Speech for the Annual General Meeting 2005
07/20/2005
Not to be published until the speech begins!
Speech for the Annual General Meeting of Heidelberger Druckmaschinen AG
Bernhard Schreier
Chief Executive Officer
Wednesday, July 20, 2005
Congress Center Rosengarten, Mannheim
The spoken word applies
Chart 1: Titel
Chart 2: Welcoming Address
Welcome and Introduction
Shareholders,
Shareholders' representatives,
Representatives of the media,
Ladies and Gentlemen,
On behalf of the Management Board and staff of Heidelberger Druckmaschinen AG, I would like to welcome you most warmly to our Annual General Meeting in Mannheim.
This is the first time that the AGM has been held at the Mannheim Congress Center Rosengarten. Allow me to begin by saying a few words to explain why we have chosen this venue.
In the past, many of you will have attended our AGMs in the Heidelberg Stadthalle. The Rosengarten in Mannheim is one of the largest and most modern congress centers in Germany, however, and as such can offer a whole range of benefits.
It has more space and more comfortable facilities for our shareholders. Its central location means it can be reached far more easily by train and public transport. It is also more convenient to reach by car and has better parking facilities. I believe that these benefits will be to everyone's advantage.
Chart 3: Summary of FY 2004/2005
Ladies and Gentlemen, the printing press industry has recently undergone the longest and most difficult economic crisis in its history. It is a crisis that even Heidelberger Druckmaschinen AG has not been immune to.
In the 2002/2003 financial year, we went through a very painful period as the crisis sank to its lowest point. At the AGM for 2003/2004 I was able to report a turnaround in our fortunes. Over the past 12 months this positive development has continued.
Most important of all, after two bitterly disappointing years in which we returned losses, the 2004/2005 financial year has seen us achieve a turnaround in earnings. We can see this clearly if we look at the key figures for the year:
The net result improved significantly to a profit of 61 million Euro following a loss of 695 million Euro in the previous year.
The profit from operating activities more than doubled to 167 million Euro.
The equity ratio climbed from 29 to 34 percent.
The profit per share improved to 0.64 Euro following a loss in the previous year.
For the first time in three years, we are able once again to pay you a dividend of 30 cents per share, providing of course that you approve our resolution today.
Chart 4: Successful realignment
These figures show that the restructuring of the Heidelberg Group initiated in 2003/2004 and concluded in the financial year just closed has begun to bear fruit. The concentration on sheetfed offset and associated processes from print data input to finished print product has put our company back on course and contributed to a significant improvement in profitability. We have also succeeded in achieving our other goals - namely maintaining and/or extending our market shares, achieving further ongoing savings in costs, and reinforcing our commitment to innovation.
The turnaround in earnings is only an initial, albeit very important step towards our ultimate goal. In addition to parting with our loss-making Digital and Web Systems divisions, we have also put in place a platform for continuous growth and prospects of improved earnings.
A good year ago, we presented more than 50 product innovations at drupa, the world's most important trade show for the print industry. These are not only underpinning our position in the face of increasingly harsh competition, but are also opening up excellent opportunities for market growth. We have also achieved significant improvements in our cost structures, bringing them to a more competitive level.
Personnel costs have also been cut. This has been achieved by concluding an agreement with employee representatives in spring 2005 which had as its goal the safeguarding of the company's future and will enable us to cut costs by around 100 million Euro annually from 2008 onwards. I will go into this agreement in more detail later.
Chart 5: Global economy continues to grow
Despite all our efforts to deliver further improvements to our processes, cost structures and, consequently, our competitiveness, the print industry was still very largely dependent on the fortunes of the global economy last year. The reason for this is the same in both good times and bad - most of our customers' customers stem from the advertising industry and their budgets in turn are inevitably heavily dependent on the economy as a whole.
All in all, the world economy grew by 4.9 percent, the best figure for many years. However, developments in the individual sectors of the economy differed quite starkly. The economy in the United States, a market that is very important to our company, followed a similar trend to the global economy as a whole and grew by 4.4 percent, the sharpest rise for a good number of years. However, the dynamics weakened from quarter to quarter.
Growth in the Euro zone was altogether more modest at 1.8 percent. In Germany, Heidelberg's second most important individual market, domestic demand remained weak.
In addition to the USA, the strong growth in the world economy was attributable to the threshold countries. China in particular showed itself once again to be a major economic power house. With a rise in gross domestic product of 10.6 percent, the rapid developments of the last five years continued unabated.
Development in the print media industry
The improvement in the world economy inevitably also had a positive effect on the economic situation in the print media industry. After three successive years of crisis, the printing industry in the industrialized states recorded a slight improvement as it took its first steps on the road back to recovery.
For the first time in three years, the industrialized countries increased their print output. In the United States, the world's largest market for print products - and consequently a very important market for us too, printshops increased sales by 4.1 percent. By way of comparison, the three years before this had seen falls of between 2 and 4 percent. This improvement in capacity utilization means that higher earnings are also encouraging printshops to invest.
For European press manufacturers, which naturally also includes Heidelberg, some of this positive development has been dampened by unfavorable movements in exchange rates, however. During the 2004/2005 financial year, the Euro once again gained in value against the American dollar and Japanese yen. For the most part, this development benefited our Japanese competitors who were able to sell their products on the US market far more cheaply than European suppliers. However, the print media industry worldwide is still characterized by overcapacity, price pressures and continuing consolidation.
Growth in China
Last year, the fastest rate of growth for print products was once again to be found in the threshold countries and in particular China. Despite the strong growth, the saturation level for print products in these developing economies is still very low. Consequently, the printshops in these countries are relatively keen to invest.
After the established markets in Europe and America, the Asia/Pacific Region has developed into the second most important of Heidelberg's five regions. The importance that China has for the future of our company and the print industry as a whole is illustrated by the fact that it already has more than ten times as many printshops as Germany. And this figure is continuing to grow at a strong rate. Just how we intend to meet this growing challenge is something that I will speak about in detail later.
Chart 6: Incoming orders, sales, operating profit, net profit
Continuing operations show significant improvement
The improvement in the global economy, the success in overcoming the crisis facing the print industry, and the exceptionally successful outcome of drupa, the industry's largest trade show, all contributed to the first rise in three years in the volume of incoming orders in our continuing areas of operation, the areas that I will be focussing on today.
At 3.5 billion Euro, incoming orders were 8 percent up on the comparable figure for the previous year. The weak dollar prevented an even greater increase. After adjustments for exchange rate movements, the increase was as high as 10 percent.
One aspect that is especially pleasing is that we enjoyed particularly strong growth in our by far most important segment - namely the Press segment, consisting primarily of sheetfed offset presses - where we recorded an increase in sales volume over the preceding year of some 10 percent. This division accounts for almost 90 percent of Heidelberg's business.
Incoming orders in the Postpress division increased by 1 percent, while orders in the Financial Services division fell as planned by 27 percent. This fall is attributable to the fact that we are increasingly outsourcing our sales financing operations to external partners, thereby reducing the risks from longer-term financing in particular.
Since the discontinued Digital and Web Systems divisions were not covered by the current consolidated accounts for the full financial year - unlike the previous year - total incoming orders in the Heidelberg Group fell slightly by 4 percent over the previous year.
Sales
In line with the increase in incoming orders, the adjusted sales figures also showed a similarly positive development, growing by 3 percent over the previous year to 3.2 billion Euro. This represented an increase of 5 percent after adjustments for exchange rate movements. This growth is in line with our forecasts from the previous year. Here, too, the higher than average growth of around 5 percent in our core Press operations to 2.8 billion Euro was particularly pleasing.
The development in sales after the end of the year represents further grounds for optimism. Following a very modest start to the year, sales from the second quarter onwards - i.e. after drupa - showed quarter on quarter growth.
