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Edited Transcript of HDD.DE earnings conference call or presentation 7-Feb-19 1:00pm GMT

Q3 2019 Heidelberger Druckmaschinen AG Earnings Call

Heidelberg Feb 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Heidelberger Druckmaschinen AG earnings conference call or presentation Thursday, February 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dirk Kaliebe

Heidelberger Druckmaschinen Aktiengesellschaft - Deputy Chairman of Management Board, CFO & Head of the Financial Services Segment

* Rainer Hundsdörfer

Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer

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Conference Call Participants

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* Aliaksandr Halitsa

Hauck & Aufhäuser Privatbankiers AG, Research Division - Equity Analyst

* Eggert Kuls

Warburg Research GmbH - Senior Analyst

* Malte Christoph Schulz

Commerzbank AG, Research Division - Industrials Analyst

* Peter Rothenaicher

Baader-Helvea Equity Research - Analyst

* Richard Schramm

HSBC, Research Division - Analyst

* Stefan Augustin

Pareto Securities, Research Division - Analyst

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Presentation

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [1]

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Thank you very much. Ladies and gentlemen, I'd like to welcome you to our Q3 call from Wiesloch. We are nearing the end of a very eventful financial year, and my fellow board member, Dirk Kaliebe, and I would like to revisit the highlights of the last 10 months.

In doing so, I would like to focus on how important the many strategic measures are for the future of Heidelberg. Besides making great progress in rolling out our digital agenda, we announced just 2 weeks ago that we are willing to extend our cooperation with our long-standing Chinese partner, Masterwork. This would represent something of a coup in the package printing sector, which is incredibly important for the future, particularly, on the huge Chinese packaging market.

Masterwork is the world's second largest manufacturer of post-press equipment in the packaging market for folding cartons and the biggest supplier in the Chinese domestic market.

Until now, Heidelberg has marketed Masterwork's portfolio worldwide with the exception of China itself and Japan as part of a distribution collaboration.

Given how well this arrangement has worked, it was time to consider taking our cooperation further. These strategic and operational objectives and advantages of this plant-enhanced partnership are as follows: consolidation to existing partnership with Masterwork; improving access to packaging customers by means of a fully comprehensive solutions portfolio; reinforcing the position of Heidelberg in the growth market of China, in particularly, in the packaging market; and making the production site of Heidelberg in Shanghai more competitive by increasing local sourcing and quality assurance with the help of our partner.

Masterwork was and is a growth-focused, financially-strong partner as like Heidelberg aims to grow in the packaging sector.

By consequent usage of the strength of both partners, Heidelberg with sales and service and came with operations and RDs, both partners could really make the most of their strengths and thus enhance the development together, achieve faster growth on the market and share risks.

So its intended capital participation, Masterwork also wants to safeguard the global distribution network for its products as Heidelberg's sales operations represent an important and growing share of the company's total sales.

By investing in newly issued shares, Masterwork also intends to strengthen the capital base at Heidelberg, as a sign of its confidence in the company's corporate strategy.

We are now taking the necessary steps to ensure the planned capital measures and pending Masterwork's participation in our company can be implemented in good time by the end of March respective within the current fiscal year.

The move would also give us approximately EUR 69 million, with which we can strengthen our consolidated balance sheet and finance plan future investments.

The rollout of Heidelberg's digital strategy is on track and making good progress. Until now, a total of 26 contracts have already been signed for the new subscription model, almost 10 machines are already in use, delivering the promised outstanding performance for our customers and, of course, also for Heidelberg. As a result, our sites are firmly set on the target of 30 contracts for the year as a whole. This corresponds to an order volume of approximately EUR 150 million.

Serious production of the Primefire digital press has started with customers in Germany, Switzerland, the United States and China already utilizing the first Primefire 106 machines with inkjet technology to serve the packaging market.

We will soon be launching an entry-level Labelfire model on to the market with a view to tapping into additional sales potential.

It is worth reiterating at this point that the market for digital printed labels is recording double-digit annual growth rates.

The Heidelberg Digital Unit, which is exploring new ways to market equipment and consumables, has been set up and tasked with considerably growing the e-commerce sales from the present level of just around EUR 100 million to around EUR 300 million.

