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Edited Transcript of SKB.DE earnings conference call or presentation 22-Mar-18 10:00am GMT

Full Year 2017 Koenig & Bauer AG Earnings Call

Würzburg Mar 23, 2018 (Thomson StreetEvents) -- Edited Transcript of Koenig & Bauer AG earnings conference call or presentation Thursday, March 22, 2018 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Claus Bolza-Schünemann

Koenig & Bauer AG - President of Management Board, CEO, President and Head of HR, Legal Affairs & Insurance

* Mathias Dahn

Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board

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Conference Call Participants

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* Eggert Kuls

Warburg Research GmbH - Senior Analyst

* Richard Schramm

HSBC, Research Division - Analyst

* Stefan Augustin

equinet Bank AG, Research Division - Analyst

* Stefan Maichl

Landesbank Baden-Wurttemberg, Research Division - Investment Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thank you for joining the Koenig & Bauer Conference Call on the 2017 Full Year Results. (Operator Instructions)

I would now like to turn the conference over to Mr. Claus Bolza-Schünemann. Please go ahead, sir.

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Claus Bolza-Schünemann, Koenig & Bauer AG - President of Management Board, CEO, President and Head of HR, Legal Affairs & Insurance [2]

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Good morning, everyone. Welcome, and thank you for your interest and time for this year's call 2017 of the Koenig & Bauer group. With me here on the table are Dr. Mathias Dahn, our CFO; and Dr. Heusinger, responsible for Investors Relations.

First of all, some technical, some innovative details before we get to the numbers 2017.

We are heavily re-entering the corrugated printing market since this is around about not only large, but a significantly growing business mainly driven by Internet trading. Everything has to be packed. Therefore, we launched the CorruFLEX as well as the CorruCUT press. The CorruCUT is a very large-format corrugated machine with the integrated die-cutter and mainly for the very large analog printing market. The flexo presses, you may think old fashioned, but very much up-to-date. This new machine has tremendous features, especially short make-readys and amazing comfort for the operators. And we do have a pilot customer. We are very proud about this customer, Klingele, and we will deliver the first press early 2019, the first CorruCUT from Koenig & Bauer.

In line with the CorruCUT, the CorruLINE, we also have the digital version, the CorruJET. This is also a sheetfed corrugated machine with fully digital inkjet printing technology. And this is in test mode right now here in Würzburg and we are keen for the delivery to the first customer.

Not only in the corrugated business, also packaging for liquids, of course, is our completely new developed CS MetalCan, wonderful, also analog printing machine, very, very high speed. I mentioned this earlier, 138,000 cans per hour, absolutely incredible, 10 inking units, very high output and extremely short make-ready times, state-of-the-art not available for any other customer so far. And we have actually signed 2 contracts for intensive field testing with this new machine since the field test is essential in this very, very demanding can decorating business.

In 2016, we have purchased Iberica in Barcelona; today, KBA-Iberica for flat-bed die-cutting. This is a very fine company. We are very, very happy with the development. It was a great investment since our folding carton business. Every printing machine actually needs to have the die-cutters to cope with the high output of the printing machinery. And even being a small vendor in this market, we are absolutely astonished about the growth, which was able -- where we were able to show in 2017 and we are keen to grow this business further on in the upcoming years.

In parallel to the flat-bed die-cutter, we have developed the rotary die-cutter for our Rapida series, especially 106 series, fastest die-cutter in the world. And we are also very happy [with the current load] of our flat-bed die-cutter, 2 of our customers, very flexible cutting technology.

One of our major goals we are following is service, pleasing our customers with state-of-the-art service around the world. And we did have some very aggressive growth targets for service and we are absolutely online and our -- in line with this goal, excuse me, and our service revenue is right now pretty much around 26% of our total turnover. And we are keen to enhance service around the world with new solutions, with better, even better training in-house as well as on-site, proactive service, augmented reality. And we are absolutely convinced we are also up-to-date with our service business and we are looking for further growth throughout the coming years.

On Page 7, a very small detail, but a very interesting detail. We have constant innovations for our banknote business. SUSI means [super dual time]. This is a very special printing process for high-precision offset printing, especially with banknotes here. This is not available for any other kind of printed product. And this very, very unique technology allows us to print actually very fine and very complex movement effects on banknotes, similar to a KINEGRAM, but not applied but printed. These optical effects are absolutely counterfeiting-safe, if I may say so. And we are very proud that we launched this new feature last year at a banknote conference.

We also have a very small start-up, coverno, north of Germany, very small entity, mainly developing software on authentication of banknotes, mainly with optical devices.

These were some of our technical highlights within 2017. And I would like to pass over to Dr. Dahn to give you the key figures of the year 2017. Dr. Dahn?

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [3]

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Yes, many thanks, and warm welcome also from my side.

