Making Heidelberg Fit for the Future

Ralf Schlozer
Jun 18, 2014

The announcement of annual results is always a good opportunity to provide an update on company strategy or present a new organisational alignment. The latest Heidelberger Druckmaschinen annual press conference, however, had far deeper implications than that.

A main message to investors, debtors, and the whole graphic arts community was that Heidelberg delivered on its promise of returning to profitability. Although the net revenue of €4 million was not particularly impressive, it is nevertheless an encouraging sign because it implies a turnaround. In the last five years Heidelberg has accrued a net loss of almost one billion Euros. While financial analysis will certainly have a feast on the numbers, the announced strategic reorganisation and several other organisational moves have important implications for the future of the company.

In the last year Heidelberg has conducted an in-depth analysis of the business areas the company is active in. They have been clustered into four strategic fields of action:
– Digital printing
– Service and consumables
– Sheet-fed Offset
– Weak margin operations

 

Heidelberg's four strategic clusters

Source: Heidelberger Druckmaschinen

Seeing digital printing at the top of the agenda evokes some mixed emotions. Heidelberg’s history in digital print is a history of attempts and missed opportunities. It might well be the last opportunity now and it will take some effort to convince the market that Heidelberg is an “offset and digital combined” company, which the new CEO describes as a goal. But there are encouraging signs that Heidelberg is getting serious about digital print. More details on planned activities have been written covered in a previous blog .

While major contributions from digital are still on the horizon, Heidelberg sees revenue and profit gains in the expansion of its activities involving services and consumables in the short term. Already in the last two years the services business unit has had a positive contribution to the company’s results, while the hardware results remained in the negative. There are several actions planned to boost this business area. Heidelberg intends to open its consumable business to users of other print equipment. Heidelberg is also looking into smaller acquisitions of local manufacturers of consumable products which can benefit from Heidelberg’s distribution power for their products to be marketed worldwide. An example is the takeover of the coating manufacturer Hi-Tech Coatings in the UK, whose products are now marketed successfully outside its original markets in the UK, Netherlands, and Germany. Heidelberg is also streamlining its plates and platesetter business. As expected, the collaboration with Fujifilm will be expanded with Heidelberg supplying platesetters to Fujifilm, which will be marketed under the Fujifilm brand in future. In return, Heidelberg has taken over sales activities for Fujifilm printing plates in some European countries. Likely this will be expanded; depending on how fast Heidelberg’s local sales organisations can wiggle out of existing plate reselling contracts with other plate manufacturers. Another new activity under Heidelberg’s service and consumable umbrella is the reselling of used offset presses. Finally the Performance Plus program will be rolled out on a global scale. Announced late in 2013 the program has a small number of early customers in the US and Germany so far. Performance Plus is to a certain degree a service contract on steroids. Heidelberg will evaluate the operations at a customer site, define specific efficiency and cost savings goals, and implement the necessary training, best practices, support, and other measures to achieve the desired goals. The customer only pays when the performance goals are achieved.

Sheet-fed offset equipment sales are the historic core of Heidelberg’s operations and still accounts for over half of all revenues. Hopes of this business area returning to former glory have been dashed and Heidelberg’s goal is now improve profitability rather than revenue. The portfolio has been streamlined already by discontinuing the GTO and Quickmaster 46 products and costs squeezed, but more consolidation is likely to come.

The final cluster consists of business units with weak margins and lower potential. Naturally press releases tiptoe around naming concrete activities and measures. Judging by what has been included in the previous strategic clusters, the main candidates are prepress and postpress. According to Heidelberg, the portfolio analysis conducted last year showed that the only way to achieve economic success in some product areas is to switch to new business models. Over the next six months, the company is therefore planning to make decisions on discontinuing some operations or radically altering the vertical range of manufacture, in some cases with the involvement of partners — which could mean outsourcing most of manufacturing. This could have some interesting implications. In prepress Heidelberg is active in workflow and Computer-to-Plate (CtP). The Prinect workflow has been moved to the business area digital and as a key component of printroom management is on the safe side. Shedding the CtP business would be difficult as selling CtP devices is a key to bundling them with plates — which are part of the consumable area in which Heidelberg hopes to grow. Additionally Fujifilm selling rebranded Heidelberg platesetters should boost production numbers. Frequently overlooked, Heidelberg is an important manufacturer of postpress equipment and manufactures cutting, folding, saddle-stitching, binding, die cutting, and folding carton gluing equipment. In some areas like folding and cutting Heidelberg is a leading manufacturer. However the postpress area is less intertwined with other areas earmarked by Heidelberg for growth. Postpress is important for digital printing as well, but Heidelberg has shown little activity in adapting their postpress equipment to the needs of short run and smaller format digital print. In postpress it will be somewhat less easy to forge a win-win deal as with Fujifilm and there could be some drastic measures in store for the operations. Until 2009 Heidelberg showed separate operating results for its postpress division in its financial reports, which disclosed losses for most years and only marginal contribution in the few better years. It is unlikely that the situation has improved much since 2009 and without products outside offset press finishing the revenue outlook is negative. Heidelberg has given itself six months make decisions on the fate of the weak margin business units, but downsizing in some of these business units will be inevitable.

Besides the strategic clusters, there were several other key announcements that will shape Heidelberg’s future. Only a day before the annual report press conference Heidelberg announced the takeover of Gallus by swapping its 70% stake for new shares of Heidelberg. Former Gallus owner Ferdinand Rüesch will become a new strategic anchor investor (and the largest single investor) by acquiring around 9% of Heidelberg shares in return for the Gallus stake. This move could ease somewhat the pressure from stock markets and short term investors on the Heidelberg shares. Gallus is a leading manufacturer of flexo label presses and had sales of 188 million Swiss Francs in 2013 and about 500 employees worldwide. Heidelberg had already acquired a 30% stake in the company in 1999, but technology transfer between the two companies has been limited so far as Gallus web-fed label presses are quite different from Heidelberg’s offset sheet-fed presses. This is about to change as Heidelberg is further developing its digital portfolio. In the fall of this year, Heidelberg and Gallus will be unveiling a new digital printing system for the label market based on Fujifilm technology. In January Heidelberg sold its inkjet label division to Markem (see the previous blog), which had too little momentum, in favour of a more promising new press design. The Gallus label printing know-how and market access will surely be a boost to the new label press while Heidelberg being in complete control of Gallus will streamline integrating the inkjet unit and DFE into a Gallus press base.

Another sign of the new management breaking with old traditions is the move out of Heidelberg’s historic and iconic location in the town Heidelberg. Of course it makes a lot of business sense to use the empty space at the nearby factory in Wiesloch/Walldorf, which has seen strong personnel decline. The move would remove the need for an impending modernisation of the headquarter buildings in Heidelberg as well. Heidelberg said that the administrative headquarters and demo center will move to the Wiesloch/Walldorf production site by the end of the financial year 2014/2015. This will involve the relocation of the Management Board and about 500 employees. R&D and print media academy will remain in the old, central location, bound by long term leases, but at least for the 900 heads strong R&D team the move is inevitable.

It appears that Heidelberg’s new CEO Gerold Linzbach is serious about change, some of which will be painful, but recent moves have put the company back in profitability and the focus on digital markets (a report on the digital strategy is in our shop) and new partnerships ought to pay off. Market scepticism about Heidelberg’s previous efforts around digital print are certainly warranted, yet with new leadership there is hope that this strong global brand will make a comeback that includes digital print as a key part of the strategy.

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