Future growth also will be driven by the sector's largest and most advanced innovation center, which was opened at our main site in Wiesloch just a month ago, in December, and employs around 1,000 members of staff.

Furthermore, we delivered the 1,000th Heidelberg Wallbox, a charging system for electric vehicles. It is incredibly short space of time. You can see the outstanding customer feedback on the websites of well-known online dealers and in discussion of forums dedicated to eMobility. In the medium to long term, Heidelberg aims to generate approximately EUR 50 million in additional sales within this product and others like it.

By contrast, in operational terms, there are ups and downs. Despite growing economic uncertainties on global markets, the development of our industry is generally stable. This applies first and foremost to our core markets in Germany, the United States and, of course, China. This has reflected in the solid order backlog of EUR 804 million as of December 31, 2018. Consequently, our overall annual forecast is still very much in sight even though, we like the whole of the mechanical engineering sector, have had to cope with sometime significantly longer order processing times to noticeable bottlenecks affecting the supply of [bot] in parts for the assembly. This meant that in December alone, several orders in Germany had to be postponed from the third quarter to the fourth quarter. However, we are confident we can handle the plant volume by our year-end. We have all the parts in-house by now. Nonetheless, we will have to factor in higher expenditure, owing to the additional work that will be necessary because of these orders have been extended.

Consequently, sales in 2018, '19 are expected to show moderate growth as mentioned earlier. As things stand at present, the EBITDA margin is likely to be at the lower end of the forecasted range of 7.0% to 7.5%.

I now would like to handover to Dirk Kaliebe, who will provide further details of our financial figures.

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Dirk Kaliebe, Heidelberger Druckmaschinen Aktiengesellschaft - Deputy Chairman of Management Board, CFO & Head of the Financial Services Segment [2]

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Yes, also welcome from my side, and let me guide you through the numbers and through the activities we have had.

Based on our figures for the first 9 months on the financial year, we are on course to achieve our targets for the year as a whole. Important milestone has been achieved as my colleague has already explained.

The scheduled transaction with Masterworks will reside after completion of strengthening of our capital base and help and accelerates the financing of our strategic agenda going forward.

Regarding the business in the regions, we can confirm a broadly stable environment, especially in our key markets as Mr. Hundsdörfer has presented.

Nevertheless, we feel that customers became more cautious about business outlook and, therefore, closing and negotiating deals, tasks taking a little bit longer.

After 9 months, incoming orders totaled to EUR 1.9 billion, which is matching the previous year's figure. In the third quarter, we experienced in the month of December some postponement of orders into January, especially in Germany and certain part of China. In comparison to the first, third quarter 1 year ago, we also lost orders volume in the U.K. due to the obvious reason and also in Italy. Here, the reason was an out-phasing of the governmental funding program.

The order backlog has increased by 16% to about EUR 800 million, especially due to service and subscription contracts and is a sound basis for the expected year-end ready in the fourth quarter.

Sales after 9 months improved to 2.7 -- to EUR 1.7 billion. By the end of the third quarter, supply chain bottlenecks, especially with regards to mechanical components and parts have intensified in a way that we have not been able to shift all scheduled machine in time. Therefore, Q sales fell below the previous year figure of EUR 579 million. After talks with our main suppliers, we think that we can catch up in production and should by the end of the year be able to deliver all scheduled machines to our customers.

As a consequence of the missing volume in Q3, EBITDA, excluding restructuring in Q3, fell short on the previous year and stood at EUR 39 million.

After 9 months, total EBITDA declined slightly to EUR 101 million compared to EUR 105 million. This was, in particularly, due to the increased personnel costs as a result of the collective bargaining agreement as well as less capitalized R&D costs. Consequently, the EBITDA margin of 6% fell slightly below last year's level for the first 9 months. EBIT, excluding restructuring result after 9 months, amounted to EUR 49 million after EUR 54 million a year ago.

The restructuring result of minus EUR 9 million is linked primarily to early retirement plans and is expected to sum up as planned and already communicated to around EUR 20 million by the end of the year.

