of workers in the printing industry.
The second pain point of our customers is the cost of energy. The Gallus One has been designed to consume significantly less energy. As energy has become a major cost driver in printing, this helps to reduce the cost of operation of the printer.
The third pain point which we are addressing is sustainability. Traditional printing needs printing plates as well as a large amount of substrate for setup and alignment of the machine for a certain print job. Digital printing, on the other hand, reduces waste as no printing plates are needed and less waste is produced. Now, finally, I would like to mention that we have developed our own ink, which matches the printing system and ensures excellent printing results. We at Heidelberg are convinced that Gallus One is a win-win for both our customers and for Heidelberg. There's so much about that as I find really interesting new products, which brings me now to the next agenda point on our outlook. So let's first look at chances and risks of the second half of the fiscal year.
Compared to our previous report, there are no fundamental changes in our assessment. Not least, given by the high order backlog, we expect a high sales volume also in the second half of the year, provided the supply chain situation does not worsen. We will continue to increase prices, which will support our margins also in the second half of the year. On the other side, we expect further cost increases in the second half of the year. We assume that unions and employers' association will agree on a new collective wage agreement. As a result, personnel costs will likely increase. Also material and energy costs are expected to rise again in the second half of the year.
However, despite of all these headwinds, the encouraging half year results are a good starting point also for the six months ahead of us. There's so much about the chances and risks that we see. Let's have a look at the guidance itself. We confirm the outlook, but would like to emphasize that the economic uncertainties remain high. So far, we have not seen a slowdown of the business as a whole, as also Marcus mentioned, but we need to stay cautious. Therefore, we will direct our attention at securing our supply chain, absorbing the cost increases that we are expecting in the second half of the year, improving our gross margin by adequate pricing.
This will provide the basis for achieving the full year forecast of EUR 2.3 billion in sales and an EBITDA margin of over 8%. Dear ladies and gentlemen, before we end our presentation, let me say a few words about the change in our management board. As you will have heard, my colleague, Marcus Wassenberg, is leaving Heidelberg by the end of the calendar year in order to join the KION management board. I personally very much regret Marcus Wassenberg's departure, as I really enjoyed working with him after I joined Heidelberg half a year ago. Over the past three years, Marcus has done highly effective work, both in restructuring the company and in driving forward the transformation.
Marcus, I would like to thank you, sincerely for your excellent work and would like to wish you the very best for the future.
Thank you.
Yeah, we are quite happy that we were able to fill the vacancy quickly. Tania von der Goltz will succeed Marcus Wassenberg, first of January next year. Tania joins us from Fresenius Medical Care. She's an internationally experienced and recognized financial expert. Together with her, we will continue to drive forward the strategic realignment, the financial strengthening, and the cultural transformation of Heidelberg. I'm really looking forward to working with Tania here at Heidelberg. Ladies and gentlemen, this concludes our presentation, and we are now happy to take your questions. I hand back for the operator to explain the procedure.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. We will take our first question from Daniela Glaab with Citi.
Yes. Good afternoon, gentlemen. Thank you very much for taking my questions. There are actually three of them. I'll take them one by one. The first one is on your comment that you haven't seen a slowdown. I would like to ask you whether you were speaking about the business overall or specifically about the order intake momentum in the ongoing quarter, and maybe you can share a little bit what you see on the current trading with regards to clients placing orders with you as we speak. That is my first question.
Why don't you ask your questions, and then we answer one after the other.
The second one is on your outlook for the current year. You mentioned the risks for the second half. I would be interested in why the price-cost inflation calibration should become more challenging in the second half. Maybe you could comment on that. Also whether this is hypothetically speaking or whether there are any specifics we should be aware of. Lastly, the third question is you're guiding towards more than 8%, there has been quite some disparity in between the first and the Q2 . Maybe you can spell a little bit quantitatively what you mean with the qualitative argument that you hope to land above 8%. That's my third question.
Yeah, let me start and then, Marcus, you can fill in a little bit. First, we do not see a slowdown. You ask, is that the business overall or order intake? Well, it's both. You know, we do have a pretty good order book, obviously, sales depends on our ability to manufacture and ship, and that is on a very high level. You can see that from the high level of sales. When we say we do not see a weakening, what we mean is the order flow remains stable. Yeah. There's no sign of a decline. When we say that, we mean the business overall.
