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.

Earlier this year I wrote about the Euro/Yen development and its effect on Komori's fortunes vs. its primarily German competitors.  Komori's market position is already benefiting from the new FX trend and the continued Yen weakening through at least the end of June leads one to expect further positive development in a generally uninspiring market.   

The next graph attempts to compare the order development for sheetfed equipment of the three mayor sheetfed players, with 2012-Q1 orders being 100%. The second bar shows the 2012-Q2 when all companies booked most of their DRUPA orders. 

Afterwards new business was actually shrinking for the next three quarters for the two German suppliers while Komori's order trend developed positively.

Looking at 2013-Q2 on the above FX chart I would expect to see more positive news from Komori.

Heidelberg's annual report shows some much anticipated improvements following the strong order intake at DRUPA 2012, but a closer look shows that the outlook remains rather cloudy.  

This long-term quarterly orders chart shows declining orders following the last DRUPA 2012 effect.  Fourth quarter shipments were strong, resulting in a low backlog of  just above Euro 500 million.  That does not bode well for next quarter's shipments and given the overall economic context it probably requires a small miracle to maintain last year's sales of Euro 2.8 billion and generate much needed further positive results.

Germany and China now account for 30% of sales and one can only hope that those two locomotives don't loose steam anytime soon.  

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.

While snowstorm Nemo covered New England under a couple of feet of snow, the Heidelberg shareholder presentation made for interesting reading.

With statements like "We are in a privileged position" and "Not too much price pressure from the customer, performance still counts in many segments", it seems the good times are back and the recent rise in the share price seems to confirm that the mood among investors is improving again. 

As I pointed out before, Heidelberg and KBA appear to be the winners in terms of market share in the recent past.   

Asia/Pacific is now 33% of the action for HD and - not surprisingly - around 70% for Komori.

Europe is now 19% for Komori and - again not surprisingly - almost 48% (including Eastern Europe) for HD.

North-America where Komori historically commanded a strong #2 position is interesting.  It is notable that Komori  forecasts a mere $68 million in sales for the fiscal year ending in March '13 with actual equipment sales for the first three quarters adding up to only $33 million. (New orders were even lower.) 

North America now represents only 7.8% of Komori's actual orders for the last three quarters, vs HD's 13.6% (about 300mE or $390 million), so Komori is all but off the radar screen.  

What could explain the lack of interest in Japanese made presses in the US market?

A look at this five year currency chart (courtesy of oanda.com) may answer the question.

The graph shows the dramatic drop of the Euro against the Japanese Yen in 2008 and continuing over the next four years.  Given this roughly "30 % disadvantage" Komori's performance  in Europe is actually quite impressive and is probably an indication of the company's effective cost management. (In addition, the company's recent appointment of Baumann as its German distributor can be seen as a sign that Komori is not going to roll over.) It also means that European products sold in the US became a lot cheaper than Japanese products since 2008. 

Note though the reversal of the trend in late 2012 as Japan joined Europe and the US in the global money printing competition.  

It is nice to see the optimism in Heidelberg's report, but  the favorable currency tailwinds may turn soon.  

In my last post I highlighted the DRUPA effect and - to nobody's surprise - the third quarter of 2012 appears to be more in line with the rather depressing new normal in the market for offset printing equipment. 

Making sense out of the various financial and industry reports is always a bit challenging, but the emerging picture in the sheetfed market shows the German suppliers (in particular Heidelberg, but also KBA) expanding their overall dominant market position.   I am purposely not including the web offset segment, mainly because two of the three global leaders are not reporting results.  (However, based on the known orders of the last two quarters, the market for web offset equipment continues to be very slow, not surprising, if one looks at the overall economic picture.)

In order to get to more of an apples-to-apples comparison for sheetfed, I had to make a few assumptions, but by and large the big picture is probably pretty close to what you see here.  

With Manroland Sheetfed's sparse reporting of new orders an inclusion here would have to be based on guesswork, but the deafening silence probably confirms that the company's market position continues to dwindle.  HD and KBA appear to be the primary beneficiaries.  The other company normally included would be Mitsubishi, but again it has all but disappeared from its parent group's reporting (and possibly from the markets outside Asia).  Most likely its sheetfed business is in the neighborhood of Ryobi's and thus does not affect the overall picture much.

All in all, Heidelberg and KBA have a commanding share of the market and especially Heidelberg benefited from DRUPA.  The improved backlog buys the company a bit more time as it realigns itself to a much smaller market for sheetfed presses.

A closer look at the regional and segment performance reveals additional insights.  Maybe in another posting after the big turkey.

Happy Thanksgiving!

Printing equipment makers generally released encouraging news following DRUPA.  Heidelberg announced that orders for the second quarter of 2012 (HD's first fiscal quarter) jumped to about EUR 890 million. 

The "DRUPA effect" is well known in the industry and can be easily recognized in the chart showing Heidelberg's new orders by quarter.  Nevertheless, Heidelberg's increase in orders is impressive, given the numbers released by its competitors as well as the assumption that additional equipment orders are largely responsible for the increase.  The publicly available data would suggest that Heidelberg improved its market position even further. 


As Heidelberg Goes, So Goes the Sheetfed Industry.  

Heidelberg's strong position warrants the adaption of the old saying about GM and a further look into the numbers could provide interesting clues about the future of the industry.

In my experience (and thanks to Alan Beaulieu from the Institute for Trend Research, www.itreconomics.com), looking at moving totals and rate-of-change (RoC) often provides better insight than the often volatile monthly or quarterly data. In the printing equipment industry, I found annual moving totals and the corresponding RoC most helpful. While the data is normally constructed using monthly data, it also works well with the quarterly figures available for Heidelberg.

The lower part of the chart below shows the quarterly orders (Q*4) and 4-quarter moving totals (4QMT) measured in millions of Euros. For easier comparison the quarterly orders are multiplied by 4 to fit within the parameters on the right hand axis. 

The upper part of the chart shows the rate-of-change.  The 4Q/12 shows the change of the current yearly data (4QMT) relative to a year ago. The Q/12 shows where the current quarterly data is realtive to a year ago.  The zero line means there is no growth.

The 12/12 indicates where the company is in the business cycle.  The blue line has turned up and shows positive growth.  The 3/12 dotted red line has passed above the 12/12 and indicates a potential transition to a positive business cycle. The next two quarters will confirm if the company will see a positive cycle or whether DRUPA 2012 provided false hope as we have seen after the previous DRUPA in 2008.

Given Heidelberg's dominant position in the printing equipment industry, this will be of interest to the entire sector.