The financial result was burdened temporarily with EUR 4 million by the early partial redemption of the corporate bond in Q1 this financial year and totaled to EUR 39 million. As a consequence, net result after taxes after 9 months was almost balanced at minus EUR 2 million. The previous year's net results stood at minus EUR 10 million, mainly due to a negative tax effect from the U.S.

At approximately EUR 50 million, operating cash flow was clearly positive due to the increase of net working capital linked to the supply chain bottleneck. Higher investments for the ramp-up of digital printing and investments of approximately EUR 65 million free cash stood at minus EUR 120 million in the first 9 months.

Investments included in the construction of the new innovation center at Wiesloch-Walldorf side and also ramp-up of subscription.

A brief look at our business segments. The higher sales volume against prior-year items, primarily, from the segment of Heidelberg Digital Technology. Here, sheetfed digital print and label print contributed. On the other side, especially in this segment, higher costs for wage increase, less capitalized R&D and an unfavorable sales mix put a burden on the operating result.

In the segment Heidelberg Lifecycle Solutions, sales and operating results were stable on the previous year level.

Coming to the balance sheet. As already said, net working capital was on financial year-end at EUR 656 million due to the mentioned reasons. We have made use of our comfortable cash position and financed the partial redemption of the bond from cash on hand in July 2018 and we will also finance the planned acquisition from liquidity for MBO. It's EUR 360 million equity increased compared to the annual reporting date of end of March 2018. This was due to the domestic pension discount rate, going up to 2.3% at the balance sheet date.

Equity ratio, therefore, was at 16%. We expect the technical implementation of the upcoming capital increase within March so that this figure would absolutely improve by about EUR 65 million by the end of the year.

Net debt increased due to the negative free cash flow, was a temporary negative effect also on leverage, which was 2.1 and will, therefore, slightly be above our own target of below 2x.

The well-balanced financial framework of, in total, EUR 725 million without any major maturities until 2022 also allows us to promote new business models and make targeted acquisition going forward. Financial framework, therefore, is stable and well established.

Let me look on the outlook for the fourth quarter. We expect sales volume of above EUR 800 million, which will lead us to an EBITDA margin from today, 6% to above 7% as mentioned. The net result for the group as a whole will be positive. Free cash flow is expected for the full year to be on the level as of December based on the assumption that the sales volume -- the majority of the sales volume will be done in March and, therefore, will convert from inventories in accounts receivables and the cash and collection will then be taken in May next financial year.

So far, my explanations. And now fire free to your questions.

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Questions and Answers

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Operator [1]

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We will now take our first question from Eggert Kuls of Warburg Research.

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Eggert Kuls, Warburg Research GmbH - Senior Analyst [2]

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Regarding the free cash flow, so I understood it right, I think, that at the end of March, you expect the free cash flow to be on the similar level, when in December so that it will be roughly minus EUR 120 million. Is that right?

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Dirk Kaliebe, Heidelberger Druckmaschinen Aktiengesellschaft - Deputy Chairman of Management Board, CFO & Head of the Financial Services Segment [3]

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Yes. All right.

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Eggert Kuls, Warburg Research GmbH - Senior Analyst [4]

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Okay. So going forward, I think, you should do a lot to bring working capital down. What is your current estimate? How long does it take to bring the working capital down to a normal level? And which requirements are needed to reach that? So it's not only up to you, I think it's also due to bottlenecks in the supply chain. And do you have some visibility there that things could improve going forward?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [5]

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Yes, Mr. Kuls. Obviously, we do have a lot of experience of net working capital management over the last couple of years. We have had ratios of net working capital of above 35%. We have now come to a point where we are trading between 27%, 28% as of sales. And we do have a program, which has decreased the net working capital up and running. We just have to keep in mind that with the ramp-up of the digital business, we do have counter measurements, which we have to compensate for and, therefore, we know what the challenges are and we have the program up and running in every corner of the company to reduce in absolute or specifically also in percentage-wise net working capital further. What I have said for this fourth quarter is mainly that the sales volume will come in March and cash and collection will, obviously, be done within 30 to 60 days. Therefore, the money, which we will receive, will be coming in April, May. And the other trend, why it was as negative was the planned investments in the innovation center and the ramp-up also of subscription. So no new issue of the bad ones. Being aware about some challenges and knowing that we have to squeeze the assets further, not only net working capital, but also in the remaining part of the company.