I'm on Page 9. Business performance last year was good. We had a 10% increase in orders with further market share gains. We grew in packaging markets and service and also in security printing. Revenue grew by largely over 4%, up to EUR 1.218 billion in revenue despite a EUR 25 million decline in newspaper and commercial rotary presses, web presses. And we have a healthy book-to-bill ratio of 1 and so quite good numbers here.

You see that in the order intake, just as much in revenue, we had a steep increase in the fourth quarter. The, let's say, shifts in order intake in 2017 over the quarters were mainly attributable to single -- quite large banknote printing orders. So this is where, I would say, the biggest fluctuation comes from.

And you also see that in revenue, it was a quite tough journey towards at the end of the year to reach the desired revenue figures. You see that we had to be EUR 100 million stronger in the fourth quarter in revenue than we have been -- or even EUR 110 million stronger than we have been in the first quarter of the year 2017.

And just as an outlook, because you're all waiting for comments on the outlook, this will be much the same this year, this I can promise you, and maybe even a bit tougher as far as I can tell.

On Page 10, we exceeded group earnings target that we have set at around 6% at the beginning of the year 2017, and we adjusted for the nonrecurring items that we had in 2016. EBIT climbed from EUR 63 million to, let's say, EUR 81 million, which gave us a 6.7% EBIT margin. And that exceeded guidance of around 6% and also exceeded, I think, the figure that I told you before. And that I would be brave to -- in my fight towards KPMG in not having a further, let's say, loss carry-forwards capitalized. I was weak and they won, so net income was influenced with a further onetime of EUR 12.7 million. That is, of course, distorting the EPS and needs to be corrected.

And the dividend proposal, which we have already announced is EUR 0.90 per share, so quite in line with what we announced. We would show every dividend part of -- at the beginning of 2017.

The next page, we have a stronger financial power and balance sheet. I will come to the balance sheet in the minute. We reduced working capital successfully in large parts of the group, and I can say in all in terms of inventories. There are, in particular, some areas in security printing that needs further work. This is well addressed. But it was not possible to, let's say, reach the targets that we set ourselves in 2017 for security printing by the end of the year 2017 yet. Here, we have to continue our work, but by and large, working capital optimization was well on track in 2017 despite maybe the appearance.

Clearly, the free cash flow was burdened by high investments and in large part by the payment for the external funding of the pension obligations. We told you at the beginning of the year 2017 that we want to, let's say, [out fund] EUR 65 million in the course of 5 years. We did half of the EUR 65 million already in 2017. And you've read it probably already we'll do the rest of that in the first quarter of this year and bring our balance sheet down in terms of length and bring our equity ratio up by doing that.

We also have secured by the end of 2017, we have, let's say, refinanced our group entirely in a different form. We have now facility of up to EUR 350 million with, let's say, increased option of EUR 50 million with quite a long maturity until 2024.

And coming back to the balance sheet, we have increased equity to EUR 424 million and that's a significant step vis-à-vis last year where we have already been over 30%. We are now over 36%, and this is a good step towards the target that we have to be above 45% of equity.

On Page 12, Group Income Statement. I think, here, what really needs to be maybe pointed out, the only thing that needs to be pointed out is that we regrouped EUR 10 million worth of research and development costs into cost of sales. So with this, the cost of sales have increased by EUR 10 million and R&D have decreased by EUR 10 million. That's the only really thing that sticks out. Everything else is rather dull, I would say, and maybe boring.

Cash flow. I think I've mentioned the most noteworthy parts already.

And I clearly would like to jump to, in terms of explanation, to jump to the balance sheet. Here, just to be safe, we also have a joint view on this. You see in the -- on the top-left corner, investments/other financial receivables, you see the EUR 50 million, which is the corresponding part of the investments that we made into the outsourcing of the pensions. We will, and this is the figure that will disappear just as much EUR 70 million of net pension provisions will disappear [by the start of] the first quarter because we then will attach this to the, let's say, to the beneficiaries of those pension plans.

What I explained already regarding inventories. It's visible. We were able to reduce inventories at the end of 2017 as compared to 2016. And clearly, the one thing that sticks out is the increase in receivables. And I said before that the majority is attributable to security printing where we, let's say, have a very long payment term with 1.3 customers, I would say. It's not one single customer, but it's a mix of things. But in general, we are waiting for one customer to pay here. Things are really moving nicely, but we weren't able to collect the figure by the end of 2017.

And the other thing that have not helped, this is a figure that is, of course, looking at the last day of the year only. On average, we have been much better, but the thing is, here, if we have a very strong quarter in the fourth quarter and make a lot of deliveries by the end of the year, then naturally, by the end of the year, we have not collected everything in cash yet.

