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Edited Transcript of HDD.DE earnings conference call or presentation 6-Nov-19 12:00pm GMT

Q2 2020 Heidelberger Druckmaschinen AG Earnings Call

Heidelberg Nov 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Heidelberger Druckmaschinen AG earnings conference call or presentation Wednesday, November 6, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marcus A. Wassenberg

Heidelberger Druckmaschinen Aktiengesellschaft - CFO & Financial Services and Member of Management Board

* Rainer Hundsdörfer

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

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Conference Call Participants

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* Alexander P. O'Donoghue

Joh. Berenberg, Gossler & Co. KG, Research Division - DACH Mid-Cap Analyst

* Malte Christoph Schulz

Commerzbank AG, Research Division - Equity Analyst of Industrials

* Milan Lazovic;Whitebox Advisors;Analyst

* Peter Rothenaicher

Baader-Helvea Equity Research - Analyst

* Piotr Ossowicz;Serone Capital Management LLP;Partner

* Richard Phelan

Deutsche Bank AG, Research Division - MD & Head of the European Credit Research

* 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 would like to welcome you today for the first time to a Heidelberg quarterly call in new lineup. Our new Chief Financial Officer, Marcus Wassenberg, and I will jointly explain the development of our company in the current financial year and the status quo of our strategic development. Afterwards, we look forward to your questions as usual.

But first, I would like to say a few words about the current changes in the bodies of our company. Let me begin with the change at the top of the supervisory board that we announced last week. Dr. Jaschinski, who has been a member of the Heidelberg supervisory board for 12 years, will resign from his position at the end of November for personal reasons. I sincerely regret this, but of course, respect it. I would also like to thank Dr. Jaschinski on behalf of the entire management for his advice and comments as a member of the supervisory board and as a Chairman over the past 4 years.

With Dr. Martin Sonnenschein, the supervisory board has appointed an extremely competent successor who will assist us in the continuation of the digital transformation with his extensive experience as an adviser. My colleagues on the management board and I are very much looking forward to working with Dr. Sonnenschein. His many years of industry experience, particularly in digital transformation and innovation projects, are a perfect fit for Heidelberg's today's challenges.

Together with the supervisory board, we have decided to further streamline our management structure and to also restructure and reduce the size of Heidelberg's management board. Stephan Plenz, previously our management board member responsible for technology and Heidelberg Digital Technology segment, will leave us by mutual agreement at the end of his current contract in June 2020. More on this later.

Now to our operating business. The second quarter has shown that our strategy is basically right. But at the same time, our business is still very volatile and market conditions are challenging. All in all, after less-than-gratifying start to the year, we succeeded in achieving an overall solid half year performance in the month of July to September against the backdrop of difficult general conditions.

Positive highlights in the quarter were improvement in key operating indicators such as in order intake, sales and profitability. In particular, our technological leadership through digitation (sic) [digitization] in our core sheetfed offset business continues to drive investment and is currently generating rising sales and growing market share, particularly in the U.S. and in China.

Digital business models and an increasing share of recurring revenue from contract business and e-commerce also makes a positive contribution. Our new subscription business, for example, already accounts for more than 10% of our order backlog, and this figure is rising. This shows that our strategic orientation is right and paying off more and more. Our medium-term goal is to generate around 1/3 of total sales from long-term and recurring contracts that's making Heidelberg much less dependent on economic fluctuations in the future.

All in all, this almost compensated for the shortfall from the first 3 months in the second quarter. We thus remain on course to achieve our annual targets of stable group sales and EBITDA margin before restructuring measures of between 6.5% and 7%.

Looking ahead, however, we can see that it's by no means a result to sit back and relax. While we were able to make substantial gains in the North American and Asia Pacific regions, thanks to a positive Print China trade show in Asia and the gratifying high demand in North America, the trend in Germany and parts of Europe, in particular U.K. as we have announced after Q1, is clearly declining. The continuing reluctance to invest due to the economic slowdown and worries about the recession is having a negative impact here.

The German government, the IMF and our industry association, VDMA, are not giving us any hope of improvement in the coming months. All 3 have significantly lowered their forecasts for 2019 as a whole for Germany and Europe and have also identified major risks for 2020. In addition to these economic risks, however, we must also compensate for other effects. High investments in the digital transformation are putting increasing pressure on our earning margins.