Obviously, there are differences, region by region. If you look at the total, it's really remarkably stable. Yeah. Regarding the outlook, well, you know, it's just a sum of different factors we are looking at. We are looking at wages, so personnel costs, which will for sure increase. That's an effect which we did not have the first half of the year. That's now happening. We don't know the extent yet. Same is true for energy. Energy will also increase. It's just factors which now just come in, and this is why we remain a little bit cautious here.
We believe that we will end up above 8% in EBITDA margin, as we said. Given all the uncertainty we have and all the cost and increase, also material costs, of course, that we see, we remain cautious and say, okay, from what we know, we believe that we will end up higher than 8%. It's very difficult to give more specifics on that because it's just a very high degree of uncertainty. Marcus, I don't know how you see it.
Yeah, I absolutely agree. Daniela, allow me to just add some remarks here. First of all, speaking of order intake, we have seen a very strong September, and actually the number for October is exactly around that same ballpark, which is actually a very good indication. It's something actually that proves that it's a very stable order intake situation.
As we said, order backlog is on an all-time high. It's like almost a decade, the highest order book that we have. The way and that has to add best price quality. That speaking, you asked about inflation. We expect like EUR 30-35 million in material cost increases for the full year. For the first half of the year, we recorded EUR 15 million. We start with around EUR 20 million, EUR 5 million of which we expect just for energy.
That is one factor. The other factor is, as you know, there's huge negotiation ongoing. We had actually, in front of our premises today, a strike from the unions. As you know, they are demanding an increase of 8%. Every percentage point in Germany is for us an increase in personnel costs of EUR 3 million-EUR 4 million for the full year. That obviously, if that comes and we don't know when it comes and how much comes, will increase not only personnel costs, but actually, cost of a product significantly. That all adds up. As there are, you know, a lot of variables, it is very tough for us to predict, you know, what will happen, when it will happen, and what the outcome will be.
Therefore, to give a better guidance right now or a more specific guidance, I find very, very tough. If you ask me, like, you know, how sure are you of those cost inflations? I would say we have high visibility, but timing is obviously something that, you know, particularly in personnel costs, is something we cannot manage. We have to see and wait. Therefore, there is a bit of uncertainty when it comes to our numbers. I'd say so much, and I think, yet again underlining what Ludwin Monz has said. We have a rock-solid basis from which we start, and then we have to manage and hope that.
Very, very clear, Marcus. Thank you for the elaboration. Let me try to ask the question maybe a little bit differently. If you compare the current order backlog gross margin to current sales gross margin, is there a material difference or do you expect any in the coming months?
Well, when it comes to gross margin, I would say not until so far. What we see is that we have to keep up with price increases in order to compensate for the material cost. What we see in the current order book, we managed so far. Question will be when is there a tipping point, you know? There will be a tipping point, as we all know, where our customers are not ready to accept additional price increases. Obviously we are left as other parts of, not maybe the industry, but the metal and electro industry at least, we are hit by those cost effects. Until so far, I would say we have managed to keep our margin stable. Question is how long this will remain.
Very clear. Thank you both. Marcus, good luck with your future endeavors.
Thank you, Daniela.
Our next question comes from Peter Rothenaicher with Baader Bank.
Yes. Hello, gentlemen. Firstly, I'd like to continue with the questions on the quality of the order backlog. Your order backlog results in, I would say, significant delivery times, maybe 6-9 months or something like that. I think you have already considered, when taking in orders, the upcoming wage increases. Isn't there really a chance to compensate here for a large extent by the then already higher prices kicking in and also in terms of material costs? Material costs for many areas, steel and so on, have come back. You tell us that you will see a further increase in the second half of the year. Don't you see any countervailing effects?
Look, when we take an order, right? We can only negotiate a price at that point in time. It goes into our order books, and it takes, as you say, half a year or even longer until we can start shipping. Then, of course, that agreed upon price is the basis for the revenue and also for the corresponding gross margin. There is this delay. Yeah. What we, of course, know is, and what we see is that the price quality of the orders in our order book is improving over time as we have increased prices multiple times already, and we continue to do so. We know that this will help us with the gross margin.