As to the liabilities. Well, you see, of course, the equity has been up nicely with all the profits that we made and also some minor gains in pension provisions that were booked through the OCI. Pension provisions came down with the application of marginally better interest rate. And the one thing that I still want to point out is other provisions came down without having an effect in the P&L. So that was a question that we had when we released the preliminary figures, whether or not we would juice up our assets by releasing provisions, and this is a clear proof that this was not the case in 2017.

Going through the segments. A very good momentum in Sheetfed, 15% increased orders, clear increase in service business, good momentum both for packaging and commercial. I think it's noteworthy to say that we have expanded our position in packaging, but we also believe that the commercial printing market is not shrinking. And therefore, we think it's pretty unfair to leave that market entirely and the others. And therefore, found it nice and smart to also invest some time into commercial printing and the respective customers here. That worked well, I have to say. I'm pretty curious how this is going to play in the future.

And Claus mentioned before that we made a good move in flat-bed die-cutting. I think it took us a while to come to that conclusion to acquire the activity. 2016 was a very good year in Iberica and we were almost able to double the order intake figures within the year and that is clearly a proof of concept for our, let's say, for our endeavor here to offer the customer a good product also in flat-bed die-cutting and naturally also in rotary die-cutting.

Revenue, 7% up. Very nice order backlog. And the margin of 5.7% is pleasing, as we wrote. But pleased also note how steep the increase was in terms of quarters -- quarterly profitability, and as I said, this will continue this year to be the case.

By the way, one last word on -- because you're probably going to ask later anyway. We don't have a single market where we have a bad order activity. So order activity, also in the first quarter, is positive. Without giving any outlook on the specific order intake figure for the full year/the first quarter, the sole thing that I want to comment on today and that we will say is that we have a quite good order activity throughout the regions and throughout all the segments and businesses that we're in.

Digital & Web on Page 16. We have been successful in many fields, we have not been successful in all fields. Clearly, that segment was very much dampened by the restructuring of Flexotecnica, which produced a loss of EUR 5 million. So net of Flexotecnica, net of the flexibles packaging that we, as I said before and many times in the last quarters, that we did restructure and had to restructure last year, net of that loss, it was a breakeven with a slight plus in that former Digital & web Division. Former, I mean, in the sense that before taking flexo printing into that segment. Order intake and revenue, below prior year. We expected that because we expected also decline in newspaper and commercial web presses. Good and growing service business, but clearly 2017 was characterized by optimization efforts for flexible packaging. And as you heard before, we were happy to sign the first letter of intent with a very important player in corrugated presses. This is a business that will, we hope, help that business, which is looking at the full corrugated portfolio in the sense that we started with digital with HP, you know that. We started with our own digital sheetfed printer and now we added the corrugated analog printer -- flexo printer, and we hope that where we have digital, just as much as corrugated, we'll have that business grow. And we also see good signs that flexo is much better in shape than we have been last year.

In 2000 -- on Page 17, order intake, revenue and profit, up in all areas of special machinery. Order intake, up 16%. Gains in security printing, metal, glass, decorating and marking and coding so all divisions showed good growth. You see heavy fluctuations in order intake over the quarters. I think it's not a secret where these fluctuations come from. This will again remain the same in 2018. As I said before, we have good order activity. Because some of you asked the question around one specific order, we will not comment on specific orders as we never did this in security printing, but the pipeline is pretty much intact, again with a quite steep incline in the course of the year.

And if I may now turn to Page 18 -- 19, I'm sorry. We see a 4% organic growth in revenue. We see an EBIT margin improvement and an EBIT margin of around 7%. We, I said before, that quarterly division will not improve towards 2017. I think we might even see a tougher first half year than we have seen at the beginning -- or at the end of last year in retrospect, but that's, I think, too early to call. And I think we have also shown last year that we are pretty much able to deliver on our targets even if they're back-end loaded.

We see that the next growth step in service business is around the corner, and we are also very eager to increase our service portion of the business further. We were making a nice progress last year over '16 and we made a nice step '16 over '15. But clearly, of course, the comps are getting tougher, and it's still a good way until we come from EUR 25.6 million to the EUR 30 million that is the Digital 2021.

We want to further grow -- I forgot one thing, very important detail. Since I mentioned market share, I think we gained market share in all divisions. Even though it was tough in flexo, I think this is the only area where we might have been a bit weak. But I think the big joy for us was that we grew in sheetfed and the big joy was that we grew in security printing where we just -- where we lost a single machine last year and our market share must have been somewhere at around 95% if I count the machine. And since this was a single machine, it was just the market share also probably in large machines, that means also in terms of euros.

We want to just be in line with our projects we announced at the beginning of 2017. We want to increase profitability further. We are well on track with service. We are well on track now -- I should say, we are ahead of schedule when it comes to security printing. We are a bit behind the curve in our own production network. And we are on par in purchasing. So that is well on track. And I just made the comment already that we want to finish the external funding of the pension liabilities in Q1 and have the balance sheet improve by that in terms of equity ratio.