How do we deal with these developments? We are taking economic risks into account by consistently driving forward Heidelberg's digital transformation and rapidly increasing the proportion of reoccurring sales by expanding our contract business as explained above. We are already seeing the first success here in the second quarter. We deliberately intend to reduce the expected pressure on our margin by focusing even more consistently on cost. Our goal is to do everything in our power to secure profitability.

Let me give you 3 examples of measures that are already underway and have already been initiated. We will optimize our manufacturing footprint with new location concept. That means produce more product lines in China, close the production site in St. Gallen in Switzerland and start the manufacturing joint venture with Masterwork in China for parts production at the beginning of 2020. This will significantly reduce our manufacturing costs over the next 3 years.

Secondly, we will review our product portfolio for profitability and divest noncore parts. For the future development of our digital printing portfolio, we are also in concrete talks with potential development partners in order to achieve our goals faster and reduce the development costs.

Thirdly, we will increase the speed of change and further streamline our organization and management structure in order to sustainably increase the efficiency of our organization and further reduce the cost. Digital transformation means getting closer to the customer and being able to react faster to their needs through flat hierarchies. The responsibility lies with the employees who are in direct contact with the customer.

As I mentioned briefly at the beginning of the call, we are starting at the top level. We are reducing the size of the management board and will reallocate the functions, make them more focused, agile and efficient. I will take over the Technology division with the function areas R&D and production as well as the sheetfed, digital, label and post-press business units myself. My goal will be to increase operational excellence in production, and I will focus our research and development even more strongly than before on our customers and our core businesses.

Dr. Ulrich Hermann will be responsible for digital services and sales. He will make our sales more efficient by digitizing our sales channels. He will also expand the solution offerings with subscription offers and IoT.

Marcus Wassenberg will be -- continue to be responsible for finance and will increase Heidelberg's earning power and finance new digital business models and investments. He will also be responsible for purchasing in order to leverage the potential here as well.

The position of Stephan Plenz, who will resign by mutual agreement at the end of his contract in June 2020, will not be filled. The management board would like to thank him for his extremely successful commitment here at Heidelberg. Stephan Plenz has not only been responsible for setting up a modern production structure with a very successful site in China but has also helped shape the most innovative and successful product portfolio in our industry, which will enable Heidelberg to move into the digital -- in the digitalized future.

At this point, I would like to hand over to my new colleague on the management board, Marcus Wassenberg, who, as you know, has been on board since early September. Marcus, the floor is yours for details on our key financial figures and outlook, please.

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Marcus A. Wassenberg, Heidelberger Druckmaschinen Aktiengesellschaft - CFO & Financial Services and Member of Management Board [2]

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Thank you, Rainer, for the nice words and the kind introduction. I'd like to take the opportunity to briefly introduce myself to you and then describe my first impressions of Heidelberg, and then, of course, give you deeper insight into our figures for the first half of 2019 and '20.

On the personal side, I'm 52. I'm married, have a 9-year old son, been the CFO of Rolls-Royce Power Systems for 4 years and prior to that have been the Chief Financial Officer for Senvion in Hamburg for 3 years. Now I've been on board for exactly 66 days as the Chief Financial Officer and still delighted to have come to Heidelberg. The company uniquely combines tradition, innovative strength and the desire for continuous transformation in a dynamically changing global context. I feel this actually every day in this company, especially here in Wiesloch, the largest site where production, R&D and strategic development are networked in a very special way. Especially when it comes to digital transformation and the long-term stable financing required for it, I see my greatest strength due to my expertise and history.

Nevertheless, my first days at Heidelberg [strongly] show me that in addition to transforming the company from an equipment manufacturer to a company that uses digitization and digital business models as an opportunity for growth, the sustainable and substantial improvement in profitability must come to the fore. If we look at the recent past, we can see that we have relatively stable sales but only about breakeven earnings after taxes. And this cannot and should not be our goal. The main reason for the unsatisfactory operating performance are, on one hand, the continuing high upfront expenditures from digital transformation; and on the other hand, structural costs resulting from broad portfolio and an organizational structure that is yet not efficient enough.

I'd like to emphasize that we offer an excellent product portfolio and have profitable core business. Nevertheless, we need to focus. We must give more thought to cooperation and further reorganize the organization in order to strengthen profitability. Therefore, the reduction of costs, process efficiency and the focusing of the portfolio will be in the core of my activity for the remaining and next financial year.

So for my first insights on the board of this exciting company. I really do look forward to a close and transparent dialogue with you all. And now to our key financial figures for the current quarter.