The importance of the threshold countries, particularly in the Asia/Pacific region, was also reflected in increased sales last year. These countries now account for 25 percent of sales. By way of comparison, this figure was just 14 percent at the end of the 1990s.
Despite the altogether pleasing development in sales, we were not satisfied with the progress made in all sectors. Some sectors, including postpress, failed to keep pace with the general market trend. Moreover, some individual markets failed to live up to our expectations. Business in the USA, for example, was hampered by the weak dollar, while Russia was unable to repeat the strong growth of recent years.
Thanks to good incoming orders, we currently have a good order backlog. At the end of the financial year, on March 31, it was in excess of 1 billion Euro, thereby putting it some 40 percent above the same figure for the previous year. This ensured that our production capacities for the first few months of the new financial year were well utilized.
Turnaround in earnings
However, the most important aspect of the past financial year, Ladies and Gentlemen, was the fact that we achieved a turnaround in earnings despite all the uncertainties.
In addition to the growth in sales, this result is attributable not least to the Group's fundamental realignment, including the disposal of the two loss-making divisions, Digital and Web Systems. The sale of these two divisions was successfully concluded in the first few months of the 2004/2005 financial year.
We also pushed ahead with the Group's restructuring, tightened the organizational framework, streamlined procedures and achieved long-term reductions in capital tie-in and structural costs.
All of these measures enabled us to achieve our goal of significantly lowering the threshold above which we start making profits.
The profit from operating activities showed a marked improvement from 10 million Euro to 160 million Euro. Here, too, the trend over the individual quarters is particularly interesting. The first quarter and to a lesser extent the second quarter were still relatively weak. The third quarter, in other words the first without the two loss-making divisions, saw us achieve an operational return on sales of 8 percent, this rising to just short of 14 percent in the fourth quarter. Taken over the year as a whole, we achieved an operational return on sales of 5 percent. This is a quite remarkable result given the very difficult years that the print industry has experienced.
We were able to significantly improve on our after-tax result and returned to profit for the first time in three years. The net profit for the year was 61 million Euro. This represented a return on sales of 1.8 percent.
Chart 7: Improvement in the capital structure - free cash flow, equity
Ladies and Gentlemen, we were also able to improve our capital structure during the 2004/2005 financial year. The Heidelberg Group's liabilities were reduced quite significantly. Our free cash flow climbed to 154 million Euro despite the legacies from the discontinued operations and the Group's restructuring. This represents a significant improvement on what was already a good result from the previous year.
Generally speaking, we achieved long-term improvements in our financing structure during the 2004/2005 financial year. This was due primarily to the successful placement of an exchangeable bond with a volume of 280 million Euro and a further private placement. These instruments enabled us to profit from the attractive conditions on the capital market while also increasing our financing flexibility. Liabilities to banks, which had been almost 700 million Euro in the previous year, fell as a result by more than two thirds to just 216 million Euro.
Equity
Equity, which had been reduced significantly following the high loss in the preceding financial year, remained unchanged at 1.23 billion Euro. The equity ratio climbed from 29.1 to 33.9 percent.
Chart 8: Workforce levels
Ladies and Gentlemen, the number of employees fell as planned following the deconsolidation of the two divisions. The workforce of the Heidelberg Group averaged 18,679 employees over the year, some 4,000 fewer than in the previous year.
Developments in the individual divisions
Chart 9: Press division - initial chart
Ladies and Gentlemen, I mentioned at the start of my speech that the past year marked a turnaround for the print media industry - including Heidelberg. A number of factors came together as part of this process. We can see this clearly by looking at developments in the individual divisions
The demand for products and solutions for the prepress segment and, in particular, for the sheetfed, packaging and flexographic printing markets rose sharply a good year ago, coinciding with the arrival of drupa. The fact that we had a complete portfolio of products on exhibit at the trade show was therefore perfect. Our customers were impressed with the new products and product variations that we were launching at just the right time.
Chart 10: Press division - figures
This paid dividends. After adjusting for exchange rate movements, incoming orders received by what is our most important division by far - the "Press" division - increased to 3.1 billion Euro, a rise of 12 percent over the previous year. Sales also climbed by 7 percent - after exchange-rate adjustments - to around 2.8 billion Euro. The difference between these two figures indicates a significant increase in the order backlog. Despite some pronounced differences in the individual formats, we will still not see particularly high production capacity utilization over the coming months, though levels will be acceptable.
Chart 11: Press division - Speedmaster XL 105
Our new large-format Speedmaster XL 105 is setting new standards in terms of productivity, quality and cost-effectiveness, not least in high-run packaging printing. It has made a significant contribution to the increase in incoming orders and sales since its launch. Thanks to numerous integrated innovations such as non-contact sheet transport, printshops are now able to increase productivity by up to 30 percent.
Despite high costs for drupa and difficult circumstances on the market, we succeeded in increasing operating profits before special items by a good 20 percent to 183 million Euro. This represented a respectable return on sales of 6.5 percent. This result also reflects the success of our efforts to cut structural costs.
Postpress
Chart 12: Postpress division - initial chart
In the Postpress division, too, we presented an entirely new generation of products at drupa, thereby consolidating our position vis-à-vis our competitors. However, the market in the past financial year failed to take off to the extent originally expected. Since the United States is one of the largest markets for postpress products, the weak dollar was one of the main reasons for the subdued development.
Chart 13: Postpress division - figures
All in all, incoming orders in this division improved only slightly by 1 percent to 359 million Euro. Sales reached 348 million Euro, on more or less a par with the previous year following adjustments for exchange rate movements. Our efforts to increase efficiency brought about a significant improvement in the operating result before special items, increasing from a loss of 18 million Euro to a loss of 2 million Euro. We are confident that further positive movement on the market will also see us break through the profit threshold in this division during the current financial year.
Chart 14: Financial Services division
To enhance reporting transparency, we grouped together our sales financing activities into a dedicated division during the past financial year. Despite a drop from 41 million Euro to 26 million Euro, the result achieved by the Financial Services division was particularly pleasing. The decline in profits and revenue - in this instance interest earned - had been budgeted along these lines.
Streamlining the portfolio
Ladies and Gentlemen, the past financial year was not just a year of change in our traditional areas of operation. It was also a year that saw the realignment of the Heidelberg Group.
Even before the last Annual General Meeting exactly one year ago, we had already sold the Digital division to our joint venture partner Eastman Kodak. In August, just a few weeks after our shareholders' meeting, the Web Systems division was sold to Goss International Corporation, in which we now have a 15 percent holding. The sale of these two divisions has significantly improved Heidelberg's earnings situation.
Chart 15: Developments in the regions
Before I conclude this look back at the past financial year, allow me first to discuss developments in the individual regions. These differ from each other quite starkly.
We transact around 40 percent of our business in our most important region, Europe. The 2004/2005 financial year was the first time for three years that we had improved on the previous year's order levels. Incoming orders grew by an impressive 14 percent and sales by 7 percent.
However, following several years of rapid growth, the Eastern Europe region fell short of our expectations, with incoming orders growing by 8 percent and sales stagnating at the same level as the previous year. The prime reason for the leveling off in business is likely to lie in customers in a number of countries having already invested in very powerful machines in the run-up to EU accession, and in the lack of major investments in Russia.
The North American market is showing only cautious signs of recovery following the setbacks of recent years. Despite the strong dollar and the competitive disadvantages this brings with it, we were able to increase incoming orders in the North America region by 4 percent. This equates to a significant 10 percent once adjustments for exchange rate movements have been taken into account. Although sales in the second half of the year improved significantly, sales for the year as a whole still fell slightly short of the previous year.
The situation in the Latin America region continues to stabilize following years of difficult political and economic crises. This was also reflected in Heidelberg's incoming orders, which increased by 13 percent. Sales climbed by 5 percent.