And on Page 20, this is just a recap of the targets that we have announced to achieve until 2021. I think last year was important for us because we had already a comparatively difficult comps for 2016. We passed the test in the first year and now we are very ambitious to deliver just as well in the remaining 4 years until 2021.

So many thanks for your attention, and we'll take all your questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from the line of Eggert Kuls with Warburg Research.

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

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Couple of questions, if I may. One is with regard to Digital & Web division. Here, I want to know if the restructuring of flexo is finished meanwhile and therefore we can expect the positive result again for this division? So that's the first one.

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Claus Bolza-Schünemann, Koenig & Bauer AG - President of Management Board, CEO, President and Head of HR, Legal Affairs & Insurance [3]

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That's a yes.

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

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Sorry?

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Claus Bolza-Schünemann, Koenig & Bauer AG - President of Management Board, CEO, President and Head of HR, Legal Affairs & Insurance [5]

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Quick answer is definitely, yes.

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

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Okay. Then you have invested a lot last year with regard to CapEx. What can we expect here for 2018? Same level? Or will it go down again?

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [7]

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You have to take into account that naturally, I mean, if we say we invested a lot in our pension scheme, as I said before, that this is going to continue because we want to get the rest out of the balance sheet and by the end of the first quarter, which is a quite tough quite move, I would say. We also have a couple of items that we want to spend money on, expansion of our [health] and service network. We want to, as said before, we started the -- sorry, the demo center in Würzburg. We also do have in mind a similar demo center, expanded demo center in Radebeul in Dresden. And this, we will spend money. I think 2018 will not be a cheap year. There are a couple of items that weigh in, but after '18, I think things will normalize nicely again.

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

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Okay. So my question was with regard -- or without the external funding of pension, so only...

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [9]

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Yes. If you detach this I think, yes, we have to take into account that SAP is going to be dragging some investments. We -- and the remaining CapEx will come from, let's say, investments into how can we be better towards the customers in terms of demo centers. I think it's not a secret that if you have the facilities to run test for customers at all times, this gives you a much better lever. And let us think about flexor printing, since we mentioned it before, the big name clearly, against we fight -- against which we fight have own testing facilities where the customer can come with their, let's say, product and test the machines and we simply don't have that, and that's clearly a negative as compared to competition. And we need to invest here in order to be a pain in the back for our competitors. And therefore, as I said, after 2018, things will normalize.

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Eggert Kuls, Warburg Research GmbH - Senior Analyst [10]

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Okay, good. And maybe could give a little bit more color on the progress of the efficiency program, the EUR 70 million? So how much of that EUR 70 million have you generated already? And what do you expect to generate in 2018?

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [11]

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Well, we said in the outset that this is going to be a quite linear program and I had hoped -- Claus said I have been specific enough already, but I will not be more specific if I repeat myself now. We are a bit ahead of the linear schedule, maybe even good, I think, ahead of schedule when it comes to picking costs out in security printing. We are absolutely on track with the service business. We are a bit behind the curve. But again, this is EUR 50 million over 5 years, so this is not a big deal that we are talking about in terms of year-on-year improvement with our own production network and we are on par with the purchasing efforts.

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Eggert Kuls, Warburg Research GmbH - Senior Analyst [12]

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Okay, very good. So we can expect...

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [13]

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In a balanced fashion, I would say, it was meant to be linear and it was linear in the first year.

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Eggert Kuls, Warburg Research GmbH - Senior Analyst [14]

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So again, in 2018, we will see benefits of, let's say, EUR 10 million to EUR 15 million around?

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [15]

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That's linear, yes.

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Eggert Kuls, Warburg Research GmbH - Senior Analyst [16]

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Yes, okay. That's linear, right. Then I wanted to know if you have an idea when the first sales will be made with the machine for the 2-piece can? Is that already in 2019 or...

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [17]

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So we didn't tell you that before because this is Q4 call now and we signed first contract by the end of 2017.

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Eggert Kuls, Warburg Research GmbH - Senior Analyst [18]

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Okay. In this way, the machines will be delivered during 2018 then, I guess?

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Claus Bolza-Schünemann, Koenig & Bauer AG - President of Management Board, CEO, President and Head of HR, Legal Affairs & Insurance [19]

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Yes, we have -- the obligation, the pleasure to deliver machines into test environments at very large customers because we need practical tests and this will happen this year.

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Eggert Kuls, Warburg Research GmbH - Senior Analyst [20]

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Yes, it's what you already mentioned during your presentation, right?

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Claus Bolza-Schünemann, Koenig & Bauer AG - President of Management Board, CEO, President and Head of HR, Legal Affairs & Insurance [21]

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Yes.