As my colleague Rainer has already explained, we've had a very weak business in Western Europe, especially in Germany. On the other hand, we can confirm a healthy development in the U.S. and report a significant increase in orders in China. Overall, however, we still see that customers are cautious about their business prospects. And therefore, deals are sometimes requiring a little bit more time.

Consequently, the first 6 months ended with a slight decline in incoming orders compared to the previous year. Nevertheless, the order backlog increased from around EUR 654 million to EUR 756 million at the end of the quarter, and this forms a sound basis for the expected year-end spurt.

Sales after 6 months were slightly up to the previous year figure. After the shortfall in quarter 1, our second quarter showed a rebound in sales from EUR 570 million to EUR 620 million in second quarter of the year on the year-on-year comparisons. This was mainly driven by good sales volume in North America and Asia Pacific and a positive impact from FX.

EBITDA margin, excluding restructuring result, increased to 6.2%. Previous year was 5.5%. The figure of -- sorry, the figure of EUR 69 million EBITDA included approximately EUR 8 million from the first-time application of IFRS 16. EBIT, excluding the restructuring result, amounted to EUR 22 million after the first 6 months as compared to EUR 27 million in the previous year. The restructuring result of EUR 5 million was mainly attributable to the closure of a small coating site in the first quarter.

Earnings after taxes are still negative -- minus EUR 16 million after 6 months. For the whole year, we expect to break even as sales increase, especially in the second half of the year.

The free cash flow, still characterized by significantly higher tied-up capital and net working capital and by our investment in digital transformation, totaled minus EUR 100 million as compared to minus EUR 86 million in the previous year. I think Rainer has already explained the main reasons for the high net working capital. It's caused by inventory for the expected sales volume half year 2, ramp-up of digital printing machines and the high capacity load in our Chinese factory. In terms of net working capital and free cash flow, we are therefore still a long way from achieving the targets we set ourselves at the end of the fiscal year.

Planned investments will be successively reduced by around EUR 20 million in the coming months as planned. The projects to optimize flow turns and inventory levels as well as improvements in receivable management are ongoing, and I intended to reduce tied-up capital by around EUR 50 million. However, this will not come apparent until the end of the financial year as we, as always, expect the higher sales volume of the year in the final quarter.

The total defined liquidity potential around EUR 100 million from the measures described must remain our target. Only in this we can significantly improve free cash flow by the end of the financial year compared with the previous year. Leverage as a debt ratio rose temporarily to 2.1, and we expect it to fall below 2 again by the end of the fiscal year.

A quick look now to the business segments. The rebound in sales in quarter 2 has mainly been attributable to Heidelberg Digital Technology segment and here especially from the business unit sheetfed. Q2 sales were up from EUR 340 million to EUR 380 million. EBITDA profitability of this segment improved on the back of the higher volume and the IFRS 16 effect. Heidelberg Lifecycle Solutions segment, on the other hand, recorded stable sales and earnings.

Let's now turn to the balance sheet. At around EUR 250 million, equity decreased by around EUR 150 million compared with March 31, 2019. This is attributable, on the one hand, to the loss after 6 months but mainly to significantly lower interest rate of 1.1% for domestic pensions on the balance sheet date. Therefore, the equity ratio fell to 10% as compared to 17% by the end of March.

The higher capital commitment is also visible in the balance sheet due to the expected sales volume in the second half of the year, but also due to the ramp-up of digital printing portfolio, net working capital rose to EUR 745 million. We're also tying up somewhat more capital with the ramp-up of the subscription model.

As already mentioned, net debt rose around EUR 355 million due to the negative free cash flow. Including IFRS 16, the figure is right around EUR 450 million (sic) [EUR 416 million].

So far my comments on the quarter. We'll now start with the Q&A. Operator, would you please ask for questions? Thank you.

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Questions and Answers

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Operator [1]

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We will take our first question from Stefan Augustin from Pareto Securities.

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Stefan Augustin, Pareto Securities, Research Division - Analyst [2]

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A few questions. I would ask them one by one, if I may. The first one would be actually to the net working capital development. We see that HDT -- or that the inventories are up on the unfinished goods despite the lower HDT backlog after 6 months, if I compare year-over-year. And the question would be how much this has to be done on having more subscription models and how much would be rather on, let's say, business doing in overseas, in the U.S. and in China, and so we have longer shipping times and lead times, and when we would actually see more pronounced reversal from China.