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Eggert Kuls, Warburg Research GmbH - Senior Analyst [6]

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Okay. Regarding the upcoming business year, I know it's a little bit early, but if you get the money for the shipped machines, I think, it's very probable that you should generate a positive free cash flow in the next fiscal year. What is your expectation there?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [7]

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I wouldn't love to say, it's too early to judge about the next financial year. But if you look into the last 5, 6, 7 years, we always have had seasonality in the business, but constantly, we have reduced net working capital. The other effect, what I would just like to highlight, is we are still ramping up digital business, and we are still ramping up new business models. This, obviously, also carry some capital bounded. We have to balance this one, and we will do our best to also squeeze the assets further, while obviously we are not intending to have these numbers in the second year and the target is always clear to reduce it further.

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Eggert Kuls, Warburg Research GmbH - Senior Analyst [8]

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Okay. And can you please remind me the unit price for the Wallbox?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [9]

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It's -- we ordered on the online channels and depending on the configuration, it's around EUR 300 to EUR 500.

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Operator [10]

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We will now take our next question from Aliaksandr Halitsa.

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Aliaksandr Halitsa, Hauck & Aufhäuser Privatbankiers AG, Research Division - Equity Analyst [11]

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I'd like to ask on the Primefire, Labelfire. If you could update us on the current production run-rate? And how many have you already produced of those machines? And how many were already installed or are being installed currently? That's the first one, and then I'll continue after that.

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [12]

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So Primefire, of course, we started slowly first with 4, then 8, then 12. So the run-rate will be in a few months 1 per month. We target 4. Primefire, we installed about 4 -- no, at Labelfire, we produced 15, 18. I think there are 18 in the field by now. I have to check the exact number, but they're ramping also step-by-step. We have and that will boost, I think, the sales significantly also a entry-level Labelfire to expand our market, so we'll see also there some good development in the next 3 to 6 months.

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Aliaksandr Halitsa, Hauck & Aufhäuser Privatbankiers AG, Research Division - Equity Analyst [13]

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And then the target that you're stating here, the steady contracts by the year-end, is that or does that refer to a signed contract or booked contract that you have already in your order intake?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [14]

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Signed contracts.

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Aliaksandr Halitsa, Hauck & Aufhäuser Privatbankiers AG, Research Division - Equity Analyst [15]

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Signed contracts.

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [16]

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Yes and of those 26 we have right now, 10 machines are in production where we get already the revenue stream flowing and the performance is quite good. Customers are very happy with the output. And so the experience is quite good. The goal by the end of this fiscal year by end of March is to have those 30 contracts signed and this looks pretty good.

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Aliaksandr Halitsa, Hauck & Aufhäuser Privatbankiers AG, Research Division - Equity Analyst [17]

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And just to confirm, you mentioned 10 machines are already in the field producing revenues, based on subscription model?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [18]

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Yes, absolutely, 10 are already running.

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Aliaksandr Halitsa, Hauck & Aufhäuser Privatbankiers AG, Research Division - Equity Analyst [19]

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And then the last one is, it's hypothetically, you would -- so you mentioned already that you have 22 subscription contracts booked as the order intake. If we were to consider that those machines were basically built on the normal scheme, not the subscription model, but on the pure as normal equipment-only deal, what would be the order intake then in the kind of the value of the order intake? For the subscription model, we assume it's a rule of thumb 1 million per machine over 5 years.

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [20]

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Yes, so the average price or the average volume of 1 machine is around about EUR 1.5 million and contract over lifetime is about EUR 5 million. So it's a significant additional business, which we achieved with a subscription model over the 5 years. We get and that's the beauty of it we get the whole life cycle business, which we usually don't get it today in the transactional business. You get only the machine. That's it.

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Aliaksandr Halitsa, Hauck & Aufhäuser Privatbankiers AG, Research Division - Equity Analyst [21]

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But I'm kind of trying to understand what is the value of the kind of equipment in this contract, if we kind of were to assume that those 22 subscription contracts were based on the -- basically pure equipment deal? So if we take 22 subscription contracts, then we apply EUR 1 million per year, over 5 years, then you get to EUR 110 million of order intake. If this kind of deal was not subscription deal, but purely equipment deal, what would be the order intake then?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [22]

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That's on 22 contracts, EUR 35 million.

