2015 promises to be another year of surprises, hopefully bringing more good than bad ones.  While I leave the forecasting to the professional tea leaf readers, it is always worth taking a look at currencies this time of year. 

The chart below shows the development of the Japanese Yen (green) and the Euro (blue), both vs the US-$ over the last 10 years.

The black line in the lower box depicts the Euro-Yen relationship.
Obviously, the dollar has appreciated against both currencies over the last half year, but for the last two years the Yen valuation has been completely reversed and a Euro today buys 145 Yen vs about 100 Yen two years ago.  That won't make life any easier for European manufacturers competing with Japanese companies, never mind US digital or offset equipment makers.
However, with the US-$ being the strongest since DRUPA 2012 and the US economy having an overall improved outlook, US printers may well look at ending their capex hiatus and modernize their plants again. 

With the web offset press market continuing its downward slide towards irrelevance in the sub $500 million range and sheetfed being flat to negative (orders in China are apparently less plentiful these days...), I was hoping to find some more upbeat news in the digital printing arena. With digital equipment makers reportedly being the most visible exhibitors at this year's Graph Expo, there is clearly interest in the technology and one would expect to see continued growth driven by new technology, such as Kodak's Stream technology.  

Kodak emerged from bankruptcy in September 2013, so I took a look at how the company is doing one year into its new lease on life. With over $2 billion in annual sales, Kodak remains one of the big players with a true focus on commercial printing.

To keep things simple, I'd paraphrase the strategy as "milk the shrinking  Graphics, Entertainment and Commercial Films business (GECF) while growing the Digital Printing & Enterprise business (DP&E). (A presentation with the graphs below can be found at Kodak's investor site.)

A year into the plan, it appears that GCEF so far has shrunk somewhat faster than planned but the strong third quarter demonstrated the importance the segment has for the overall business.

Somewhat more concerning is the lack of growth in the Digital Printing & Enterprise segment and with 9-months sales of just under $500 million with quarterly sales being flat at just below $170 million.  It looks more and more likely that the segment will not even reach the 2013 levels.

The company reaffirmed full year sales between $2.1 and $2.3 billion, however this will be short of the $2.6 billion laid out in the original plan.

At $744 million, cash is about $100 million below the original plan.  Cash flow from operations is negative ($136 million),  but has been close to neutral for the third quarter, possibly signalling the needed turn-around. 

Kodak is betting on growth in its DP&E segment and it is too early to say if the strategy will work or not.  The next couple of quarters will show if the company can turn the promise of its strong digital printing technologies into sales and earnings or if it will need to rely further on its shrinking plate and commercial film business.

While the stock price development was not pretty during 2014, there seems to be some recent optimism again.

Hopefully, this is an early indication that the 4th quarter will yield results supporting the company's strategy.  For the record, I do not own any shares in the company, nor do I plan to buy any in the near term.  And of course, I am not providing any investment recommendations.

Of course we all know that this is true, but after Goss' recent downsizing of its US business one wonders what happens when a lot of technical know how disappears at the same time.

Seeing most of the long-term management in Engineering and Service as well as a large number of highly experienced technicians and engineers leave their posts all on the same day, must leave customers wondering how their investments in newspaper and commercial presses, bindery and mailroom equipment and even the new packaging presses will be supported by the company in the future.

Obviously, business in the web offset market is depressed. Estimates peg the market for new presses at $400 to $500 million compared to some $2.5 billion prior to 2009. But the majority of the installed base is operating with only limited or no decline in annual tonnage – pricing may be another story – and continues to need qualified and responsive support, as well as the engineering skills needed to upgrade and modify equipment as production parameters change.

To support the customer base through know-how and skills, an organization of former Goss technical staff is being formed to match qualified engineers, project management experts and experienced technicians with customers looking for those skills, be it permanently or for current and future projects.

If you are are interested to learn more or get in touch, please follow the CMYK Resources link on this page.

In February you read here that Heidelberg would need a strong fourth quarter with equipment sales between Euro 500 and 550 million to put the company in the black for the fiscal year.   In fact, in its annual report, released a few days ago, HD reported Euro 494 million, a third of its annual equipment sales, for the quarter.  While the report's new format is probably not to everybody's taste, it provides interesting insights.  The fairly narrow push over the goal line by Euro 1.7 million pre-tax profit on Euro 2.4 billion in sales makes one wonder how much help had to come from the balance sheet.  A reduction of Euro 154 million in 'other provisions' of which only Euro 133 million appear in the cash flow statement is probably a first clue.  

To be clear, there is nothing wrong with adjusting provisions when warranty reserves are not fully needed or a restructuring cost estimate was overly conservative.  In addition, balance sheet adjustments are usually watched carefully by a company's auditors.  However, these adjustments can distort the view of how far along a company is on its way to are real turn-around.