Do we actually need to wait until the next year and the production of the manufacturing in China is ramping up? Or will we have before already some relief? And it would be very great if we could have runup through your measures to improve, let's say, receivables over sales and the liabilities, how we possibly get them up a little bit.

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Marcus A. Wassenberg, Heidelberger Druckmaschinen Aktiengesellschaft - CFO & Financial Services and Member of Management Board [3]

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So on the net working capital, basically, as you rightly say, it's mostly driven by unfinished goods. And that has, indeed, to do with the production in China and the blossoming of the Asian Pacific market, which then results in higher lead times. Hence, we're building up inventory that we plan to basically sell at the end of the financial year. So more and more, you see a relief in net working capital by then.

On the total measurements, yes, I think we can -- after those measures have been now implemented, we can give you updates. Right now, obviously, it's a bit too early for me to do that since I've just joined the company for 60 days. But afterwards, I think we can give you an update on that as we progress, and as you rightly say, it's the core of our activity. When it comes to the production in China, I hand over to Rainer.

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [4]

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Yes. The production in China is developing nicely. We still have localization of about 50%, and that's basically what we're driving to increase the degree of localization up to 85%. And that is a big part of the manufacturing joint venture, which we have agreed upon with Masterwork, which will start to be productive beginning of next year.

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Stefan Augustin, Pareto Securities, Research Division - Analyst [5]

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Okay. And the next 2 questions would be then some, say, updating questions. The end of Q2, could you elaborate a little bit how much order intake volume you had actually from subscription models of all kinds and more or less how many contracts you have now in the books so far? And the other one would be a possible update on asset disposals. Are we close ahead of anything? Or does it take some while?

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Marcus A. Wassenberg, Heidelberger Druckmaschinen Aktiengesellschaft - CFO & Financial Services and Member of Management Board [6]

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So for the order intake in the last quarter, it's about EUR 30 million to EUR 35 million. As compared to the order book, it would be around EUR 90 million. And that would basically, I think, on total, Rainer, it would be something like 55 to 60 we run currently.

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

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Then asset disposal is well underway. We cannot disclose anything at this point in time, for probably understanding reason. But I'm very confident that we'll meet what we basically announced a few months ago. It's well underway.

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Operator [8]

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(Operator Instructions) We will now take our next question from Malte Schulz from Commerzbank.

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Malte Christoph Schulz, Commerzbank AG, Research Division - Equity Analyst of Industrials [9]

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A few things I would like to get a little bit more color on. First of all, maybe also on your restructuring time line. I mean how much -- are you still satisfied or still confident to have like EUR 20 million charges on this 1 year? And maybe also how -- when you would expect the next more deeper cut maybe into the organizational structure, anything which we should keep in mind for the rest of the year?

And also, I mean, if we had a little bit more sheetfed this quarter, just as a kind of mix progression over the next quarters, should we accept that sheetfed will become a little bit more stronger generally now over the quarter-to-quarter? Or would you regard it rather as a one-off?

And my final question is if you can update a little bit more on the digital side or on your subscription model. How would you think that you're on track? And how much percentage-wise revenue will we see from subscription by the end of the year?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [10]

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Now first to a question about restructuring. We will -- we have continued restructuring projects, in particular to streamline also, on the one hand, our management structure. And at this time, as I mentioned, we started in the management board, and it will also flatten the hierarchy as we go. But this is all covered in our EUR 20 million restructuring sum.

But there are other things which are already priced in, which you probably remember on all, because we explained that a few calls ago. We have a significant number of early retirement agreements, which will reduce our workforce in the next 3 years, significantly in Heidelberg, and allows us to move manufacturing capacity out of Heidelberg into lower-cost countries or outside of Heidelberg. So one of these measures -- restructuring measures, so to speak, is the buildup of the manufacturing joint venture in China, serving our Chinese factory, increasing the local content.

Then to your question, do we expect an increase in sheetfed, no, this what we have done was by joint effort, the catch-up effect to basically flatten out what we didn't manage to get in orders in the first quarter. So it will be as we originally -- in [sum with] that it will go sideways. Heidelberg has gained some market share. I just looked at the market share numbers in China, in North America, but we are still at the market share level where it doesn't make sense to push too hard because we want to maintain the price level. Even today, one of the challenges is to manage to increase our prices, which has become a lot more difficult than in the previous years.

The digital printing still is a small contributor to our business. But it's moving forward. We established some more very good projects, which will turn also into orders in the near future.