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Operator [23]

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We will now take our next question from Malte Schulz of Commerzbank.

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Malte Christoph Schulz, Commerzbank AG, Research Division - Industrials Analyst [24]

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First of all, a little bit, I think about the client sentiment, something -- it seems at least to me that kind of there's a little bit more reluctance of some clients, particularly, in Germany to order machines. Is it something you're concerned to not just let -- just some push-outs into next quarter, but we will see some push-out a little bit to continue as we see a little bit more slower demand? And then other question also now, I mean, when we look at our guidance you already stated that you go -- that you aimed for the lower end of the guidance, but it's still, I mean, if you consider that you already had some bottlenecks to solve, it still sounds quite aggressive to reach and at least the 7% margin on, let's say, EUR 820 million of sales. So what you kind of target probably for Q4?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [25]

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So first of all, on the market side, the markets are still pretty much intact and stable. All the projects are good, even there are new projects coming up. What is true, it takes a little bit longer to close those deals, in particular, in some areas, of course, the U.K., everybody is waiting how the Brexit is going to turn out, but I'm very confident as soon as that happens, as the uncertainties gone and everybody knows, which way business has to be done, it will be back very quickly. Then, of course, South China is also one of those areas, where we have some reluctance in closing those orders, but there's no budgets being canceled. It's only that they drag out a bit, but we can even close order there with a little more effort. So we don't see a crisis at all. The market has lost some dynamic, which would come -- or which will come back out very certain as soon as those issues probably are resolved or just have happened. The uncertainty is always what scares people. Two, the sales volume to the end of the year, we have pretty much all the components we need to finish our fiscal year in-house or underway. We did a lot of work the last 2 months -- or the last 3 months to line up all our suppliers. So we don't have any shortages in components anymore and Heidelberg has a pretty good track record to finish the last -- to finish the year and the last quarter strong. So I'm very confident they'll pretty much meet our targets, meet the top line and when the top line works, the bottom line works as well.

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Malte Christoph Schulz, Commerzbank AG, Research Division - Industrials Analyst [26]

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Okay. Understood. But when you look a more little bit midterm also, I mean, (inaudible) your midterm targets and it's kind of what happened to make you feel more comfortable to maybe do a guidance raise at least on the margin side? You don't have to say, if you want to do it now, like what was an excellent fiscal year, but just what would kind of would be the point would you make you confident enough to go maybe from 7% to 7.5% to something like 8% and 8.5%.? Would you need a specific already, specific subscription level? Or is it something you can also imagine in a situation where you have mostly bread and butter business and only tiny subscription base?

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Dirk Kaliebe, Heidelberger Druckmaschinen Aktiengesellschaft - Deputy Chairman of Management Board, CFO & Head of the Financial Services Segment [27]

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I would say, there's nothing changed concerning the assumption, which we have had in summer this year. We do have a mix issue, which has ramped up of the digital business on the line side, meaning Labelfire, Primefire, which is an increase in the subscription business and ramping up new business models. And in addition, Mr. Hundsdörfer has explained also new business like eMobility. So out of additional volume, we assume to get margin out of it and last, but not least, our improvement program, it is up and running. So the combination of more volume and new business model with cost discipline is the basis for this assumption.

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Operator [28]

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We will now take our next question from (inaudible) of Metzler.

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Unidentified Analyst, [29]

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First one is on working capital. And could you give us an indication what do you expect for working capital? And how it will develop in Q4? So will it be -- also be just stable? Or will you see a significant, which will be in assets generation, you aspiring a significant improvement in terms of working capital?

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Dirk Kaliebe, Heidelberger Druckmaschinen Aktiengesellschaft - Deputy Chairman of Management Board, CFO & Head of the Financial Services Segment [30]

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As I've said, it's depending on the delivery by the end of March. If you assume that the maturity of sales will be done as planned, we will convert unfinished and finished good into sales and where we see accounts receivable out of it, cash and collection will then be done in April and May. Therefore, our net working capital might be neutral and the swinging effect might be the backlog with the down payments, which we might receive. But it is just a timing issue and no structural issue in itself.