We were once again able to win market share in the Asia/Pacific growth region despite the considerable weakening of the dollar against the Euro. This was particularly true for the booming Chinese market, but also for other important markets in the region such as Australia and Indonesia. This region remained the most important market of all for our large A1 format. Incoming orders in the region increased by 5 percent and sales by 8 percent after adjustments for exchange rate movements.
China
Allow me now to say a few words about China and the strategies that we are pursuing in this country. China, Ladies and Gentlemen, is the world's number one growth market for printing presses. The Chinese economy grew by more than 10 percent in 2004 and thereby matched similar growth levels in earlier years. The demand for printed matter is growing at a similar rate to the gross domestic product. This has once again seen the emergence of numerous new printshops during the past year. You may remember I stated earlier - and it is certainly worth repeating - that China already has more than ten times as many printshops as Germany.
Forecasts state that China will be the world's largest single market for printing presses by 2007. It therefore offers enormous potential. But China is not just one of our largest customers. It is also providing a base for small local competitors with corresponding cost advantages who are emerging slowly but surely on the small format press and postpress equipment markets. Consequently, the only way in which we can succeed long-term on the Chinese press and postpress market is if we also have production facilities there.
Chart 16: Heidelberg builds factory in China
That is why we have taken the decision to construct a production and assembly facility in the Shanghai Qingpu Industrial Zone. This industrial zone is home to around 600 foreign and domestic investors, primarily from the fields of precision mechanical engineering, the automotive supply industry, IT, the new materials sector and the bioengineering and pharmaceutical industries.
Chart 17: Opening up the Chinese growth market
We will begin constructing the new assembly site with a small core team. The factory will have a production area of 5,000 square meters and an additional 1,200 square meters of office space. Construction is planned to be completed by early 2006 and the facility will be leased by us.
Chart 18: New Heidelberg factory in China
As early as the start of 2006 we will begin producing relatively straightforward folders for the Chinese market in this new facility. Employee training and assembly of the first folders will begin before this, however, using a temporary building. We also plan to commence production of A3 small format presses for the Chinese market at the same site as soon as possible.
The investment volume in the Shanghai site will be just over 10 million Euro. The workforce will be increased over several stages in the medium term to an initial maximum of 200 employees.
The construction of our own production facility in China represents a key element of our strategy to gain greater access to growth markets.
Finally, allow me to look back at the past financial year and the development of Heidelberg's share price.
We are not satisfied with the share price, which at the end of the financial year, on March 31, was 12 percent below the price 12 months earlier.
We are confident, however, Ladies and Gentlemen, that the Heidelberg share price will reach its full potential following further improvements in our profitability and an improvement in the general economic circumstances. These include stronger growth in Germany and other major European countries - a development that would urgently benefit the whole of the economy, a further weakening in the Euro vis-à-vis the dollar and yen, and slower growth in raw material and energy prices.
Items on the agenda: Dividends, acquisition of own shares
Following this look back at the past financial year and examining how Heidelberg's share price has developed over the last year, I would like to discuss two items on today's agenda in some detail.
The fact that the past two years returned losses meant we had to forego a dividend. We are therefore delighted that we have now achieved a turnaround in earnings. The Management Board and Supervisory Board are proposing that today's Annual General Meeting approve a dividend of 30 cents per share.
Based on the closing price on the XETRA on March 31, 2005, this represents a dividend yield of 1.22 percent. While we are still a long way from the dividends being paid in the printing press industry before the onset of the current crisis, we have nevertheless laid the foundations for long-term increases in earnings in the future and thus for increased levels of dividend.
One further item on the agenda is the empowerment of the company to acquire its own shares. You awarded us these powers at the Annual General Meeting one year ago. So far, we have not made use of this authority. Since this power will expire on December 31, 2005, we are proposing that it be replaced by a new one.
We would propose that the Management Board of Heidelberger Druckmaschinen AG be empowered, up to December 31, 2006, to acquire its own shares up to a maximum of 10 percent of the current share capital. It would be possible to acquire the shares through the stock exchange or via an offer made to all shareholders. The acquisition of these shares is intended to bring benefits to both the company and its shareholders.
In addition, the proposal also envisages giving the company the means to acquire its own shares in order to exercise the stock options within the framework of the stock option program, as approved by the Annual General Meeting in 1999.
Strategy
Ladies and Gentlemen, So much for financial year 2004/2005.
During the current financial year we will be employing a clearly defined package of measures to stabilize the turnaround in earnings brought about during financial year 2004/2005 and to further reinforce our profitability.
We have also identified various areas of the print media industry which offer additional potential for boosting sales. We also plan to further improve and optimize our cost structures and thereby tap into additional potential earnings for the Heidelberg Group.
How do we intend to do this? By consistently committing ourselves to five key areas.
With our restructuring in place, adding corporate value to the Heidelberg Group is one of our primary goals.
Following the disposal of the Digital and Web Systems divisions, we are now concentrating our efforts on our core business activities, namely sheetfed offset, and all-in-one solutions for the high-growth packaging and label printing sectors. We have succeeded in defending our undisputed position as the world market leader in sheetfed offset. Our market share of over 40 percent is still higher than our nearest three competitors taken together. We are still the leading international solution provider in the print media industry. No other supplier can offer an end-to-end workflow management system that records and optimizes a full gamut of print-related work processes.
Chart 19: Integrated solutions
Our strategy of supplying integrated solutions sets us apart from our competitors. This not only applies for the entire value-added chain from prepress to postpress, but also for our equipment financing operations and our international network of Print Media Academies with their unique training courses. We have the world's most comprehensive service and sales network in the industry and are looking to build on this strategic advantage.
We have streamlined our structures and cut our structural costs by a total of 20 percent. This has brought about a marked improvement in our cost/profit ratio.
Our products and product innovations are geared to growth areas within the industry.
It is our declared goal to provide our customers with added value that will enable them to be successful on the market. Our customers' customers expect maximum flexibility, short production times, low prices and an increasingly unique range of products and services.
To meet these needs and expectations, we are offering more and more custom-made solutions using our application and process technologies. In the year under review, we developed and installed numerous customized presses.
One outstanding example of this is the longest sheetfed press in the world which we supplied to the United States a few months ago. This press includes a total of 16 printing, coating and drying units. We are also catering to our customers' wide range of needs in the label and packaging printing sector, a segment of the market that is enjoying strong growth and is largely independent of the economic climate. We can offer users equipment developed specifically for this market.
Our "Prinect" end-to-end workflow management system also gives our customers a marked competitive edge. This software package records and digitizes all print-specific work processes and thus helps to measurably improve the productivity and profitability of printshops. Prinect solutions are modular in design and are therefore ideal for automating business processes in both large-scale printshops and SMBs.
To ensure that our customers' processes remain efficient at all times, our systemservice facility monitors their Heidelberg machinery over its entire product life. Our customers can rely on us to provide well-trained service technicians who are quickly on-site, Internet-based Remote Service that can often eliminate problems online, and a round-the-clock support and spare parts service that uses logistics chains optimized worldwide for speed and reliability.
Investments in R&D and training will remain high
Chart 20: Heidelberg investments over the next three years
Heidelberg is not only the world market leader, it also leads the way in pioneering technological developments in sheetfed offset presses. To maintain this leading position, we will be investing more than 500 million Euro in new production plant and in excess of 600 million Euro in research and development over the next three years. Combined with expenditure on training, we will therefore be investing around 10 percent of sales in safeguarding our future over the years ahead.
Pact concluded for safeguarding the future
Chart 21: Activities for boosting profitability
Ladies and Gentlemen, we have initiated a number of activities to increase profitability over the next few years. These primarily comprise measures to boost sales, cut costs and reduce capital tie-in.
Safeguarding the future and cutting manufacturing costs are key. After long and difficult negotiations, we concluded a framework agreement with employee representatives in April 2005 which had the aim of safeguarding the future of our company. This agreement, which extends up to 2008, will secure jobs, lower personnel costs, and improve competitiveness at our German sites.