While Heidelberg's service segment is consistently profitable on an operating profit basis (albeit with relatively large quarterly swings) and the financial services segment seems to be doing really well (Euro 5 million operating profit on Euro 3 million sales in the fourth quarter), the equipment segment has not been profitable for several years.   

As the chart below illustrates, HD's equipment segment was profitable only in the last quarter of the two last fiscal years, always on peak sales. (Note, for clarity, operating profit in red is tied to the right y-scale, while sales, orders and backlog use the left scale.)  

Equipment orders were virtually flat around Euro 350 million per quarter causing the backlog to drop to a new recent low.  While there has been progress in the operational results, for Heidelberg to really turn around, the equipment segment needs to address its structural issues.  Like any manufacturing company, there needs to be a certain volume to absorb overheads and throw off profits.  Despite the strong quarter, the segment was unprofitable on an operating basis for the full year.  Having one good quarter per year on above average volume won't work for much longer as flat orders result in skinny backlog cushions.   At Euro 389 million the beginning backlog is Euro 75 million worse than last year's already mediocre position. Chances are the first quarter of FY14/15 won't be great and Heidelberg will start in the hole again.  

Quad Graphics (second from the left on the above chart, courtesy of RRD's 2013 investor presentation) is acquiring Brown Printing, which is part of the most right column, representing Bertelmann's US activities.

We will see if this is only an exit from the consolidating US catalog and magazine market for Bertelsmann or whether there are greener pastures elsewhere for the Arvato book business as well.  In any case, it is probably not good news for equipment makers if one can buy three plants full of well maintained production equipment for $100 million.   

The press release talks about an "adjusted EBITDA after anticipated synergies"-multiple of less than four, let's say $25 million plus.  That probably means the three substantial factories with their over 1,800 employees generate quite a bit less than that today, which tells us something about the continuing price pressure in the industry.

Fourth quarters in this industry are special.  For years I have wondered what forces were at work, always driving volume increases in the fourth quarter, the fourth quarter of the fiscal year that is, not the Christmas season.   Companies have different fiscal years, but they all seem to experience their own 4th quarter miracles.  Heidelberg seems to be no different.
 
No question, Heidelberg's financial performance is improving and management is lowering the break-even point.  However, orders have been declining each quarter for the last nine months.  To maintain its sales and earnings forecast the equipment division will have to boost shipments by at least 50% over its year-to-date average.   If orders in the quarter don't pick up as well, the first quarter could look ugly. 

As evident from the most recent 3rd quarter report (ending 12/13), improved performance for the equipment segment, a better net financial result and a little bit of help on the tax line resulted in positive net income of Euro 7 million for the quarter. 

For the fiscal year (ending 3/14), management expects positive net income at revenues 10% below last year's level of Euro 2.735 billion.  Therein lies a formidable challenge with potentially further consequences for the new fiscal year.

Sales for the 4th quarter would have to be around Euro 770 million and the equipment segment would have to ship between Euro 500 and 550 million (depending on how much extra the services segment can ship).  At that level the company would certainly be able to generate the net income needed to finish the year in the black.

While there is no question that Heidelberg's factory can accomplish that level of shipments (Q4-12/13 was an even higher Euro 630 million), current backlog of Euro 540 million is not exactly comfortable.  And if the downward trend in orders of the first three quarters does not get reversed in Q4,  the company will likely start the year even deeper in the hole than a year ago. 

One can only hope for a 4th quarter order miracle to help build some backlog and avoid the first quarter droughts Heidelberg has seen in the last two years.

One of my long-term mentors in this industry sent me a note after reading a recent post, saying "if orders are your number one problem, you don't have a number two problem".

Looking at KBA's third quarter report, one has to give the management team credit for not only doing a good job making the most out of a continuing difficult market situation, but also trying to adjust to the new reality by making strategic moves in order to add to the core business and (maybe late but probably not too late) addressing structural issues at the expense of short term results.  
Orders increased over the last two quarters but are below the DRUPA year 2012. The company still lives off its backlog of what I believe to be an exceptionally strong order intake of good margin specialty presses (booked in 2011, and visible in the three large red columns below), but eventually that rat will have gone through the python, as the saying goes.  

Orders for the last four quarters added up to €999.8 million.  That is still a big number for any printing equipment manufacturer, but the last time KBA shipped less then a billion was in 1999.  Since then annual sales have averaged €1.36 billion and topped out at €1.74 billion in 2006. 

Assuming that the reported shipment delays are only short term issues and given the current adequate backlog in sheetfed and web as well as increased inventories, the company should be able to achieve its new sales forecast of €1.1 billion for the year (vs. a plan of €1.3 billion), still requiring it to ship 1/3 of annual sales in the last quarter.  However, and there is the problem, barring a surprise order spike the backlog will likely end up between €520 and €550 million, uncomfortably low for a billion Euro company with an unusually wide product portfolio, requiring special engineering (and thus longer lead times) for many of its orders.  2014 is going to be another challenge.