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Unidentified Analyst, [31]

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Okay. But then in turn, Q1 must be pretty strong then?

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Dirk Kaliebe, Heidelberger Druckmaschinen Aktiengesellschaft - Deputy Chairman of Management Board, CFO & Head of the Financial Services Segment [32]

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As we've said it in all other years, in Q1, we will have cash and collection and then we will start part of the production and then it depends what volume we're going to do in Q1. But, therefore, I would say, we are not worried about the net working capital. We know about the driving factors. We know where to steer it and how to squeeze it further to get out the money, which we have up to now as capital bounded in the balance sheet.

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Unidentified Analyst, [33]

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Okay. The next one is on your margin and your specified guidance to be lower end. So you do not expect to recoup those shortfalls you have seen in Q3 that they might be recouped in Q4?

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Dirk Kaliebe, Heidelberger Druckmaschinen Aktiengesellschaft - Deputy Chairman of Management Board, CFO & Head of the Financial Services Segment [34]

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Partly yes and no as we are still by the end of December at an EBITDA margin of 6%. We still have to increase for the full year to 7% by 1%. And as we have tried to explain what the higher volume coming in Q4 and the additional volume, we assume that this will make up the increase from 6% to 7% for the full year, landing at the lower end of the guidance.

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Unidentified Analyst, [35]

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Okay. I'm just wondering because sales-wise, you don't see any change. However, on the margin side, you turned a bit more cautious. So I just -- I'm just wondering what is the cause here.

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Dirk Kaliebe, Heidelberger Druckmaschinen Aktiengesellschaft - Deputy Chairman of Management Board, CFO & Head of the Financial Services Segment [36]

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We have always said that we're going to see slight increase in top line against the previous year that we are targeting between 7% to 7.5% EBITDA and that we're planning to be positive against and that resides against the previous year. These things in the end have not changed. We are in the bandwidth. We just said most likely the uncertainties around, we would end up at the lower end of the bandwidth of EBITDA having 1 sector here, 1 sector there, but then wait -- let's wait for the end of the year and then explain afterwards where we have ended and what might be the reasons.

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Unidentified Analyst, [37]

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Okay. And then on your midterm goals, regarding sales development in order to get or to get close to the EUR 3 billion. What will be the catalyst or what are you seeing that makes you that confident that within the next 3 years, you will achieve EUR 500 million of additional sales because if we look at the orders, if we look at the current momentum, it's more or less flattish? So what catalyst will drive those sales improvement because if we look at subscriber models, I think they are more back-end loaded. So is it then the ramp-up of those digital machines only or is it of another catalyst there?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [38]

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It's basically the 3 area where we expect the additional growth in the next years to come. The one thing is the digital printing machines and the ink when they start producing, it's going to add significantly to top line and margin and, of course, unfortunately, also, like subscription, this business with the digital presses is also somewhat back-end loaded. You first need to get the machine into the field and then, as our customers start operating them, the ink is flowing and adding to that with the estimation that after like 4 years or so, the sales in ink will super exceed in the sale of the machine. That's the nature of such a business. The similar effects we see with the subscription, as remember, we started with a slow ramp up on purpose. We need to test the model. We need to make sure we can support it in the field. We needed to build the necessary infrastructure. All that is happening right now, that's why we said 10 contracts last fiscal year increased to 30 by the end of this fiscal year and then further ramp-up in the coming year. So it gains momentum as we go and not linear, but exponential. And then last but not least, there are in all these additional activities with, for instance, eMobility and the Wallbox we've launched in -- as the old Heidelberg brand is only part of that. We're also supplying this charging technology also as Tier 1 and Tier 2 supplier to the automotive OEMs. So also that is a business and also there we expect like the EUR 50 million additional sales over the next 3, 4 years. And this if you add altogether, digital machines and subscriptions and Lifecycle and e-commerce, of course, as well, these additional activities, this should bring us to those EUR 3 billion we're still have in focus. All the measures, all the activities are started and those show as they ramp up.