The key elements of the agreement cover an extension of working time by 5 percent with no additional remuneration, the discontinuation of payment for overtime work, and a reduction in bonus payments. The Management Board and leading executives are also foregoing remuneration to a comparable extent in order to reduce personnel costs. These measures will enable Heidelberg to make annual savings in personnel costs which will rise to around Euro 100 million by 2008 and will then be maintained at this level each year.
Ladies and Gentlemen, this pact to safeguard the company's future should not be viewed solely from the perspective of the company, but is rather a classical win-win situation. In return for concessions made by employees, we have pledged up to the year 2008 not to make any redundancies for operational reasons, not to undertake any significant relocations of production from Germany, and to maintain the same level of investment in research and development and in training. In addition, part of the unpaid working time will go towards a company pension module for employees.
Earnings potential through improvements in production costs and processes
In addition to savings in personnel costs, we will continue to improve our cost structures through our "High Performance Production" efficiency enhancing project, or HPP 2006 for short. This project has been running for two years and is designed primarily to improve productivity in our production plants.
This is geared to reducing stock levels and cutting throughput times. It also enables us to be faster and more flexible in responding to our customers' needs. The HPP project is expected to be concluded in the coming year. Costs of 9 million Euro will bring long-term savings in the double-digit million Euro range.
Chart 22: Prospects for financial year 2005/2006
During the current financial year we expect to see moderate growth in sales on a comparable basis. In the first half of the year in particular we will profit from our high order backlog.
The new financial year got off to a good start. Incoming orders in the first three months were satisfactory. We will announce detailed information on the progress made in the first quarter on August 2.
Ladies and Gentlemen, let us take a closer look at the prospects for the future. Assuming an anticipated moderate growth in sales for financial year 2005/2006, we will profit from the further recovery in the sector in the industrialized states but also from the consistently high growth rates in the threshold countries. We will watch these countries closely over the coming years, in particular China. In the industrialized countries, we anticipate the recovery will free up the investment backup that has accumulated over the crisis years and will generate higher order levels.
Heidelberg has the means to offer the best possible solutions to a wide range of customers in very different regions - whether they are SMBs or industrial printers, and regardless of whether they are located in industrialized nations or threshold countries - depending on their particular needs and level of development. We have excellent market opportunities in the threshold countries in particular, thanks not least to our tightly meshed sales and service network.
During the current financial year, we will exceed last year's operating profit of 167 million Euro and the after-tax profit of 61 million Euro. In addition to higher sales, we will also benefit from our efficiency enhancing measures and the deconsolidation of the loss-making Digital and Web Systems divisions. Furthermore, some of the savings in personnel costs that we agreed at the end of April will come into this year's accounts. However, results could be dampened by exchange rate movements and the prices of energy and raw materials.
It is our declared goal in the years that follow to return the company to its previous levels of profitability. Our projects to boost corporate value will make a significant contribution in this regard.
You, our shareholders, will also profit from increasing annual surpluses. We will continue in future to base our dividend payments on the interests of the capital market. We are looking to cover our capital costs over the current financial year and, in subsequent years, to achieve a return higher than the weighted capital costs of 10 percent.
Committed to innovation
Ladies and Gentlemen, as in the past, additional product offensives are needed to this end. The competition in the printing press industry, Ladies and Gentlemen, will not be decided on the basis of exceptional quality, low prices and good service alone, but will also depend very heavily on a supplier's commitment to innovation.
Heidelberg successfully defended its role as innovation leader in the industry over the past year. We were able to do this because we systematically maintained our level of investments in research and development and, consequently, in Heidelberg's future, throughout the last few difficult years.
During the past financial year, we have invested almost 200 million Euro or around 6 percent of our sales in research and development. A look at our many product innovations at drupa confirm that these investments have paid dividends. Series production of these innovations is now underway.
I have already spoken about the new Speedmaster XL 105. Start of series production commenced at the start of the current financial year. We are pleased with capacity utilization levels.
Chart 23: Market introductions FY 04/05
Speedmaster CD 74-P
We have also successfully launched a number of additional products on the market.
Our new Speedmaster CD74-P is equipped with a perfecting system and provides users with an increase in productivity of 15 to 25 percent compared with conventional medium-format perfecting presses. It enables rapid changeovers between paper and cardboard and between straight and perfecting modes. This press is targeted at commercial printers covering a wide range of printing stock, and at label and packaging printers who also print the reverse side of packagings, for example printers operating on the cosmetics market.
As of summer 2005, we will also be supplying the Speedmaster CD 74 as a long perfecting press with up to ten printing units and an additional coating unit in series production. In fall this year, a British printshop took delivery of a customized Speedmaster CD 74 with no less than twelve printing units - making it the longest press in the medium format sector.
Chart 24: Postpress Stahlfolder TH/KH
Series production of our new generation of Stahlfolder TH/KH folders began in September 2004 and has contributed to a substantial increase in our market share in the sector, ensuring high capacity utilization levels at our domestic production facilities in Ludwigsburg. Thanks to the number of variations on offer, the folders are ideal for printshops of all sizes as well as for postpress specialists. They also enable customers to specialize and offer a unique product portfolio.
Chart 25: Postpress Stitchmaster ST 350
Series production of the Stitchmaster ST 350 began in November 2004. This unit is a flexible and cost-effective saddlestitcher for printshops and postpress specialists. Its outstanding production levels make it a particularly attractive unit which combines high quality and reliability coupled with exceptional operating comfort. We manufacture this product in Leipzig at cost levels that are very favorable for domestic circumstances.
Chart 26: Postpress Varimatrix 105 CS
The new Varimatrix 105 CS die cutter was launched at the start of May and is the first product to arise from the company's cooperation with a Taiwanese manufacturer. This product for cutting and stripping expands our portfolio of solutions for the growing packaging market and is a cost-effective entry-level solution for packaging printers. Heidelberg presented the Dymatrix 106 CSB die cutter, a machine for complex and demanding applications, as early as drupa 2004. The product and solution expertise and the production facilities for manufacturing these machines - which are used for producing folding cartons for the packaging industry - are located at Heidelberg's site in Mönchengladbach.
Chart 27: Prinect Workflow
In the field of prepress and workflow software, the Prinect system solution innovations formed a key focal point of our drupa presence and many of our in-house fairs during the year under review. The sustained interest on the part of our customers showed that we are on the right track with this approach. The fact that thousands of customers have already taken part in our Prinect Experience Tour and are able to follow the complete production process for a virtual print job step by step underlines the considerable interest shown by users worldwide. Since Prinect - like our hardware - is of modular design, small and midsize printshops are also able to assemble a suitable and profitable solution and add to this later as their needs grow. Although we no longer have any production facilities in Kiel, it is still home to our prepress software specialists.
Ladies and Gentlemen, why am I focusing on our German sites?
I am firmly convinced that we will continue to add value at our German sites that will satisfy the capital market's profitability requirements and will safeguard jobs in Germany. After all, Germany can only be successful in future if it continues to be a source of added value.
Ladies and Gentlemen, innovations, products, market share and satisfied customers would not and could not exist if it were not for Heidelberg's workforce. We have asked a lot of our employees over recent years. They have responded to these challenges with flexibility and commitment.
I would like to take this opportunity to express my gratitude to all our employees for the particularly high level of commitment they have shown in economically difficult times and in the face of many different challenges.
My gratitude also extends to the employee representatives whose chairman, Mr. Josef Pitz, is taking part in his last Annual General Meeting as a member of the Supervisory Board. I wish him health and happiness in his well-earned retirement. He will be succeeded in his post by Mr. Rainer Wagner, with whom I look forward to working closely in the years ahead.
On behalf of all other Heidelberg members of staff, I would like to thank the organizing team for arranging our first Annual General Meeting here in the Rosengarten in Mannheim so successfully.
So a warm thank you to our AGM team and thank you to you, Ladies and Gentlemen, for your attention today.