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [22]

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But the thing is, these are not machines that we'll simply ship or will be shipped to the customers for free in order to test, but they are paid for, right? So these were proper sales. And we want to release the machines to be up for the serious production by the end of 2018.

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Eggert Kuls, Warburg Research GmbH - Senior Analyst [23]

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Okay. And you already mentioned that you don't want to comment on single orders, otherwise I would have asked both...

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [24]

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(inaudible)

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Eggert Kuls, Warburg Research GmbH - Senior Analyst [25]

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[The issued order]. Okay, so I'm waiting for that. Maybe a very last question. You mentioned whether you expect H1 '18 to be tougher than last year. Can you a little bit give more color why that is?

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [26]

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Well, simply because we know the revenue distribution pretty well already. We are, I would say, we are almost fully booked. I mean, everyone, if I look around at the plants and the factories, then we really -- it's like a beehive and people are really working. And we know the delivery schedules, and this is why I'm saying it would be a surprise if this year would be a walk in the park as compared to last year. We are pretty positive on our targets. There's nothing that you hear that is remotely trembling voice on my end. The only thing that I now, having the delivery schedules ahead of me, I know that our revenue distribution will be back-end loaded once again.

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Eggert Kuls, Warburg Research GmbH - Senior Analyst [27]

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So it's only a question of revenue distribution?

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [28]

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Yes.

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Eggert Kuls, Warburg Research GmbH - Senior Analyst [29]

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Okay. Because when looking to the order intake in the second half of last year, it's obvious that you had a very, very good order intake in Special solutions, which is your highest-margin business. And so from this point of view, I guess the mix this year and maybe also next year could improve.

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [30]

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Might be. By the way, it's not our highest margin. We have one area, which has better margins, but this is clearly the showcase, yes.

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Operator [31]

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(Operator Instructions) The next question comes from the line of Stefan Maichl with LBBW.

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Stefan Maichl, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [32]

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Stefan Maichl from LBBW. Some questions, if I may. The first one, we had a rather strong order intake in Sheetfed solution year-on-year, but also sequentially in the last quarter in Q4 without a big trade fair as we have seen in Q2. Could you probably share with us the regional dynamics in Q4? And is this a level that we might also see in the Q1 or Q2 of 2018? I mean, you mentioned you have a good run in the year. So could it be that we might run EUR 170 million, EUR 180 million in the first 2 quarters? That's the first question.

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [33]

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Well, the thing that I clearly can say is that we were quite pleased with Sheetfed last year. In 2016, we had the first -- I'm sorry, the first half year in the second -- in the second quarter, we had the Drupa there that we didn't have. We had in 2017 the Print China or China Print whatever it's called. I'm getting confused all the time because their shift changes -- they shift names year-on-year, so I keep forgetting what it was in the last year, but...

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Stefan Maichl, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [34]

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Print China.

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [35]

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Many thanks. And we, in a way, emancipated a bit from the trade fair in 2016, and clearly, this is what I said before. For us, the revenue distribution -- or sorry, the order intake distribution in the year of the throughput is simply distorting the quarter. It's not the sorting of the full year order intake. So the order intake is as what the order intake will be in any given throughput year, but the quarters will be distorted by that trade fair. We didn't have that effect in 2017 much, although it was good Print China. Now we see stable, I would say, demand in all geographies. That's what I said before. And we have good market share gains also.

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Stefan Maichl, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [36]

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But I mean, you have already reached that Q2 Print China level in Q4. Were you astonished about that? I mean, has there been any regional-specific issues or large orders received in that quarter, large-format orders?

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [37]

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Can I -- maybe just a point here. That was complicated. There was not one geography or customer sticking out. This was just business as we wanted them.

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Stefan Maichl, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [38]

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I understand. So the second one is on the KBA-Industrial Solutions. You've mentioned in your report that there has been some burden, earnings burden, in 2017 from that business. Maybe you could provide some more color on that and give us an outlook for 2018?

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [39]

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So first of all, we are not reporting this in a segmented view. It is correct that we wrote down our, let's say, our interest in the Industrial Solutions as we have not been happy with the performance of that entity. We never made a mystery about this. And this was a good, let's say, moment in time. We also said that we wanted to increase our own production network in terms of profitability, and this is the answer to why we have that intention.

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Stefan Maichl, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [40]

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Okay. Third one, I think it's the first time for many years that they have recognized that they have capitalized development cost in your balance sheet, about EUR 4.6 million.

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [41]

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(inaudible)

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Stefan Maichl, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [42]

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Probably you're not happy with that, you have been forced to do that. But could you state the project behind probably in the Digital & Web division? And should we see something similar in 2018?

