Exclusive Update on Heidelberg’s Outlook from CEO Bernhard Schreier

With recent announcements from Heidelberg that include cost-cutting measures, mention of a possible hostile takeover attempt and the restructuring of its R&D activities, Printing Impressions conducted an exclusive interview with Bernhard Schreier, CEO of Heidelberger Druckmaschinen AG, for a status report on the manufacturer's near- and long-term outlook.

Printing Impressions: Success from Heidelberg's EUR 1.1 billion sales performance and launch of VLF presses at Drupa was somewhat tempered by the announced cost-cutting measures. Was Drupa a measuring stick in the company's decision-making progress?

Schreier: Drupa was a great show to position our various innovations and the overall Drupa results were satisfactory, so that Heidelberg recorded an impressive volume of orders in Düsseldorf that exceeded the expectations. Nevertheless, the economic outlook and the development of higher material and energy costs is not promising. Heidelberg will, therefore, continue to work on processes and measures to improve its cost and earnings structure. The company has also been putting a great deal of work into its medium- to long-term strategy. This has made it clear that, all in all, increasing costs call for a further significant adjustment to the existing cost structures.

Printing Impressions: What do you feel is the root of the market sluggishness mentioned in the Heidelberg cost-cutting plan? And to what degree do the U.S. economy, exchange rates and excess capacity factor in? What other variables, if any, are also at work?

Schreier: Indeed, currency issues are affecting Heidelberg's business significantly. Heidelberg is facing worsening exchange rates between the euro and the dollar and yen. This resulted in significant competitive advantages enjoyed by our Japanese rivals.

In addition, higher labor and energy costs are reducing the margins.

Printing Impressions: During your company's annual meeting, you alluded to the prospect of a hostile takeover attempt. Given antitrust laws that might preclude your competitors from making a bid, what interests do you feel would represent the biggest threat to such a campaign? Also, would you totally rule out a major competitor making a play for Heidelberg?

Schreier: You already mentioned the antitrust laws and their meaning for our industry. In principle Heidelberg won't comment on takeover rumors concerning the company.

The aim of the Heidelberg Management Board is to stay independent. All of our efforts are going into the direction of increasing the value for our customers, as well as for our shareholders.

Printing Impressions: What are some of the advantages that will be reaped by your announcement to move some of your small-format press production to the former Baumfolder site in Ohio? And will press production ultimately be expanded there?

Schreier: The main market for this machine, the Quickmaster QM 46, is North America (around 80 percent of the total production). And, from a long-term perspective, this machine will have its market there. Also production costs are lower in the U.S. Besides the Quickmaster QM 46, Heidelberg is not planning to extend press production in Sydney, Ohio, or at other places in the United States.

Printing Impressions: How will the announced restructuring of your R&D efforts impact future product development?

Schreier: In the past years, we spent a lot of money to create a new printing press platform, which is called XL. This was now shown at Drupa in all formats. This platform development is completed, which leads us to less spending in the next few years. Our R&D activities are fully driven by the needs of our customers. Apart from that, we also develop into new technological fields to be able to continuously stay ahead of the competition in the sheetfed press market.

If one compares our R&D/revenue ratio of our sheetfed press products with that of one of our competitors, we are fully aligned with the R&D cost ratio of our competitors.

Printing Impressions: What aspect(s) of Heidelberg operations need to be addressed in the short term in order to strengthen the overall business and restore shareholder value?

Schreier: Heidelberg's Drupa presentation clearly showed the company's strong focus on raising business segments, such as packaging, as well as service and consumables. In addition, Heidelberg will strengthen its sales activities in emerging markets. All of this will go fully in line with our cost-cutting measures.

Printing Impressions: To what factors do you attribute the company's dramatic drop in stock price this summer?

Schreier: Main reasons were the financial climate in the U.S. And, in conjunction with that, the beginning worldwide drop of the overall economic situation. Rising energy costs and worsening exchange rates did the rest.

Printing Impressions: What is the prognosis for the balance of 2008 and 2009?

Schreier: The company does not expect to match the previous year's sales figure for the financial year 2008/2009 as a whole; the operating result will considerably fall short of the previous year's result. Due to the uncertain economic situation worldwide and the volatile market environment, it will not be possible to provide a forecast of the key figures for the financial year 2008/2009 as a whole until later in the year. An outlook should be published no later than with the half-yearly results at the beginning of November 2008.

Printing Impressions: Sales of consumables by Heidelberg have grown steadily. Why is that so important to your company's continued success?

Schreier: Like packaging printing, services are relatively insensitive to economic fluctuations. In the future, Heidelberg will place greater emphasis on business involving consultancy services, spare parts, maintenance, and consumables. We have been involved in the consumables business for around 10 years, but cannot achieve any significant further growth by acting independently. Consequently, we are making greater use of cooperation arrangements and acquisitions.

At the end of last year we took an initial step in this direction by acquiring Stielund & Taekker, the largest consumables dealer in Scandinavia. And, just a few weeks ago, we bought Hi-Tech Coatings, a manufacturer of high-performance coatings.

Our services and consumables activities currently generate sales of EUR 700 million, and our target is to break the EUR 1 billion barrier in three years' time.

The fact that many of the consumables sold by Heidelberg have been marketed under the "Saphira" brand name for a number of months now will definitely also help to boost business. This uniform brand name tells printers that the products are tested by Heidelberg and optimized for use in Heidelberg solutions. They help users benefit from the full range of functions supported by the equipment and ensure first-class print results.