Chart 28: AGM title
Speech for the Annual General Meeting of Heidelberger Druckmaschinen AG
Bernhard Schreier
Chief Executive Officer
Wednesday, July 20, 2005
Congress Center Rosengarten, Mannheim
The spoken word applies
Chart 1: Titel
Chart 2: Welcoming Address
Welcome and Introduction
Shareholders,
Shareholders' representatives,
Representatives of the media,
Ladies and Gentlemen,
On behalf of the Management Board and staff of Heidelberger Druckmaschinen AG, I would like to welcome you most warmly to our Annual General Meeting in Mannheim.
This is the first time that the AGM has been held at the Mannheim Congress Center Rosengarten. Allow me to begin by saying a few words to explain why we have chosen this venue.
In the past, many of you will have attended our AGMs in the Heidelberg Stadthalle. The Rosengarten in Mannheim is one of the largest and most modern congress centers in Germany, however, and as such can offer a whole range of benefits.
It has more space and more comfortable facilities for our shareholders. Its central location means it can be reached far more easily by train and public transport. It is also more convenient to reach by car and has better parking facilities. I believe that these benefits will be to everyone's advantage.
Chart 3: Summary of FY 2004/2005
Ladies and Gentlemen, the printing press industry has recently undergone the longest and most difficult economic crisis in its history. It is a crisis that even Heidelberger Druckmaschinen AG has not been immune to.
In the 2002/2003 financial year, we went through a very painful period as the crisis sank to its lowest point. At the AGM for 2003/2004 I was able to report a turnaround in our fortunes. Over the past 12 months this positive development has continued.
Most important of all, after two bitterly disappointing years in which we returned losses, the 2004/2005 financial year has seen us achieve a turnaround in earnings. We can see this clearly if we look at the key figures for the year:
The net result improved significantly to a profit of 61 million Euro following a loss of 695 million Euro in the previous year.
The profit from operating activities more than doubled to 167 million Euro.
The equity ratio climbed from 29 to 34 percent.
The profit per share improved to 0.64 Euro following a loss in the previous year.
For the first time in three years, we are able once again to pay you a dividend of 30 cents per share, providing of course that you approve our resolution today.
Chart 4: Successful realignment
These figures show that the restructuring of the Heidelberg Group initiated in 2003/2004 and concluded in the financial year just closed has begun to bear fruit. The concentration on sheetfed offset and associated processes from print data input to finished print product has put our company back on course and contributed to a significant improvement in profitability. We have also succeeded in achieving our other goals - namely maintaining and/or extending our market shares, achieving further ongoing savings in costs, and reinforcing our commitment to innovation.
The turnaround in earnings is only an initial, albeit very important step towards our ultimate goal. In addition to parting with our loss-making Digital and Web Systems divisions, we have also put in place a platform for continuous growth and prospects of improved earnings.
A good year ago, we presented more than 50 product innovations at drupa, the world's most important trade show for the print industry. These are not only underpinning our position in the face of increasingly harsh competition, but are also opening up excellent opportunities for market growth. We have also achieved significant improvements in our cost structures, bringing them to a more competitive level.
Personnel costs have also been cut. This has been achieved by concluding an agreement with employee representatives in spring 2005 which had as its goal the safeguarding of the company's future and will enable us to cut costs by around 100 million Euro annually from 2008 onwards. I will go into this agreement in more detail later.
Chart 5: Global economy continues to grow
Despite all our efforts to deliver further improvements to our processes, cost structures and, consequently, our competitiveness, the print industry was still very largely dependent on the fortunes of the global economy last year. The reason for this is the same in both good times and bad - most of our customers' customers stem from the advertising industry and their budgets in turn are inevitably heavily dependent on the economy as a whole.
All in all, the world economy grew by 4.9 percent, the best figure for many years. However, developments in the individual sectors of the economy differed quite starkly. The economy in the United States, a market that is very important to our company, followed a similar trend to the global economy as a whole and grew by 4.4 percent, the sharpest rise for a good number of years. However, the dynamics weakened from quarter to quarter.
Growth in the Euro zone was altogether more modest at 1.8 percent. In Germany, Heidelberg's second most important individual market, domestic demand remained weak.
In addition to the USA, the strong growth in the world economy was attributable to the threshold countries. China in particular showed itself once again to be a major economic power house. With a rise in gross domestic product of 10.6 percent, the rapid developments of the last five years continued unabated.
Development in the print media industry
The improvement in the world economy inevitably also had a positive effect on the economic situation in the print media industry. After three successive years of crisis, the printing industry in the industrialized states recorded a slight improvement as it took its first steps on the road back to recovery.
For the first time in three years, the industrialized countries increased their print output. In the United States, the world's largest market for print products - and consequently a very important market for us too, printshops increased sales by 4.1 percent. By way of comparison, the three years before this had seen falls of between 2 and 4 percent. This improvement in capacity utilization means that higher earnings are also encouraging printshops to invest.
For European press manufacturers, which naturally also includes Heidelberg, some of this positive development has been dampened by unfavorable movements in exchange rates, however. During the 2004/2005 financial year, the Euro once again gained in value against the American dollar and Japanese yen. For the most part, this development benefited our Japanese competitors who were able to sell their products on the US market far more cheaply than European suppliers. However, the print media industry worldwide is still characterized by overcapacity, price pressures and continuing consolidation.
Growth in China
Last year, the fastest rate of growth for print products was once again to be found in the threshold countries and in particular China. Despite the strong growth, the saturation level for print products in these developing economies is still very low. Consequently, the printshops in these countries are relatively keen to invest.
After the established markets in Europe and America, the Asia/Pacific Region has developed into the second most important of Heidelberg's five regions. The importance that China has for the future of our company and the print industry as a whole is illustrated by the fact that it already has more than ten times as many printshops as Germany. And this figure is continuing to grow at a strong rate. Just how we intend to meet this growing challenge is something that I will speak about in detail later.
Chart 6: Incoming orders, sales, operating profit, net profit
Continuing operations show significant improvement
The improvement in the global economy, the success in overcoming the crisis facing the print industry, and the exceptionally successful outcome of drupa, the industry's largest trade show, all contributed to the first rise in three years in the volume of incoming orders in our continuing areas of operation, the areas that I will be focussing on today.
At 3.5 billion Euro, incoming orders were 8 percent up on the comparable figure for the previous year. The weak dollar prevented an even greater increase. After adjustments for exchange rate movements, the increase was as high as 10 percent.
One aspect that is especially pleasing is that we enjoyed particularly strong growth in our by far most important segment - namely the Press segment, consisting primarily of sheetfed offset presses - where we recorded an increase in sales volume over the preceding year of some 10 percent. This division accounts for almost 90 percent of Heidelberg's business.
Incoming orders in the Postpress division increased by 1 percent, while orders in the Financial Services division fell as planned by 27 percent. This fall is attributable to the fact that we are increasingly outsourcing our sales financing operations to external partners, thereby reducing the risks from longer-term financing in particular.
Since the discontinued Digital and Web Systems divisions were not covered by the current consolidated accounts for the full financial year - unlike the previous year - total incoming orders in the Heidelberg Group fell slightly by 4 percent over the previous year.
Sales
In line with the increase in incoming orders, the adjusted sales figures also showed a similarly positive development, growing by 3 percent over the previous year to 3.2 billion Euro. This represented an increase of 5 percent after adjustments for exchange rate movements. This growth is in line with our forecasts from the previous year. Here, too, the higher than average growth of around 5 percent in our core Press operations to 2.8 billion Euro was particularly pleasing.
The development in sales after the end of the year represents further grounds for optimism. Following a very modest start to the year, sales from the second quarter onwards - i.e. after drupa - showed quarter on quarter growth.
The importance of the threshold countries, particularly in the Asia/Pacific region, was also reflected in increased sales last year. These countries now account for 25 percent of sales. By way of comparison, this figure was just 14 percent at the end of the 1990s.