In my August post I already mentioned the need for further downsizing because of the shrinking backlog.  While it might have been tempting to delay the inevitable further and squeeze out another break-even year with a strong fourth quarter, KBA management is not pushing its problems into next year hoping for a gift from the market.  While it is the right thing to do, the stock market did not like it much.

Heidelberg focused on the good news in its latest quarterly report and the company confirmed its positive net income target, with six months to go.  A look at the numbers reveals that the challenge is formidable and long-term structural questions remain. 

Orders continue to be slow as the chart below illustrates and per the trusted German VDMA report "sales of printing presses form German printing press manufacturers in the period from January to August 2013 were down 7% on the previous year.  Incoming orders declined 12% in the same period".  Well, of course 2012 was a DRUPA year, but still, it is not a pretty picture. 

Heidelberg sees the Japanese Yen and the US Dollar as the culprits, which should not come as a surprise to readers of this blog. We looked at the effect of currency back in July.  http://www.cmyktrends.com/1/post/2013/07/komori-bucking-the-trend.html

My back-of-the-envelope calculation suggests that, in order to achieve management's positive net income target, operating results in the next six months will have to improve by some €90 million, with the biggest swing being required in the equipment division.   

The challenge is that the equipment division needs sales volumes significantly north of €400 million a quarter to contribute meaningful profits.

The division shipped  €631 million in last fiscal year's fourth quarter (€379 million in this quarter) and generated a solid operating profit.   However, today's equipment backlog is about €180 million below last year's September number, which makes it so much harder to achieve a blow-out fourth quarter.  

With almost no change in headcount over the last two quarters, it appears that the organization is being maintained to support a strong fourth quarter in order to achieve its volume targets.  Long-term this strategy will not work unless the offset equipment market grows again so that Heidelberg can be profitable four quarters a year.

If the market continues to shrink and Heidelberg struggles to become profitable it will eventually become even harder to make (and pay for) the headcount reductions necessary to be reasonably profitable at revenues below €2.5 billion. 

Long-time Print show attendees are probably familiar with the show's "Must See 'Ems" program, but this year the No-See-Ums are worth looking at.

Heidelberg's absence led to many comments along the lines of "who would have thought we'd ever come to Print and Heidelberg would not be there...".   While the company surely had many good reasons, I felt the absence created a vacuum in terms of brand presence that was quickly filled by HP and Xerox, leading to the inevitable conclusion - right or wrong - that digital printing has taken the crown.

Another notable no-show, especially after all the DRUPA 2012 attention, was Landa.  It did not seem to be a big deal for people who were more interested in buying equipment for their businesses now.  The fact that Komori - seen as prime partner for Landa at Drupa - highlighted their Konica-Minolta partnership sent the clear message that Landa technology is still far out in the future, especially since even the show-cased KM-1/IS29 (who comes up with these names?) will probably not be available to US customers before 2015.  Oh well, still plenty of time to figure out if a 3,300 sheets/hr UV inkjet machine is a cost-effective alternative to your old offset press or whether an existing niche product like Presstek's DI is an even better solution anyway. 

Manroland sheetfed supposedly signed up last minute for a booth, but I could not find them in the hall nor the catalog and even the digital product finder was no help.  With Komori and KBA holding up the flag for sheetfed, nobody seemed to miss them, quite contrary to Heidelberg. 

So, what does it all mean?  Is it the end of the classic Print show, giving way to in-house events?  Not in my view.   While open houses and technology forums are great opportunities to communicate with the customers you know in a captive situation, it is dangerous to avoid the public market place of a trade show.  Not being there is worse than being there with even the most modest booth.  Kodak's very small appearance was probably at first a shock to many, but it gave them an opportunity to tell their story and connect with customers.  

If you don't exhibit you give the stage to your competitors to tell their story, and yours as well.

Upon looking at KBA's half-year results, it is becoming clear that 2013 is going to be another challenging year for equipment manufacturers.   While orders in the second quarter were up from a weak first quarter, the trailing four quarters add up to just under one billion Euros of new orders. 

The situation looks particularly serious for the web division which is faced by higher complexity costs than its competitors due to its more fragmented product portfolio. 

During strong cycles the division benefits from the higher margin securities press business, but the picture below illustrates that the Web segment has been living off backlog for the last 18 months - most likely higher margin multi-year specialty press orders -  generating sales north of my current break-even estimate of Euro 120 million per quarter. 

Assuming no immediate reversal of the trend an obvious question is how quickly the company can lower its breakeven point.   Sheetfed results have been negative for four out of the last five years and the above analysis suggests that the (relatively) good times for the web division are coming to an end.

With backlog down to just about 6 months of sales and twelve months trailing orders adding up to only 384 million Euros it is unlikely that the web division will stay above break-even in the coming quarters.

As management is working on its strategy to become more of a supplier to the packaging industry by acquiring Flextecnica (flexible packaging) and Kammann (container decorating) the coming downsizing discussions are an unwelcome distraction.