However, what we cannot foresee when we agree on a price with a customer, the actual cost will be at the point in time when this product is shipped. Nevertheless, we know that price levels are increasing, so we have some buffer, if you like, but the cost base has also grown. Yeah. That's basically the mechanics behind it. It's very difficult to put that in quantitative measures. Yeah.
Another question, though. In the first half of the year, clearly your inventory increased, having the impact on net working capital. You already indicated that by the year end this will improve as always at Heidelberg. What would be your best guess for free cash flow for the full year and what benefit from property sales would you calculate in here?
Thanks, Peter. It's Marcus speaking, so I'll take that. Basically what we've seen is in the whole set of inventories, we have basically raised our levels, and that has obviously to do with delivery times to secure component availability. Between all of us, I would just say this is us being prudent. This is not a significant issue. As you rightly said, we're ramping up our production. We will release for sales obviously later on. We don't see customers stepping out just to sort of avoid the question on that. We actually see that we can deliver products, and products are well taken, well received.
Even when we talk about finished goods, it's just sitting at our regional hubs in our countries ready to be shipped to the customers, and we don't see customers rejecting products. Nobody's stepping out of any contracts, nothing like that anyhow. This will be declining, and this will be obviously a good effect on the free cash flow, which I predict to be at a mid two-digit number. Something I would say around about EUR 40 million, EUR 50 million, maybe EUR 30 million, depending on parts availability and how we plan to secure for next year. That is obviously something we have to manage on an almost daily basis. We have to really balance things in a different way. But truth be told, 22% in net working capital is still a very good number for this company.
When I started out, it was EUR 27 million-28 million. You know, this is a rock solid number and I would just say free cash flow is around that ballpark. When it comes to cash ins from the sale of properties around EUR 90 million. I think EUR 30 million coming from UK, EUR 30 million coming from Atlanta, and the other one I forgot.
Wängi.
Wängi, yeah. That would be Switzerland. I think that is, like, something we have actually. Yeah, we have actually cashed in already. That would be it. EUR 90 million.
I'm a little bit wondering why then would be only EUR 40 million-50 million free cash flow if in total EUR 90 million is coming from property sales and thereof I think the biggest part in the second half of the year. You see in the second half of the year support from inventory reduction.
Part of the EUR 90 million are already cashed in, so the Switzerland property sale was done and therefore cash has been transferred. It's only EUR 60 million that you have to take into account. Then again, we feel like we're more hit by increasing costs, so therefore we feel that the net profit after tax will maybe not be as high. You cannot just prolong the number of EUR 44 million and double it up. Therefore we have to be more prudent.
Yeah.
Just as a caveat here, guys, we wanna be prudent. We don't wanna hide something here, but we have to be prudent in a time there where we have so many variables in our predictions. It's not a normal year for us. Bear with us that we don't wanna, overpromise. We have to manage things on a daily basis. I think that Ludwin and Tania will be the first to let you know when there is, an upside. Right now we have to be prudent here.
If we look into the segments, in the first half of the year you had very good performance in packaging. Do you expect packaging also to outperform the commercial area in the second half of the year? Also with regard to the Wallbox business, do you see here in the second half of the year some recovery?
Yeah. Let me start with packaging. First of all, the reason why packaging is so strong is not only that it's a good market which is growing. I was referring to that before. It's also that the comparison base of last year was simply relatively low. Nevertheless, we see some good growth here, and I believe that if you compare the two segments, commercial print and packaging, certainly, packaging is the one that's growing faster. Yeah. That's the better one because there is a fundamental driver behind that, and that's consumption. Yeah. As the world population is growing, there's more consumption and this is why more packaging is needed.
I believe that the underlying factor is positive and this is why this segment will continue to grow. In commercial print, we see other trends. We see in particular also technology shifts. We see that the quantities which are printed are lower. There's a lot more change in that segment. But you know, these are longer term developments. If you just ask for the next quarter or the next half year, I would not expect a significant change here. Yeah. It's just what it is. Longer term, I believe that packaging has just more potential, yeah, and will grow faster. You were asking about the Wallbox business. Yeah.