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Malte Christoph Schulz, Commerzbank AG, Research Division - Equity Analyst of Industrials [11]

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Okay -- yes, continue, please.

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Marcus A. Wassenberg, Heidelberger Druckmaschinen Aktiengesellschaft - CFO & Financial Services and Member of Management Board [12]

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Yes. I was going to say that when it comes to subscription, basically, as we said, there is right about now EUR 8 million in revenue. And it's going to grow this financial year to somewhat between EUR 25 million and EUR 30 million, which basically then represents 10% to 12% of our overall revenue.

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Malte Christoph Schulz, Commerzbank AG, Research Division - Equity Analyst of Industrials [13]

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Okay. Maybe one follow-up if you'll allow. How much of your kind of R&D cost is related to subscription?

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

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Come back. We didn't get the question. Sorry.

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Malte Christoph Schulz, Commerzbank AG, Research Division - Equity Analyst of Industrials [15]

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Okay. Sorry. No problem. How much of your R&D costs are related then to the digital subscription area?

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

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Basically none. Business model doesn't need R&D. The basis, of course, is all our innovation in general, the highly automated machines, smart print shop workflow, but that is available also for customers who just buy the machine in the conventional [print action] business.

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Operator [17]

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We will now take our next question from Richard Schramm from HSBC.

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Richard Schramm, HSBC, Research Division - Analyst [18]

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I have one question concerning the closure of the plant in St. Gallen in Switzerland you mentioned. Can you shed a bit more light on this? How many employees will be affected? What is the time line for this? And what are the costs related to this? I assume that Switzerland is a pretty costly production place. And therefore, I could imagine that this will go beyond the EUR 20 million restructuring charges you're usually scheduled for a year.

And the second question concerning to the [bert] focus in your strategy you have used several times. Could you elaborate a bit more on what precisely this means for your product portfolio? Where do you see a need to cut back? Because so far, I always assumed Heidelberg to have the ambition to be a one-stop shop, and so this is a kind of reversal of this strategy.

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [19]

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Thank you for your question, Mr. Schramm. The closure of the plant in -- the plant in St. Gallen will concern about 60 people. It's basically the remaining assembly of machines we have there. And first of all, Switzerland is expensive when it comes to labor costs. But it's very inexpensive when compared to Germany when it comes to restructuring. And we might have a solution where the whole thing doesn't cost us any restructuring costs. So we will easily fit that into the EUR 20 million. So there's no additional cost to be expected to show up. It will, however, significantly improve our cost structure for the label machines, which we will assemble in Langgöns, which is by far the lowest-cost manufacturing site Heidelberg has in Germany.

In regards of product portfolio, of course, this is not going to affect our core business, which is everything which Heidelberg produces to print. Neither the different printing technologies, sheetfed offset, flexo or digital printing, all these 3 technologies are part of our overall strategy and no change in strategy there. Of course, also not in regards of software related to all the functions in the print shop because the software is the essential driver of the smart print shop, and we are also expanding these functions towards post-press to a bigger extent than in the past.

And last but not least, of course, Heidelberg has some businesses outside of our core business, the printing industry. And that's what we're looking at to probably dispose those. They might be very nice businesses, but to get focus, we'll review it. Then, of course, one thing we always do, but that's no big deal, we look at what of the products we are making within our core business are still future businesses and which are not, where there is no demand any more or declining. Of course, you will sometimes phase out one of the products. Does that answer the question, Mr. Schramm?

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Richard Schramm, HSBC, Research Division - Analyst [20]

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Yes.

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Operator [21]

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And we will now take our next question from Alexander O'Donoghue from Berenberg.

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Alexander P. O'Donoghue, Joh. Berenberg, Gossler & Co. KG, Research Division - DACH Mid-Cap Analyst [22]

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Alexander O'Donoghue from Berenberg here. I just have 3 questions. I'll go through them all straightaway. The first one is just since you mentioned you went over 2x temporarily in leverage, I just wanted to check whether this has any effect on any of your financing conditions with your lenders.

Second question is just on the -- you mentioned the reduced production cost for moving these factories. Do you have any kind of idea of how much that could affect margins over the next few years? I mean how much cost savings are we talking about?

And the third question is I understand that you need to reduce the CapEx in the short term, but are you worried this could affect your long-term growth potential? And is there any big projects that have now been canceled and maybe there's a waste as you've started a project and now it's canceled?

