Bucking the slump to post a profit

Press manufacturers hit by credit meltdown / Market collapse shrinks order intake and sales / Net income Euro 7.8m / Fewer sales, group loss in 2008

(PresseBox) ( Würzburg, )
Like the rest of the sector, printing press manufacturer Koenig & Bauer AG (KBA) is experiencing dramatic knock-on effects from the current financial turmoil on its export business. Following a slump in demand in key markets such as the USA, and the abrupt tightening of credit lines for customer investments, group order intake to 30 September fell 12.5% from Euro 1,148.2m the previous year to Euro 1,005m. The 15.8% contraction in new orders for sheetfed presses, from Euro 581m to Euro 489.3m, was particularly painful. It was due partly to widespread reluctance among small-scale printers to invest in new kit and partly by the postponement and even cancellation of several contracts signed at Drupa, as attempts to secure financing failed. The volume of new orders booked by the web and special press division declined by 9.1% to Euro 515.7m from Euro 567.2m twelve months earlier, with an increase in new contracts for newspaper presses failing to offset softer demand for security and commercial presses.

Group sales to the end of September totalled Euro 1,075.3m, 11% below the prior-year figure of Euro 1,208.6m. Disappointing post-Drupa business led to a 12.2% drop in sheetfed sales from Euro 569.2m to Euro 499.9m, while sales of web and special presses slipped 10% to Euro 575.4m (2007: Euro 639.4m). This was largely due to the absence of rotogravure business (sold to Cerutti in September 2007 following a steady decline in sales) and a decrease in shipments of commercial and security presses. The group order backlog stood at Euro 721.6m, compared to Euro 888.3m twelve months earlier. Of this, Euro 510.2m (2007: Euro 571.1m) was generated by web and special presses, and Euro 211.4m (2007: Euro317.2m) by sheetfed presses.

In the black thanks to web and special presses

Notwithstanding narrower contribution margins, higher material and energy prices, the substantial expense associated with intermittent below-capacity plant utilisation and allowances for bad debts, KBA posted a modest operating profit of Euro 7.9m (2007: Euro 41.5m). This was generated solely by web and special press sales, which outweighed a double-digit loss in the sheetfed division. A financial loss of Euro 4.3m was accompanied by a plunge in earnings before taxes (EBT) to Euro 3.6m, from Euro 38m a year before. KBA closed the period with a net profit of Euro 7.8m (2007: Euro 29.8m) and proportional earnings per share of 47 cents (2007: Euro 1.83).

Positive cash flow, solid finances

While funds ebbed from Euro 134m at the end of December to Euro 123.4m, they still represented a solid financial position. Cash flows from operating activities swelled to Euro 49.8m from Euro 15.7m twelve months earlier. Outflows for investing activities came to Euro 28.6m, the free cash flow Euro 18.4m. Equity stood at a solid Euro 514.7m, or 37.5% of the balance sheet total (31.12.2007: Euro 515.1m and 37.7%).
At the end of September the group payroll totalled 8,003, 263 fewer than the previous year.

More domestic sales, fewer exports

Domestic sales climbed 5.4% to Euro 169.8m (2007: Euro 161.1m), reducing the export level from 86.7% to 84.2%. The proportion of group sales generated by the rest of Europe eased from 53.8% to 52.3%. While the shipment of big newspaper press lines to India raised the percentage contributed by Asia and the Pacific from 14.1% to 19.1%, there was a further decline in North American sales from 9.6% to 7%. The proportion of sales generated in Latin America and Africa fell from 9.2% to 5.8%.

High restructuring costs will increase loss

The inevitable outcome of a diminished order backlog was below-capacity production output at the parent company, and this continued in the fourth quarter. As a countermeasure, overtime and holiday accounts are being run down and after a ten-day closure in late October KBA's Radebeul plant submitted an application to introduce short-time work. Other production sites may have to follow suit. Thus far, subsidiaries addressing niche markets such as metal decorating, industrial coding systems and security printing have been unaffected.

In the group's third-quarter report KBA president and CEO Albrecht Bolza-Schünemann reaffirmed the revised sales and profit forecast issued in late September. In the current financial year (ending 31 December) the group now anticipates sales of Euro 1.5bn (compared to Euro 1.7bn in 2007) and a group loss due to a high one-off expense for consolidating sheetfed production plants. With exceptionally weak global demand for newspaper and commercial web presses now being succeeded by a severe decline in demand for sheetfed presses, and little likelihood of improvement in the foreseeable future, KBA management sees an urgent need to reduce capacity in its sheetfed division, having barely completed the capacity adjustment initiated at its web press plants in September 2007.

Says Albrecht Bolza-Schünemann: "With market pressures forcing a consolidation of our factories in Radebeul near Dresden (Germany), Mödling (Austria) and Dobruška (Czech Republic), we shall have to trim the existing 3,600-strong payroll by some 600 employees. Details are still being negotiated with workers' representatives. In addition to an operating loss, excluding restructuring, of somewhere under Euro 10m, we expect extraordinary expenses for layoffs and other remedial activities, together with inevitable valuation adjustments, to result in a pre-tax loss at the end of the year in the high double-digit millions."

In view of the current turmoil in the international business environment, and unforeseeable developments in financial markets, Bolza-Schünemann sees any attempt to predict KBA's path beyond 2008 as entailing too many unknown factors to be of any merit.
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