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [43]

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No, it was a tiny figure. By the way, we did this in the past already. We never said we wouldn't do it. We only do it to extremely limited extent given the size of R&D in total, which we have looked at before. And the reason was that we entered into a completely new market, which is corrugated and that's what we said.

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Stefan Maichl, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [44]

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Okay. And my last question is for Mr. Bolza-Schünemann. You mentioned in your speech the KBA VariJET 106, which was presented the first time, I believe, at the last 2-part trade fair and I assume it was planned to bring into the market in 2018. So is that not anymore in focus? Or have you maybe postponed that program to 2019/'20?

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Claus Bolza-Schünemann, Koenig & Bauer AG - President of Management Board, CEO, President and Head of HR, Legal Affairs & Insurance [45]

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Two questions in one. We have not given up, of course. And yes, correct, the original plan was to enter the market around 2018. However, we have 2 machines as prototypes, but according to demand of customers, especially in the folding carton business, we have not reached this with the digital equipment yet. And we believe it would be a mistake to deliver first machines -- force deliveries of first machines and create unhappy customers because this is the main reason it is quite a task to achieve with the digital machine well known and over I do not know, 60, 70, 80 years, 70 years develop offset quality to reach this with digital. And this, at the very end is customers asking for this and we are not there yet and therefore it needs further investments, needs further developments, research and so on. We are certainly working on this, no question. And we hope, to be frank and open, we can be on the market, the next Drupa is coming up in 2020. So yes, we are fully working on it, but it's too early yet and we don't want to go into the market with a product, which is just not ready for the market.

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [46]

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If I may add, the thing is that our intention is to only sell product that are helping the customers grow and be profitable. In other words, there needs to be a business case for the customers. This is not art for art's sake business. This is something where we find we are obliged to serve our customers in a sense that the product that they purchase from us is really not only in terms of quality excellent, but needs to be in terms of folding carton superfast and matching offset quality. And unless this is not a given, I think it's making no sense for the customer. I wouldn't advise the customer to buy one of those machines because I would not see the business case. And before we, as a company, I'm not convinced that the machine is actually matching the demands of the customers, it doesn't make any sense to convince the customers, talk the customer into something like this.

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Claus Bolza-Schünemann, Koenig & Bauer AG - President of Management Board, CEO, President and Head of HR, Legal Affairs & Insurance [47]

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We don't want to deliver headaches for both.

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Operator [48]

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Your next question comes from the line of Stefan Augustin with equinet.

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Stefan Augustin, equinet Bank AG, Research Division - Analyst [49]

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Three questions from my side, one at a time probably. The first one would be on your announced price increases. You said that they are on average overall products and divisions. Can you shed a little bit more color where do you have the larger price increases to offset, where do you believe customer will better take price increases, things like that?

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Unidentified Company Representative, [50]

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This is [Paddy]. Simply to answer, yes, we do have price increases, no matter if it's energy, if it's our material, if it's supply, order of the supply chain. Or especially in Germany, we have new, what is it, like Worker's Compensation. We have a wage increase of roughly 4.2% for 2018. And it would be nice to easily compensate this internally, but we see this is impossible and therefore we announced a price increase-ment. And this does not differentiate between offset or flexo or whatever, it's in general. And we have to fight for this. No customer is willing to just go along with it and swallow it, if I may say so. But it is a task for everyone involved in sales and service to fight for this price increase and we do need.

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Stefan Augustin, equinet Bank AG, Research Division - Analyst [51]

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So to put the question a little bit differently. A, you will most likely increase then your machines the same amount as your services?

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [52]

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We said. I think it's in the written statement. It's a [3.7 %] price increase. That's what it is.

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Stefan Augustin, equinet Bank AG, Research Division - Analyst [53]

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Okay. The next one, could you make -- or give an update on your acquisition pipeline? And do we need to factor in something for 2018 most likely?

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [54]

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If we would be so lucky if we were able to give you anything specific now. By the way, since we are a listed company, we would have to announce that as soon as we have something to say. So therefore, we are not saying anything. This gives you a good feeling. But that doesn't mean that we are not working on everything as we did before. The thing is just -- we might or might not be able to acquire target that we find desirable and doesn't make any sense to give a forecast on this.

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Stefan Augustin, equinet Bank AG, Research Division - Analyst [55]

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The last one would be on Digital & Web division. So if I recall that right, the flexo losses were mainly in the first half of the year. Is it right to conclude that when we are still a little lossmaking in the second half of the year, that this is mainly a volume problem? And would there be a threshold for the sales volume, say, if you would, first of all, below that levels we would start to get a problem in that division? I mean, Q4 order intake was still below sales level, that's why I'm asking this question.