I mean, as we said before, the charging business is a future business, yeah. Because as a matter of fact, cars will be electric going forward. It's not quite clear how long it's gonna take, but it's gonna happen. I'm absolutely convinced. This is why we continue to believe in this market. Nevertheless, there are ups and downs, and what we are experiencing right now is a down, which has several reasons. The one simply is that subsidies for Wallbox here in Germany simply ended in Germany, the KfW. So that had a huge impact in market size.
People simply stopped buying Wallbox because these subsidies went away. That's the one factor. The other factor is that if you try to buy an electric vehicle for example in Germany and I guess it's the same in other countries the shipment times are just mind-boggling. Yeah. You simply can't get one. Shipments of cars are slow also. People do not buy the Wallbox because without an electric car you don't need it. That's another factor which slows down the market right now. Again the underlying trend is positive and it's gonna happen. It's just a matter of time, yeah. This is why we continue to believe in it.
As we explained before, we've introduced new products to the market which allow us to address new product segments like the multifamily homes, like public parking spaces, large fleets, charging of large fleets. You know, it's really expanding, but it's right now a little bit slow. That's all I can say. I believe in this market. I believe that's a good business for us.
Okay. Thank you.
We won't see some recovery in the next weeks or months.
No, no, no.
For this year, I think it will be on that level.
Unfortunately. Yeah.
Okay. Thank you very much.
As a reminder to ask a question, press star one. We will take our next question from Stefan Augustin with Warburg.
Hello, gentlemen. Actually, there are just two points left, which I would like to touch. The first one is, could you give us an update on the implementation of the subscription model? I think it should have been set up right now. So how did it work out on the sales side so far? The second question is actually digging a little bit deeper into the price component. So when has it been the last time that you have increased prices on a broader base, or is it simply a very continuous process? Could you give a ballpark range about how high the inflationary component is right now?
If you look in the margin, is it over year-over-year, something between 5% or is it now about 10%, something like that?
Peter, Marcus speaking. Let's start with subscription. Our recurring revenue sales improved by 12% year-on-year, representing round about EUR 177 million for half year one in the financial 2023, which represents 14% of total sales, following EUR 140 million as compared to last year. Basically that's the increase here. We saw basically new contracts kicking in in the complete spectrum. A lot of new contracts are fully fledged, but as well we saw contracts that are representing service revenues. When it comes to the joint venture with Munich Re, we have a bit of a hiccup with the financial authorities in Munich. We need a factual agreement here.
Mm-hmm.
Such as a Deutsch. We're still not there. We're working on it with them, but you cannot sort of hurry financial authorities, as you know. That is a bit of a delay.
Mm-hmm.
that we're experiencing, but we're sure to report that we have completed everything pretty much soon. When it comes to pricing, we have basically increased prices three times. First half year, financial 2023, we increased prices by 5%. For the second half year then, we have increased already by 2.5%. For deliveries in financial year 2024, we will announce to the market a further 5% for deliveries taking place in financial year 2024 to safeguard obviously our future margin in the light of likely continuing material cost inflation. When it comes to inflation of our cost in our product, what we can say is basically that the 5% I just mentioned cover the material expense increases until so far.
If you sort of look into just one product, that actually did the trick until so far. Question remains to be seen that our calculation for the future will be stable as well, as Ludwin and I have alluded to already.
All right. Thank you very much for all these details and good luck in the future, because just in case there won't be another conference call with you in February.
Thank you very much indeed, Stefan. All the best to you.
We have no further questions in the queue. As a final reminder, if you would like to ask a question, press star one on your telephone keypad now. It seems there are no further questions, so I will turn the call back to our speakers for the closing remarks.
Very good. Thank you, ladies and gentlemen, for your interest in Heidelberg. We are very much looking forward to the second half of the fiscal year. As we said, we have a good basis but also some uncertainties. We are looking forward to talking to you again after the next quarter in three months from now. Have a good time until then. Bye-bye.
All the best. Bye. Thank you very much, Heidelberg.
Thank you for joining today's call. You may now disconnect.