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Unidentified Analyst, [39]

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Okay. So it's more kind of hockey stick development in terms of sales growth, and you are still on plan?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [40]

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Yes, of course, because it has to do with the nature of the business, first the machine, then it's machine being operated by the customer needs to be in full production, then the ink will flow that has almost a certain delay. But then at the end, the nice thing, it comes automatically.

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Operator [41]

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(Operator Instructions) We will now take our next question from Richard Schramm of HSBC.

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Richard Schramm, HSBC, Research Division - Analyst [42]

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I have 2 questions, please. One on the Masterwork agreement and the new shares. So just for the calculation reason, the 8.5% should then be equivalent to 25.7 million shares. Is this correct? So could you remind us what's the current share base that we have to take into consideration here because I'm not sure if I have the right number here available. And looking forward, the -- intensified cooperation between you and Masterwork, which obviously implies also that Masterwork will deliver certain parts or components for you in China. Could you give us an idea what volume we talk about and what's the time frame is when these deliveries start, so that we can get a feel on the possible effects on your top and bottom line from this? And if they are possibly even more in the pipeline from this cooperation also for you on a global scale that you can get really additional sales because there was already a sales agreement as far as I know. So I wonder where then this certain additional input should come from, so what the fantasy is in this closer cooperation?

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Dirk Kaliebe, Heidelberger Druckmaschinen Aktiengesellschaft - Deputy Chairman of Management Board, CFO & Head of the Financial Services Segment [43]

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Let me to the first question. Today, we are about 278 million of shares. Masterwork is supposed to sign 25.7 million of shares. Summary will be 303 million shares. They are off. They will have 8.5% after the capital increase.

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Richard Schramm, HSBC, Research Division - Analyst [44]

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To the cooperation, let's first look at the market side. We have a long-standing sales agreement already with Masterwork, and Heidelberg is selling the Masterwork's product outside of China and Japan with their own sales organization and we already announced the motivation for Masterwork's to secure their sales channel. We are selling already more than 50% of their production and it will become more as we go. For Heidelberg, it's very important to have this whole process aligned from printing to the finished packaging product. So we can offer worldwide solution, which is a comprehensive solution for the whole production, which is very important when you think about workflow to connect all these processes into the Heidelberg workflow. So it's a very important thing to improve our performance and grow the packaging market on that end. What is also helpful, of course, it will open us some doors, even we are pretty well underway in China, but it'll help open some doors as well where Masterwork is already in a plant to bring also our printing equipment in front of the post-press machinery, which is there. So it makes a lot of sense from marketing -- from a market point of view to secure this relation. On the manufacturing side, as you know, Heidelberg has a sophisticated, very competitive plant in China. However, we still have room to improve when it comes to localization and together with the Chinese partner, it's easier to localize to achieve really competitive prices for the components and, of course, to have more inroad to assure the quality we required. So maybe we're talking about even a joint venture for manufacturing that could help, but that is still open in the discussion.

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Richard Schramm, HSBC, Research Division - Analyst [45]

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Especially the last point, I think this refer to the remarks which were written you might consider also participation in the Masterwork itself, so it's kind cross-holding you (inaudible) this year.

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [46]

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That is, of course, in discussion. We haven't decided on that, but when it comes to really secure this relation, this might be a potential solution. But it's too early to talk about it. We are discussing that and if it makes sense, if it is beneficial, we might do it.

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Richard Schramm, HSBC, Research Division - Analyst [47]

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Okay. But this [checkable] increase just to confirm this, this is already fixed, so this is more or less a done deal and should be executed until end of your fiscal year now?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [48]

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Yes.

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Operator [49]

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We will now take our next question from Stefan Augustin of Pareto Securities.