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [56]

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Well, thing is, first of all, coming to your flexo point, yes, 2017 was not a nice year for flexo. That was -- we are not giving you the detailed figures, but we know them, of course. The order level that we're having in flexo right now also in terms of (inaudible) margin is much better than it was a year ago. So therefore, we are not saying everything is going to be good and it's going to be blue skies scenario tomorrow. The thing is we feel pretty confident, as we speak, about the progress that we have made. And the other question related on the, let's say, segmental figures and clearly, I mean, we have to take into account that at one point in time, the last newspaper press will have been built and we are preparing for that moment. I don't know when this is happening. The customers still wants those machines and we are delighted to provide them those machines. But clearly, we are heavily working on corrugated flexo printing, which is in that division we're working on anything, which look like digital; corrugated, in terms of HP/our own solution; and on the decor printing just as much. And therefore, naturally, it's vital for us to invent new product that are going to substitute the old newspaper presses. That's the name of the game.

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Stefan Augustin, equinet Bank AG, Research Division - Analyst [57]

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Okay. Very small follow-up. The new digital MetalCan product, will that be in Special or finally in Digital & Web?

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [58]

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In Specials.

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Operator [59]

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Next question comes from the line of Richard Schramm from HSBC.

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Richard Schramm, HSBC, Research Division - Analyst [60]

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Questions from my side, please. I think you touched already a bit the regional trends, but maybe you can shed a bit more light on the development here, especially with a view to the tensions we see arising between U.S. and EU. Could that have here an impact in some aspect to your business if we really we run into a trade war here on a global scale? Second thing, I'm always surprised to see that the service business is rising. It's nice because we can assume that this is very good then for your profitability. However, is this driven mainly by structural trend? Customers willing to give up their own service activities? Or is it just more driven by your investing in this business? And could we expect that this 30% is just a benchmark, which might also be exceeded in the long run? Or is it kind of natural threshold do you think, which then should be a balanced figure between new business and service business in the long run?

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Claus Bolza-Schünemann, Koenig & Bauer AG - President of Management Board, CEO, President and Head of HR, Legal Affairs & Insurance [61]

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Starting with the U.S., we don't see -- well, you never know what happens tomorrow. But right now, actually, no threat since the printing industry is extremely smooth. The machining, not the printing itself, but printing machinery is a fairly small business, and most important, there's no competition in the U.S. and therefore it is very much unlikely that, especially on printing equipment, there will be some crazy import taxes or whatsoever. And if it would hurt any imported, there's no local substitute for it. This is different in the steel, in the automotive, in aluminum, whatever business and I think therefore, we don't have -- we don't see a reason to have a threat there. And the U.S. business in '17 was quite nice, picked up very good. Packaging is running well. We see no downtrend right now for 2017 -- 2018, sorry. However, if the U.S. completely closes its borders, then we can't help it. But there's no sign right now. Regarding service, first of all, we invested a lot in people, in technology to bring up our service business. This was definitely a lack in the past. We did not penetrate customers consequently enough. This is running very well. What also helps, and especially in Digital & Web, since the new investment is on a very, very slow scale, automatically the machinery, the equipment gets older and older and therefore customers, if they don't invest, they have to invest in service. And besides the very large companies who have own service technicians, yes, the smaller companies do request service from our end. So I think it's both. I'm going to say heavy investment we did, no question. In some segments, we were really slow with service. But today, we have a very good also internal benchmark and this drives our own people be active service to increase this business.

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [62]

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And as to your comment regarding 30%, whether in the long run higher threshold could be possible, well, walk before you run, right? So I think it's tough for us to reach the 2021 figure. We gave you those targets 1 year ago and we consider them to be quite ambitious. They still are ambitious. We're on a good path to be there. And as you just heard, we invested. So I think our customers react well on our endeavor to improve our service. There's nothing negative that I heard from customers regarding that point, quite to the opposite I have to say. Customers are more or less pleased that we take services seriously now. But as to a prognosis whether the 30% could be exceeded in 4 years' time, I would say we have to be patient and see what we have achieved by then.

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Operator [63]

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Our next question comes from Michel (inaudible), (inaudible)

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Unidentified Analyst, [64]

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I would like to refer back to the Flexotecnica here. Could you please elaborate a bit on the product adjustments you made for the Flexotecnica? And here, how do you see the trends that we could see, maybe a significant turnaround in sales for equipment business here in 2018, here also given that the flexible printing market should have stayed in growth mode in 2017? The next question would refer to Kammann and MePrint. I think, 2017, again, was a very strong year for the Kammann and MePrint in terms of sales and margin progression. Can you elaborate here a little bit what is driving growth so much in these 2 entities? Is it product mix besides the services? And our competitors here losing some traction in your niche here? And what are your expectations for these 2 entities then for the following quarters of the coming year? And the last question would relate to securities printing business again. Would like to know if you think the competitive landscape in 2017 has changed a little bit compared to 2016? So do you see any new competitive or perhaps pricing headwinds arising for the banknote tender bidding business here? And with regards -- with special regards to East Asia, so do we see 2017 as an extraordinary good year for the securities business in terms of order intake? Should this maybe normalize to a level what we saw in 2016?