Despite the altogether pleasing development in sales, we were not satisfied with the progress made in all sectors. Some sectors, including postpress, failed to keep pace with the general market trend. Moreover, some individual markets failed to live up to our expectations. Business in the USA, for example, was hampered by the weak dollar, while Russia was unable to repeat the strong growth of recent years.
Thanks to good incoming orders, we currently have a good order backlog. At the end of the financial year, on March 31, it was in excess of 1 billion Euro, thereby putting it some 40 percent above the same figure for the previous year. This ensured that our production capacities for the first few months of the new financial year were well utilized.
Turnaround in earnings
However, the most important aspect of the past financial year, Ladies and Gentlemen, was the fact that we achieved a turnaround in earnings despite all the uncertainties.
In addition to the growth in sales, this result is attributable not least to the Group's fundamental realignment, including the disposal of the two loss-making divisions, Digital and Web Systems. The sale of these two divisions was successfully concluded in the first few months of the 2004/2005 financial year.
We also pushed ahead with the Group's restructuring, tightened the organizational framework, streamlined procedures and achieved long-term reductions in capital tie-in and structural costs.
All of these measures enabled us to achieve our goal of significantly lowering the threshold above which we start making profits.
The profit from operating activities showed a marked improvement from 10 million Euro to 160 million Euro. Here, too, the trend over the individual quarters is particularly interesting. The first quarter and to a lesser extent the second quarter were still relatively weak. The third quarter, in other words the first without the two loss-making divisions, saw us achieve an operational return on sales of 8 percent, this rising to just short of 14 percent in the fourth quarter. Taken over the year as a whole, we achieved an operational return on sales of 5 percent. This is a quite remarkable result given the very difficult years that the print industry has experienced.
We were able to significantly improve on our after-tax result and returned to profit for the first time in three years. The net profit for the year was 61 million Euro. This represented a return on sales of 1.8 percent.
Chart 7: Improvement in the capital structure - free cash flow, equity
Ladies and Gentlemen, we were also able to improve our capital structure during the 2004/2005 financial year. The Heidelberg Group's liabilities were reduced quite significantly. Our free cash flow climbed to 154 million Euro despite the legacies from the discontinued operations and the Group's restructuring. This represents a significant improvement on what was already a good result from the previous year.
Generally speaking, we achieved long-term improvements in our financing structure during the 2004/2005 financial year. This was due primarily to the successful placement of an exchangeable bond with a volume of 280 million Euro and a further private placement. These instruments enabled us to profit from the attractive conditions on the capital market while also increasing our financing flexibility. Liabilities to banks, which had been almost 700 million Euro in the previous year, fell as a result by more than two thirds to just 216 million Euro.
Equity
Equity, which had been reduced significantly following the high loss in the preceding financial year, remained unchanged at 1.23 billion Euro. The equity ratio climbed from 29.1 to 33.9 percent.
Chart 8: Workforce levels
Ladies and Gentlemen, the number of employees fell as planned following the deconsolidation of the two divisions. The workforce of the Heidelberg Group averaged 18,679 employees over the year, some 4,000 fewer than in the previous year.
Developments in the individual divisions
Chart 9: Press division - initial chart
Ladies and Gentlemen, I mentioned at the start of my speech that the past year marked a turnaround for the print media industry - including Heidelberg. A number of factors came together as part of this process. We can see this clearly by looking at developments in the individual divisions
The demand for products and solutions for the prepress segment and, in particular, for the sheetfed, packaging and flexographic printing markets rose sharply a good year ago, coinciding with the arrival of drupa. The fact that we had a complete portfolio of products on exhibit at the trade show was therefore perfect. Our customers were impressed with the new products and product variations that we were launching at just the right time.
Chart 10: Press division - figures
This paid dividends. After adjusting for exchange rate movements, incoming orders received by what is our most important division by far - the "Press" division - increased to 3.1 billion Euro, a rise of 12 percent over the previous year. Sales also climbed by 7 percent - after exchange-rate adjustments - to around 2.8 billion Euro. The difference between these two figures indicates a significant increase in the order backlog. Despite some pronounced differences in the individual formats, we will still not see particularly high production capacity utilization over the coming months, though levels will be acceptable.
Chart 11: Press division - Speedmaster XL 105
Our new large-format Speedmaster XL 105 is setting new standards in terms of productivity, quality and cost-effectiveness, not least in high-run packaging printing. It has made a significant contribution to the increase in incoming orders and sales since its launch. Thanks to numerous integrated innovations such as non-contact sheet transport, printshops are now able to increase productivity by up to 30 percent.
Despite high costs for drupa and difficult circumstances on the market, we succeeded in increasing operating profits before special items by a good 20 percent to 183 million Euro. This represented a respectable return on sales of 6.5 percent. This result also reflects the success of our efforts to cut structural costs.
Postpress
Chart 12: Postpress division - initial chart
In the Postpress division, too, we presented an entirely new generation of products at drupa, thereby consolidating our position vis-à-vis our competitors. However, the market in the past financial year failed to take off to the extent originally expected. Since the United States is one of the largest markets for postpress products, the weak dollar was one of the main reasons for the subdued development.
Chart 13: Postpress division - figures
All in all, incoming orders in this division improved only slightly by 1 percent to 359 million Euro. Sales reached 348 million Euro, on more or less a par with the previous year following adjustments for exchange rate movements. Our efforts to increase efficiency brought about a significant improvement in the operating result before special items, increasing from a loss of 18 million Euro to a loss of 2 million Euro. We are confident that further positive movement on the market will also see us break through the profit threshold in this division during the current financial year.
Chart 14: Financial Services division
To enhance reporting transparency, we grouped together our sales financing activities into a dedicated division during the past financial year. Despite a drop from 41 million Euro to 26 million Euro, the result achieved by the Financial Services division was particularly pleasing. The decline in profits and revenue - in this instance interest earned - had been budgeted along these lines.
Streamlining the portfolio
Ladies and Gentlemen, the past financial year was not just a year of change in our traditional areas of operation. It was also a year that saw the realignment of the Heidelberg Group.
Even before the last Annual General Meeting exactly one year ago, we had already sold the Digital division to our joint venture partner Eastman Kodak. In August, just a few weeks after our shareholders' meeting, the Web Systems division was sold to Goss International Corporation, in which we now have a 15 percent holding. The sale of these two divisions has significantly improved Heidelberg's earnings situation.
Chart 15: Developments in the regions
Before I conclude this look back at the past financial year, allow me first to discuss developments in the individual regions. These differ from each other quite starkly.
We transact around 40 percent of our business in our most important region, Europe. The 2004/2005 financial year was the first time for three years that we had improved on the previous year's order levels. Incoming orders grew by an impressive 14 percent and sales by 7 percent.
However, following several years of rapid growth, the Eastern Europe region fell short of our expectations, with incoming orders growing by 8 percent and sales stagnating at the same level as the previous year. The prime reason for the leveling off in business is likely to lie in customers in a number of countries having already invested in very powerful machines in the run-up to EU accession, and in the lack of major investments in Russia.
The North American market is showing only cautious signs of recovery following the setbacks of recent years. Despite the strong dollar and the competitive disadvantages this brings with it, we were able to increase incoming orders in the North America region by 4 percent. This equates to a significant 10 percent once adjustments for exchange rate movements have been taken into account. Although sales in the second half of the year improved significantly, sales for the year as a whole still fell slightly short of the previous year.
The situation in the Latin America region continues to stabilize following years of difficult political and economic crises. This was also reflected in Heidelberg's incoming orders, which increased by 13 percent. Sales climbed by 5 percent.
We were once again able to win market share in the Asia/Pacific growth region despite the considerable weakening of the dollar against the Euro. This was particularly true for the booming Chinese market, but also for other important markets in the region such as Australia and Indonesia. This region remained the most important market of all for our large A1 format. Incoming orders in the region increased by 5 percent and sales by 8 percent after adjustments for exchange rate movements.