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Marcus A. Wassenberg, Heidelberger Druckmaschinen Aktiengesellschaft - CFO & Financial Services and Member of Management Board [23]

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So I'll take maybe the first and the last questions. So basically, on the leverage, our covenants offer enough headroom, so that's not an issue. On the CapEx, you always have like smart things you need to do. And then there are smart ways of cutting CapEx because everybody knows that partly, you have things that are nice to have but not really essential, and it's particularly those that we're looking at right now. So we're not endangering any significant important projects.

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [24]

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On reducing manufacturing costs, we're talking -- improving the manufacturing footprint, we are talking about a 3 years horizon because we will not lay off hundreds of people at once. We have basically started already 2 years ago a large program with early retirement program in order to control also the age fluctuations and have a controllable know-how transfer. So that is starting to become an effect. It allows us to increase production in China, for instance, step by step, increase the local content. Of course also part of this manufacturing footprint improvement is also close the expensive Swiss factory and move it to much less costly Germany. Overall, we're talking in 3 years' time frame, at least EUR 30 million to EUR 40 million cost improvement per annum.

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Operator [25]

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(Operator Instructions) We will now take our next question from [Nicolas Remi] from [Stealth Management].

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Unidentified Analyst, [26]

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Just one question regarding the high-yield bonds you have. Do you plan any buyback with the asset disposal you are doing?

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Marcus A. Wassenberg, Heidelberger Druckmaschinen Aktiengesellschaft - CFO & Financial Services and Member of Management Board [27]

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No, we have no plans at the moment.

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Operator [28]

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We will now take our next question from Milan Lazovic from Whitebox Advisors.

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Milan Lazovic;Whitebox Advisors;Analyst, [29]

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I have a few questions just on your balance sheet. Your pension provision increased significantly from March to September, and it looks like your discount rate is 1.1% based on the footnotes. Do you -- is that the rate that is going to continue going down? And is there any risk of having to do a rights issue to cure negative equity potentially?

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Marcus A. Wassenberg, Heidelberger Druckmaschinen Aktiengesellschaft - CFO & Financial Services and Member of Management Board [30]

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Well, basically that's -- if I had a crystal ball, I'd gladly use it and sort of bet on that. And obviously, we're not happy with that development. So the -- as you rightly say, basically, the hit in equity that we took comes from the discount factor that has decreased from 1.5 to 1.1. And that's obviously not a good thing to happen.

So we need to do 2 things. One is pray that this is going to stop somewhere. And the second thing is improve our profitability, as Rainer and I are trying to describe right now, which is the best protection. And thirdly, as you are well aware, the equity that they're demonstrating here is not the relevant capital when it comes to liability. So basically, that's on the AG only, and that's much higher. So that -- we're not really concerned with that, although we're not too happy.

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Milan Lazovic;Whitebox Advisors;Analyst, [31]

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Understood. And what are you using as a reference for that 1.1 given that rates in Germany are negative through -- for the first 10 years, I believe? What I'm trying to assess is like, how much more do we have to go down?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [32]

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It's a normal basket of AAA-rated company bonds and some adjustments to the specific demographic structure of our pension this year.

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Milan Lazovic;Whitebox Advisors;Analyst, [33]

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Yes. And your pension trustee, would they have to renegotiate with you to put more cash into pension?

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Marcus A. Wassenberg, Heidelberger Druckmaschinen Aktiengesellschaft - CFO & Financial Services and Member of Management Board [34]

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No, right now not, we are well covered. And the net cash out is EUR 10 million.

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Milan Lazovic;Whitebox Advisors;Analyst, [35]

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EUR 10 million. Okay. And then the other...

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Marcus A. Wassenberg, Heidelberger Druckmaschinen Aktiengesellschaft - CFO & Financial Services and Member of Management Board [36]

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In Germany, there's no obligation to fund the deficit. This is a specific thing in the U.K. and in the Austrian fund but not in the Germany. In Germany, we are covered by the (foreign language).

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Milan Lazovic;Whitebox Advisors;Analyst, [37]

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Got you. And then the line contractual liability, footnote 18, it looks like these are prepayments from your customers at EUR 173 million. Is that cash prepayment today put in order for new orders that are coming up that you need to deliver?

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Marcus A. Wassenberg, Heidelberger Druckmaschinen Aktiengesellschaft - CFO & Financial Services and Member of Management Board [38]

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Part of this is accrued part. So the down payment from the customers are much less than this. I have to look up the specific figure as the IFRS changes are not showing the exact number for the down payments from customers anymore. But I can drop you an e-mail and give you the exact amount. I would guess it's less than half, but I would have to look up the concrete figure.