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Stefan Augustin, Pareto Securities, Research Division - Analyst [50]

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Maybe just adding on the discussion of Masterworks. Can you outline at this point in time how much of your plant in China is currently not sourced locally? So what is the scope that could be transferred? And let's say, if this is set free here in Europe, what are the aims for that, let's say, what will happen to that, let's say, unused capacities? The second question I have is actually on the Primefire and the soft orders you have commented on in the past where you said that your production capacity would be fully loaded until the end of 2019. So this is now, let's say, more than half a year ago. How has this progressed? And have you seen any cancellations in that soft order pipeline so far?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [51]

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First to MK and our production, we still have room to increase our local content by, I would say, 20% to 30%, that's the room and there the relation with Masterwork is going to be helpful and that's why they're going to use to increase our local content. You know, you probably still can buy very favorable in China, but you need also secured quality and that's better with the Chinese partner. Primefire is a list of soft orders of LOEs, it's still long and this is still growing and we're working step-by-step to turn them into hard orders as we go. Of course, like always with the new technology, sometimes people are reluctant and say, "Oh, I don't want to start now, I want to wait another 3 months or 6 months." But in general, we are well underway.

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Stefan Augustin, Pareto Securities, Research Division - Analyst [52]

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All right. Does the LOE pipeline now will reach longer than the end of 2019?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [53]

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It is somewhat longer, yes. But it's a very short term, really interesting.

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Operator [54]

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We will now take our next question from Aliaksandr Halitsa of H&A.

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Aliaksandr Halitsa, Hauck & Aufhäuser Privatbankiers AG, Research Division - Equity Analyst [55]

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Just a quick follow-up, firstly, on this Masterworks. So Masterwork's participation, just to confirm, is not in any way contingent on Heidelberg's decision whether or not to take a stake in return in Masterwork. That's correct?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [56]

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No, it's independent.

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Aliaksandr Halitsa, Hauck & Aufhäuser Privatbankiers AG, Research Division - Equity Analyst [57]

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Okay. And then the other one is if you could comment how out of those 10 machines that you have already in the field that are equipped with subscription model, how much revenue did they generate or do you expect them to generate already in 2018, '19 financial year?

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Dirk Kaliebe, Heidelberger Druckmaschinen Aktiengesellschaft - Deputy Chairman of Management Board, CFO & Head of the Financial Services Segment [58]

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Below EUR 10 million.

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Operator [59]

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We will now take our next question from Peter Rothenaicher of Baader Bank.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [60]

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Peter Rothenaicher. I have one question regarding your subscription model. So you mentioned around 30 contracts by the year-end. According to your initial plan, if I remember, you targeted to have around 100 contracts by the end of next year, meaning 70 contracts to be signed in the next business year. Is this still the target? And is this realistic in your current view? So are you already that advanced in ramping up your structures?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [61]

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So far, we're well underway. We will make those 30 contracts, we're working to build all of these support structure and, of course, we still aim for the 100 contracts.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [62]

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Okay. And in terms of the Primefire, so I had the impression that you are a little bit ahead below your initial plans in ramping up production. So in terms of units sold, what do you see now for the year-end '18, '19? And what are your expectations here for the next fiscal year?

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Dirk Kaliebe, Heidelberger Druckmaschinen Aktiengesellschaft - Deputy Chairman of Management Board, CFO & Head of the Financial Services Segment [63]

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The ramp-up is more according to plan. Of course, 1 the other machine, as we've mentioned before, it might flip a month or whatever, but we're very confident that the ramp-up is going along the plans we had in the beginning.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [64]

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Okay. And last question in terms of order intake. You now had some delays of your Q3 order intake, flipping into fourth quarter. From your current perspective, is then the fourth quarter considerably stronger again in order intake, last year, for example, you had order intake of EUR 678 million? Is this something, which is achievable? Or do you think -- are you here more reluctant?

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Dirk Kaliebe, Heidelberger Druckmaschinen Aktiengesellschaft - Deputy Chairman of Management Board, CFO & Head of the Financial Services Segment [65]

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Of course, we are working to achieve the same result. If we can achieve it, I cannot say at this point. It is definitely the case that, as I mentioned before, the market is intact, the other projects are alive, but we don't know how quick we can close them. So we might achieve it. There's still a good chance for that.

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Operator [66]

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It appears there are no further questions at this time. I'd like to turn the conference back to you for any additional or closing remarks.

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [67]

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Okay. Yes, ladies and gentlemen, thank you very much for your interest in Heidelberg. I'm very confident that we'll, as always, at Heidelberg with the last strong quarter will get the financial year into the target. Thank you for your interest, and have a great day.