China
Allow me now to say a few words about China and the strategies that we are pursuing in this country. China, Ladies and Gentlemen, is the world's number one growth market for printing presses. The Chinese economy grew by more than 10 percent in 2004 and thereby matched similar growth levels in earlier years. The demand for printed matter is growing at a similar rate to the gross domestic product. This has once again seen the emergence of numerous new printshops during the past year. You may remember I stated earlier - and it is certainly worth repeating - that China already has more than ten times as many printshops as Germany.
Forecasts state that China will be the world's largest single market for printing presses by 2007. It therefore offers enormous potential. But China is not just one of our largest customers. It is also providing a base for small local competitors with corresponding cost advantages who are emerging slowly but surely on the small format press and postpress equipment markets. Consequently, the only way in which we can succeed long-term on the Chinese press and postpress market is if we also have production facilities there.
Chart 16: Heidelberg builds factory in China
That is why we have taken the decision to construct a production and assembly facility in the Shanghai Qingpu Industrial Zone. This industrial zone is home to around 600 foreign and domestic investors, primarily from the fields of precision mechanical engineering, the automotive supply industry, IT, the new materials sector and the bioengineering and pharmaceutical industries.
Chart 17: Opening up the Chinese growth market
We will begin constructing the new assembly site with a small core team. The factory will have a production area of 5,000 square meters and an additional 1,200 square meters of office space. Construction is planned to be completed by early 2006 and the facility will be leased by us.
Chart 18: New Heidelberg factory in China
As early as the start of 2006 we will begin producing relatively straightforward folders for the Chinese market in this new facility. Employee training and assembly of the first folders will begin before this, however, using a temporary building. We also plan to commence production of A3 small format presses for the Chinese market at the same site as soon as possible.
The investment volume in the Shanghai site will be just over 10 million Euro. The workforce will be increased over several stages in the medium term to an initial maximum of 200 employees.
The construction of our own production facility in China represents a key element of our strategy to gain greater access to growth markets.
Finally, allow me to look back at the past financial year and the development of Heidelberg's share price.
We are not satisfied with the share price, which at the end of the financial year, on March 31, was 12 percent below the price 12 months earlier.
We are confident, however, Ladies and Gentlemen, that the Heidelberg share price will reach its full potential following further improvements in our profitability and an improvement in the general economic circumstances. These include stronger growth in Germany and other major European countries - a development that would urgently benefit the whole of the economy, a further weakening in the Euro vis-à-vis the dollar and yen, and slower growth in raw material and energy prices.
Items on the agenda: Dividends, acquisition of own shares
Following this look back at the past financial year and examining how Heidelberg's share price has developed over the last year, I would like to discuss two items on today's agenda in some detail.
The fact that the past two years returned losses meant we had to forego a dividend. We are therefore delighted that we have now achieved a turnaround in earnings. The Management Board and Supervisory Board are proposing that today's Annual General Meeting approve a dividend of 30 cents per share.
Based on the closing price on the XETRA on March 31, 2005, this represents a dividend yield of 1.22 percent. While we are still a long way from the dividends being paid in the printing press industry before the onset of the current crisis, we have nevertheless laid the foundations for long-term increases in earnings in the future and thus for increased levels of dividend.
One further item on the agenda is the empowerment of the company to acquire its own shares. You awarded us these powers at the Annual General Meeting one year ago. So far, we have not made use of this authority. Since this power will expire on December 31, 2005, we are proposing that it be replaced by a new one.
We would propose that the Management Board of Heidelberger Druckmaschinen AG be empowered, up to December 31, 2006, to acquire its own shares up to a maximum of 10 percent of the current share capital. It would be possible to acquire the shares through the stock exchange or via an offer made to all shareholders. The acquisition of these shares is intended to bring benefits to both the company and its shareholders.
In addition, the proposal also envisages giving the company the means to acquire its own shares in order to exercise the stock options within the framework of the stock option program, as approved by the Annual General Meeting in 1999.
Strategy
Ladies and Gentlemen, So much for financial year 2004/2005.
During the current financial year we will be employing a clearly defined package of measures to stabilize the turnaround in earnings brought about during financial year 2004/2005 and to further reinforce our profitability.
We have also identified various areas of the print media industry which offer additional potential for boosting sales. We also plan to further improve and optimize our cost structures and thereby tap into additional potential earnings for the Heidelberg Group.
How do we intend to do this? By consistently committing ourselves to five key areas.
With our restructuring in place, adding corporate value to the Heidelberg Group is one of our primary goals.
Following the disposal of the Digital and Web Systems divisions, we are now concentrating our efforts on our core business activities, namely sheetfed offset, and all-in-one solutions for the high-growth packaging and label printing sectors. We have succeeded in defending our undisputed position as the world market leader in sheetfed offset. Our market share of over 40 percent is still higher than our nearest three competitors taken together. We are still the leading international solution provider in the print media industry. No other supplier can offer an end-to-end workflow management system that records and optimizes a full gamut of print-related work processes.
Chart 19: Integrated solutions
Our strategy of supplying integrated solutions sets us apart from our competitors. This not only applies for the entire value-added chain from prepress to postpress, but also for our equipment financing operations and our international network of Print Media Academies with their unique training courses. We have the world's most comprehensive service and sales network in the industry and are looking to build on this strategic advantage.
We have streamlined our structures and cut our structural costs by a total of 20 percent. This has brought about a marked improvement in our cost/profit ratio.
Our products and product innovations are geared to growth areas within the industry.
It is our declared goal to provide our customers with added value that will enable them to be successful on the market. Our customers' customers expect maximum flexibility, short production times, low prices and an increasingly unique range of products and services.
To meet these needs and expectations, we are offering more and more custom-made solutions using our application and process technologies. In the year under review, we developed and installed numerous customized presses.
One outstanding example of this is the longest sheetfed press in the world which we supplied to the United States a few months ago. This press includes a total of 16 printing, coating and drying units. We are also catering to our customers' wide range of needs in the label and packaging printing sector, a segment of the market that is enjoying strong growth and is largely independent of the economic climate. We can offer users equipment developed specifically for this market.
Our "Prinect" end-to-end workflow management system also gives our customers a marked competitive edge. This software package records and digitizes all print-specific work processes and thus helps to measurably improve the productivity and profitability of printshops. Prinect solutions are modular in design and are therefore ideal for automating business processes in both large-scale printshops and SMBs.
To ensure that our customers' processes remain efficient at all times, our systemservice facility monitors their Heidelberg machinery over its entire product life. Our customers can rely on us to provide well-trained service technicians who are quickly on-site, Internet-based Remote Service that can often eliminate problems online, and a round-the-clock support and spare parts service that uses logistics chains optimized worldwide for speed and reliability.
Investments in R&D and training will remain high
Chart 20: Heidelberg investments over the next three years
Heidelberg is not only the world market leader, it also leads the way in pioneering technological developments in sheetfed offset presses. To maintain this leading position, we will be investing more than 500 million Euro in new production plant and in excess of 600 million Euro in research and development over the next three years. Combined with expenditure on training, we will therefore be investing around 10 percent of sales in safeguarding our future over the years ahead.
Pact concluded for safeguarding the future
Chart 21: Activities for boosting profitability
Ladies and Gentlemen, we have initiated a number of activities to increase profitability over the next few years. These primarily comprise measures to boost sales, cut costs and reduce capital tie-in.
Safeguarding the future and cutting manufacturing costs are key. After long and difficult negotiations, we concluded a framework agreement with employee representatives in April 2005 which had the aim of safeguarding the future of our company. This agreement, which extends up to 2008, will secure jobs, lower personnel costs, and improve competitiveness at our German sites.