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Milan Lazovic;Whitebox Advisors;Analyst, [39]

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Okay. Good. Because I was -- you had EUR 160 million of cash and EUR 173 million of liabilities. So it was -- okay. It's not like that.

Okay. And just overall, how do you feel about level of debt and other liabilities that you have on your balance sheet, given that you're suggesting that you would need to do significant restructuring going forward?

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Marcus A. Wassenberg, Heidelberger Druckmaschinen Aktiengesellschaft - CFO & Financial Services and Member of Management Board [40]

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It's too high, obviously, right now, driven by net working capital. But it will go down as our sales will improve over the next half year.

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Operator [41]

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

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [42]

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So you mentioned that the environment is definitely relatively challenging. And if I look at your order intake mix, you see declining orders from EMEA and more growth in Asia Pacific and North America. Has this some impact on the quality, on the price quality and the general mix of your orders and machines? And how would you consider the margin quality of your order backlog compared, let's say, to a year ago?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [43]

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Now I mentioned that already in our last call. The lack of business in Central Europe and in particular in Germany affects the product mix. We have in Germany typically the loaded machines. And loaded machines, it's like with the automotive industry, have better margins than more standard machines. So it is affecting us to a certain extent. However, looking forward, nothing is going to change. We are in line with our guidance.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [44]

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And you mentioned it's difficult to increase prices. Would you consider prices as is currently being stable or even some pressure on it?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [45]

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We usually manage to increase prices by 1.5% to 2% per annum. And that is going to become more difficult at the moment. That's also part of what shows up in the margins. But the prices are at least stable. And in some cases, we can increase the prices but not to the extent we used to -- able be in the last years.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [46]

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And yes, in this quarter, you had relatively good order intake, I think, also due to some switch of fixed orders sent from the first to the second quarter. How would you consider the current view on the running quarter? Will it be difficult, do you -- can we expect -- or do we have to expect lower order intake?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [47]

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We expect to have, I want to say that, satisfying order intake. However, it will take a lot more effort to convince the customer to give us the order now. It is a fight day per day. The -- as I mentioned, the environment -- the business environment is more challenging. Our customers, unfortunately, read also the newspaper and they read about recession and risks. So that makes them worry even than -- even their business is still good. So we'll have to fight with, but I'm pretty confident that we'll get the few orders we still need to make the year.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [48]

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Okay. And my last question. In the report there's a note regarding some risks of perhaps impairment of goodwill and intangible assets, could you perhaps comment on this? How large might be the risk here?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [49]

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Right now, I don't think that -- I mean obviously, the [South] has now come up with a new interest rate, and that obviously has been tested. So we have sufficient headroom right now. However, it's getting smaller, so that would be my answer.

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Operator [50]

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We will now take our next question from Piotr Ossowicz from Serone.

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Piotr Ossowicz;Serone Capital Management LLP;Partner, [51]

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Most of them have been answered, but just a few follow-ups. You have helpfully disclosed the level of savings you expect. Can you please provide us with a bit more details of how those savings are going to be realized and whether there are any major initiatives with the value assigned to them?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [52]

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Just the usual set of measures you usually take. You turn each euro twice before we spend it and see is it necessary to do it now or do it later. That's definitely looking in all areas of spending. And of course, you tighten your travel policy. We only allow our people to travel if there's an order behind and gain some order. And then, of course, we are very strict on labor hours, use all the flexible tools we have to reduce the labor cost and only have the people here if we really need them in order to make the business. So this is just the usual toolkit you have in order when the situation gets tighter.

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Piotr Ossowicz;Serone Capital Management LLP;Partner, [53]

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All right. It's a substantially large number though. I would imagine that there's probably something more than smart traveling policy. So just trying to understand how much of this comes from moving production that you mentioned, for example, and from other -- I know from purchasing. Just give us a sense for what is big there.

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [54]

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Yes. Of course, we try -- of course, we try to also get money from our suppliers. It is the just regular toolkit where you basically strengthen your performance and saving costs. And if you look what Heidelberg spends as a whole, it's significant. And 1% or 2% in total makes a big sum at the end.