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [65]

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So let me just start off with your last question, and you asked so many things, probably I forgot most of it. But last thing I remember, I think banknote production is something, which is global already. And I think our markets are not, let's say, Switzerland and Sweden, but -- or Germany for that matter, but rather we're talking about these are the Philippines, Malaysia, Vietnam, Thailand. By the way, these are all actual customers of ours, in which we just this year or the year before or the year before -- Vietnam, I think, I forgot to mention, Bangladesh were a customer of ours in the past 3 years. So this much I can tell. And as I said before, we've lost a single order last year on price, which we deliberately lost. And every other machine in the world, we did collect. So yes, competitive landscape is there. And Komori has a good idea to cut our prices in half. Well, it's easy for them since they don't have to invest in R&D because they, let's say, reversed engineer our technology and invert upon us and that helped them much last year. So we were pretty much standing on our feet. And naturally, it helps that we took out some costs. But we have not gained -- since this might be in the background of your question, we did not increase our market share last year by slashing prices, not a bit. This is not what we see as a good move to increase market share. We are not cutting prices. Quite to the opposite, we are working strongly on improving our equipment, on making the benefits of the equipment visible for the customer. And we believe that the future markets just as much as today's market, as I pointed out before, are located in Asia, in Southeast America, in Africa and also much in nations that maybe have 1 billion in population already, the industrial nations. They are important customer of ours, but the growth markets are clearly the first.

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Claus Bolza-Schünemann, Koenig & Bauer AG - President of Management Board, CEO, President and Head of HR, Legal Affairs & Insurance [66]

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And if I may add, in the saturated markets the population is not growing.

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [67]

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Oh, yes.

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Claus Bolza-Schünemann, Koenig & Bauer AG - President of Management Board, CEO, President and Head of HR, Legal Affairs & Insurance [68]

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But especially in the emerging markets and each has a lot of population growth is one of the driving factors. May I comment on flexo? Yes, it was a cleanup year, 2017, to clean up with the past. You do know we exchanged the Managing Director. We do have a new very active sales director since the beginning of this year coming from the competition. We did some organizational changes. We got away with technical problems we had with existing machinery in the field. This has all been taken care of and therefore we are quite confident that in 2018 the flexo business will pick up again. The flexo -- the flexible packaging market, in general, is growing around the world roughly 4%, 4.5% per year and therefore we are confident that this business will increase. And we are also convinced that we are in the right market. So this is heading for us, but it is absolutely the right way and the right market to be in. Regarding Kammann, we're struck in the past. You all know this by the sharp decline of the compact disc business. This was a nice service business, not new machineries. But the compact disc, (inaudible), whatever, has almost completely disappeared and therefore the service business did sharply decline. Kammann is on a very, very good track, has new developments, digital machines, hybrid machines, which means a mixture of digital and analog printing. They come up with high-speed container printing. So they are very well on the run and it's a pleasure to follow this company and also the growth we are expecting there.

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [69]

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Yes. And last comment, you probably didn't mean Metronic -- MePrint, but rather Metronic in marking and coding and well, we gained traction. Things are moving well and nothing pretty much to comment on. It's a high-margin business, so we really like to have it.

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Unidentified Analyst, [70]

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Okay. And just maybe a very, very quick follow-up on security printing business. I mean, since you are predominantly bidding for tenders in East Asia, have you seen the arising of a new competitor aside from the existing one, Komori, in the last year?

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [71]

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Well, you know that the Chinese, just as much as Komori have copied our machines. They're, for the time being, sold it only internally. And we trust that they will try to sell it also externally of China, so into the world. And the likelihood that they currently take up with their machines is dim. Since that with Komori, that is within their shooting range, maybe earlier than we are. I think we have to take every competitor seriously, so we also have to take the Chinese seriously, but we have not seen them in any tender.

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Operator [72]

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There are no further questions registered at this time. I would like to pass back to Mr. Dahn for closing comments.

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Mathias Dahn, Koenig & Bauer AG - CFO, Head of Information Technology and Member of Management Board [73]

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Yes, well, I think that was rather lengthy call. Thanks for your very good questions and we'll be delighted to hear you back when we report on the first quarter. Until then, I wish you a very nice end of the week. Bye.

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Claus Bolza-Schünemann, Koenig & Bauer AG - President of Management Board, CEO, President and Head of HR, Legal Affairs & Insurance [74]

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Thank you. Bye-bye.

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Operator [75]

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Ladies and gentlemen, the conference is now concluded. You may now disconnect your telephones. Thanks for joining, and have a pleasant day. Goodbye.