The key elements of the agreement cover an extension of working time by 5 percent with no additional remuneration, the discontinuation of payment for overtime work, and a reduction in bonus payments. The Management Board and leading executives are also foregoing remuneration to a comparable extent in order to reduce personnel costs. These measures will enable Heidelberg to make annual savings in personnel costs which will rise to around Euro 100 million by 2008 and will then be maintained at this level each year.
Ladies and Gentlemen, this pact to safeguard the company's future should not be viewed solely from the perspective of the company, but is rather a classical win-win situation. In return for concessions made by employees, we have pledged up to the year 2008 not to make any redundancies for operational reasons, not to undertake any significant relocations of production from Germany, and to maintain the same level of investment in research and development and in training. In addition, part of the unpaid working time will go towards a company pension module for employees.
Earnings potential through improvements in production costs and processes
In addition to savings in personnel costs, we will continue to improve our cost structures through our "High Performance Production" efficiency enhancing project, or HPP 2006 for short. This project has been running for two years and is designed primarily to improve productivity in our production plants.
This is geared to reducing stock levels and cutting throughput times. It also enables us to be faster and more flexible in responding to our customers' needs. The HPP project is expected to be concluded in the coming year. Costs of 9 million Euro will bring long-term savings in the double-digit million Euro range.
Chart 22: Prospects for financial year 2005/2006
During the current financial year we expect to see moderate growth in sales on a comparable basis. In the first half of the year in particular we will profit from our high order backlog.
The new financial year got off to a good start. Incoming orders in the first three months were satisfactory. We will announce detailed information on the progress made in the first quarter on August 2.
Ladies and Gentlemen, let us take a closer look at the prospects for the future. Assuming an anticipated moderate growth in sales for financial year 2005/2006, we will profit from the further recovery in the sector in the industrialized states but also from the consistently high growth rates in the threshold countries. We will watch these countries closely over the coming years, in particular China. In the industrialized countries, we anticipate the recovery will free up the investment backup that has accumulated over the crisis years and will generate higher order levels.
Heidelberg has the means to offer the best possible solutions to a wide range of customers in very different regions - whether they are SMBs or industrial printers, and regardless of whether they are located in industrialized nations or threshold countries - depending on their particular needs and level of development. We have excellent market opportunities in the threshold countries in particular, thanks not least to our tightly meshed sales and service network.
During the current financial year, we will exceed last year's operating profit of 167 million Euro and the after-tax profit of 61 million Euro. In addition to higher sales, we will also benefit from our efficiency enhancing measures and the deconsolidation of the loss-making Digital and Web Systems divisions. Furthermore, some of the savings in personnel costs that we agreed at the end of April will come into this year's accounts. However, results could be dampened by exchange rate movements and the prices of energy and raw materials.
It is our declared goal in the years that follow to return the company to its previous levels of profitability. Our projects to boost corporate value will make a significant contribution in this regard.
You, our shareholders, will also profit from increasing annual surpluses. We will continue in future to base our dividend payments on the interests of the capital market. We are looking to cover our capital costs over the current financial year and, in subsequent years, to achieve a return higher than the weighted capital costs of 10 percent.
Committed to innovation
Ladies and Gentlemen, as in the past, additional product offensives are needed to this end. The competition in the printing press industry, Ladies and Gentlemen, will not be decided on the basis of exceptional quality, low prices and good service alone, but will also depend very heavily on a supplier's commitment to innovation.
Heidelberg successfully defended its role as innovation leader in the industry over the past year. We were able to do this because we systematically maintained our level of investments in research and development and, consequently, in Heidelberg's future, throughout the last few difficult years.
During the past financial year, we have invested almost 200 million Euro or around 6 percent of our sales in research and development. A look at our many product innovations at drupa confirm that these investments have paid dividends. Series production of these innovations is now underway.
I have already spoken about the new Speedmaster XL 105. Start of series production commenced at the start of the current financial year. We are pleased with capacity utilization levels.
Chart 23: Market introductions FY 04/05
Speedmaster CD 74-P
We have also successfully launched a number of additional products on the market.
Our new Speedmaster CD74-P is equipped with a perfecting system and provides users with an increase in productivity of 15 to 25 percent compared with conventional medium-format perfecting presses. It enables rapid changeovers between paper and cardboard and between straight and perfecting modes. This press is targeted at commercial printers covering a wide range of printing stock, and at label and packaging printers who also print the reverse side of packagings, for example printers operating on the cosmetics market.
As of summer 2005, we will also be supplying the Speedmaster CD 74 as a long perfecting press with up to ten printing units and an additional coating unit in series production. In fall this year, a British printshop took delivery of a customized Speedmaster CD 74 with no less than twelve printing units - making it the longest press in the medium format sector.
Chart 24: Postpress Stahlfolder TH/KH
Series production of our new generation of Stahlfolder TH/KH folders began in September 2004 and has contributed to a substantial increase in our market share in the sector, ensuring high capacity utilization levels at our domestic production facilities in Ludwigsburg. Thanks to the number of variations on offer, the folders are ideal for printshops of all sizes as well as for postpress specialists. They also enable customers to specialize and offer a unique product portfolio.
Chart 25: Postpress Stitchmaster ST 350
Series production of the Stitchmaster ST 350 began in November 2004. This unit is a flexible and cost-effective saddlestitcher for printshops and postpress specialists. Its outstanding production levels make it a particularly attractive unit which combines high quality and reliability coupled with exceptional operating comfort. We manufacture this product in Leipzig at cost levels that are very favorable for domestic circumstances.
Chart 26: Postpress Varimatrix 105 CS
The new Varimatrix 105 CS die cutter was launched at the start of May and is the first product to arise from the company's cooperation with a Taiwanese manufacturer. This product for cutting and stripping expands our portfolio of solutions for the growing packaging market and is a cost-effective entry-level solution for packaging printers. Heidelberg presented the Dymatrix 106 CSB die cutter, a machine for complex and demanding applications, as early as drupa 2004. The product and solution expertise and the production facilities for manufacturing these machines - which are used for producing folding cartons for the packaging industry - are located at Heidelberg's site in Mönchengladbach.
Chart 27: Prinect Workflow
In the field of prepress and workflow software, the Prinect system solution innovations formed a key focal point of our drupa presence and many of our in-house fairs during the year under review. The sustained interest on the part of our customers showed that we are on the right track with this approach. The fact that thousands of customers have already taken part in our Prinect Experience Tour and are able to follow the complete production process for a virtual print job step by step underlines the considerable interest shown by users worldwide. Since Prinect - like our hardware - is of modular design, small and midsize printshops are also able to assemble a suitable and profitable solution and add to this later as their needs grow. Although we no longer have any production facilities in Kiel, it is still home to our prepress software specialists.
Ladies and Gentlemen, why am I focusing on our German sites?
I am firmly convinced that we will continue to add value at our German sites that will satisfy the capital market's profitability requirements and will safeguard jobs in Germany. After all, Germany can only be successful in future if it continues to be a source of added value.
Ladies and Gentlemen, innovations, products, market share and satisfied customers would not and could not exist if it were not for Heidelberg's workforce. We have asked a lot of our employees over recent years. They have responded to these challenges with flexibility and commitment.
I would like to take this opportunity to express my gratitude to all our employees for the particularly high level of commitment they have shown in economically difficult times and in the face of many different challenges.
My gratitude also extends to the employee representatives whose chairman, Mr. Josef Pitz, is taking part in his last Annual General Meeting as a member of the Supervisory Board. I wish him health and happiness in his well-earned retirement. He will be succeeded in his post by Mr. Rainer Wagner, with whom I look forward to working closely in the years ahead.
On behalf of all other Heidelberg members of staff, I would like to thank the organizing team for arranging our first Annual General Meeting here in the Rosengarten in Mannheim so successfully.
So a warm thank you to our AGM team and thank you to you, Ladies and Gentlemen, for your attention today.
Chart 28: AGM title
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