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. 

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.

The first look at Q1-2013 confirms that the prevailing winds for printing equipment makers have not changed.   Below are the quarterly new orders for KBA and - despite the fact that KBA without doubt has weathered the crisis better than most - the picture is not pretty.  

Orders for web and specialty presses were very low at Euro 67 million.  The good news here, if any, is that the lack of new order announcements for newspaper and commercial presses suggests some new security press business where KBA enjoys an enviable market position.

The backlog for web and special presses is down 33% from its recent 2011 peak to Euro 450 million, or closer to only 9 months of average trailing 12 months sales.  In addition, the lower than average sales of the last two quarters have prevented the backlog from melting down even faster which raises some obvious questions in connection with an overall increase in inventory. 

On the sheetfed side, orders have been in decline for the last four quarters.  After a quick look at Heidelberg's latest press release it looks as if this trend is also in place for the market leader.

KBA's sheetfed quarterly sales were unusually low at Euro 98 million after a gang buster Euro 248 million in Q4-2012.  Despite the meager new orders, sheetfed backlog ended up some Euro 35 million.  While this Q4/Q1 swing is nothing new for the company, it appears to have become more extreme, usually not a good sign, especially when new orders continue to decline.  First quarter numbers for the other sheetfed suppliers and feedback from this week's Print China Exhibition will provide further insight soon.

Without even going into questions like margin trends, backlog quality or accounting effects on specific balance sheet items, it is clear that the situation - probably for all equipment suppliers - remains difficult.  KBA, as others, have been working on the right strategies to stem the decline of its traditional newspaper and commercial printing segments.  Right now the company probably has some strategic opportunities even in the traditional segments as it appears to be more market focused than some of its competitors.  However, with a shrinking profitable backlog for web and specialty presses (likely more specialty than web) and a potential slowdown of the important Chinese sheetfed market, the successful execution of its inkjet and web packaging strategy will be even more important.

The stock market - as always - has its own view, as the chart below illustrates.