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Marcus A. Wassenberg, Heidelberger Druckmaschinen Aktiengesellschaft - CFO & Financial Services and Member of Management Board [55]

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So basically, I think what Rainer is referring to is the basic housekeeping effort that you have to do when times get tougher, and this is exactly what we do. Then there's the strategic move that Rainer has again elaborated, too, which is moving some part of the production to China, which gives you like a EUR 30 million benefit year-on-year in a 3-year period. And that's more the strategic side of it.

And then basically, I think there will be further effects that Rainer and I are right now not able to yet quantify since I'm with the company for 60 days only, which come from reduction of complexity, focus on the core and then actually think about more partnerships. In the digital world, you don't have to do everything by yourself, and we're highly vertically integrated. And that, I think, is something to be considered as well. But we're not yet here to give you numbers on that. It's just too early.

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Piotr Ossowicz;Serone Capital Management LLP;Partner, [56]

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Okay. Understood. So moving on, can you just give us a bit of an update on how the digital presses are doing?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [57]

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Excuse me, I didn't get the question. Can you repeat, please?

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Piotr Ossowicz;Serone Capital Management LLP;Partner, [58]

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Right. I'm asking about the digital presses. Like how much of a progress have you been making this year?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [59]

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We are making good progress. It's moving ahead. The product is getting more and more stable. The market is also giving us orders. So we are lagging behind our original plan, but it's moving forward. And Heidelberg still is with a big margin ahead of any other supplier offering similar technology.

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Piotr Ossowicz;Serone Capital Management LLP;Partner, [60]

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And roughly how much of, I know, your revenue or order book at the moment is digital?

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

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That's still a small part of it. It is in the early phase of the business. We are talking probably EUR 15 million, EUR 20 million in that range.

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Piotr Ossowicz;Serone Capital Management LLP;Partner, [62]

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That's for order book or revenue?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [63]

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No, revenue.

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Piotr Ossowicz;Serone Capital Management LLP;Partner, [64]

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Revenue. Okay. Perfect. And lastly, you have commented on the profitability of your new orders. Is there -- are any other terms different from what you have seen before, especially the payments, prepayments, working capital? Any other different trade terms in your new order versus the older orders?

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Rainer Hundsdörfer, Heidelberger Druckmaschinen Aktiengesellschaft - Chairman of Management Board, CEO & Chief HR Officer [65]

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No, no, it's pretty much in line. Of course, what we have started, it's also one of those measures, we started to try to get better payment terms wherever it's possible. But it's like about increasing prices. This is more difficult in these times than in good times.

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Operator [66]

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And we will now take our next question from Richard Phelan from Deutsche Bank.

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Richard Phelan, Deutsche Bank AG, Research Division - MD & Head of the European Credit Research [67]

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I was just wondering if you could give us the unused availability under the revolver as of the end of the quarter that's available for the company in addition to the EUR 170 million of cash that you reported at September 30. And I know in an earlier question, you mentioned there are no plans for bond buybacks, but if the existing corporate bond continues to trade at a price below par, considering that you've previously redeemed a portion of those bonds at a price of 104 in the recent past, would you consider buying those bonds, buy back with the liquidity position you have?

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Marcus A. Wassenberg, Heidelberger Druckmaschinen Aktiengesellschaft - CFO & Financial Services and Member of Management Board [68]

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Yes. So basically, we utilize the revolver to the degree of 48%. And when it comes to the current setup, we're not changing any of the parameters right now. We obviously will consider and monitor from time to time. But right now, we have no intention of doing so.

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Operator [69]

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This concludes today's question-and-answer session. Mr. Hundsdörfer, I would 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 [70]

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Thank you very much. Ladies and gentlemen, thank you very much for your attention. Let me briefly summarize once again where Heidelberg stands today.

First, developments in recent months show that our strategy is fundamentally right. The proportion of subscription contracts is rising. More and more customers are relying on our digital sheetfed offset solutions and improve their end-to-end productivity with our help. And by making targeted investments in our core business, we secure -- and core business is everything, which includes printing, we are securing our global market and technology leadership.

Second, however, it's also clear that the global economic downturn is also having an increased impact on our customers, and of course, on us. We will, therefore, focus even more consistently on cost discipline and securing our profitability in the coming months.

And third, all of us at Heidelberg have a clear goal to secure our market and technology leadership as a total supplier of machines, consumables, software and service for the benefit of our customers all over the world, a true end-to-end offer. All our colleagues work hard every day to achieve this, and that's precisely why I'm very confident that we will achieve this goal. Thank you very much for your attention, and have a great day.