Even though it is generally expected that the vigor of the world economy will barely be hampered during the current financial year, there are some risks to economic growth. As in the past, the further development of the overall economy represents the greatest risk – as well as the greatest opportunity – for the Heidelberg Group.
Our planning assumes that the world economy will generally develop solidly despite the existing uncertainties. In the section "Expected Underlying Conditions" we explain how this corresponds to assessments by most leading economic research institutes. A number of factors currently make it difficult for us to present a reliable range for the development of our sales and earnings in the next two financial years:
Our annual sales target in the medium term, which we intend to achieve within the next two or three years, has been set at over € 3 billion. Assuming that the economic environment will continue to be generally stable, we expect to gradually approach this target during the current and next financial year. Due to drupa 2012 and the ongoing upswing in the print media industry, the increase in sales in the next year should be greater than in the current financial year. As during the reporting year, growth in the Heidelberg Equipment Division will presumably be greater than in the less cyclically sensitive Heidelberg Services Division. We intend to keep our directly financed portfolio in the Heidelberg Financial Services Division as low as possible.
Higher procurement prices, resulting primarily from the rise in the cost of raw materials and energy, may burden the result. Demand for purchased parts worldwide increased considerably already during the reporting year. This resulted in an overall boost in the prices for raw materials as well as for pig iron and scrap steel. Furthermore, delivery and replacement times lengthened. From today’s perspective, this development will continue during the current financial year, and we also expect the cost of energy to increase. This will have an impact primarily on the manufacturing of printing presses. We plan to keep our staff costs relatively unchanged in relationship to the total operating performance. We came to an agreement with the Works Council on flexible working time instruments in order to be in a position to react to fluctuations in capacity. Moreover, our capacities will be more fully utilized due to the increasing demand. Assuming that the industrialized countries will be subject to a further economic upswing, we will benefit from a further improvement in the mix of sales and profit margins. In addition, the full impact of our cost reduction measures will become evident beginning in the current financial year. We sustainably reduced annual fixed costs during the reporting year by € 460 million compared with the base year 2008. We expect further sustained savings of € 20 million during the current financial year enabling us to lower our annual fixed costs by a total of € 480 million.
We were successful in drastically reducing our operating break-even point in recent years, and thereby in generating an operational break-even result of operating activities excluding special items during the reporting year. Assuming that the volume of business will increase, we therefore expect the operating result to improve during the current and the next financial year. In the medium term, we are striving for a return on sales of over 5 percent with sales exceeding € 3 billion. Thanks to the large reduction in debt, the financial result will have a substantially less dampening effect than during the reporting year.
Assuming a stable development of overall economic conditions and of our industry, we are striving for a balanced pre-tax result during the current financial year on the basis of a higher operating result and lower financing expenses. If favorable trends continue into the year of the drupa trade show, we expect our after-tax result to be in the black in financial year 2012/2013.
We will continue to focus on “Asset Management” and on the management of net working capital in the next few years, and thereby substantially restrict the outflow of funds. Although absolute values will rise due to the growing sales, we will nevertheless strive for a further reduction in proportion to sales. Our investments will continue to amount to approximately 2 percent of sales. Our priority in the current year will continue to be the expansion of our Chinese production site in Qingpu, which we will complete during the current reporting year. We are planning to primarily undertake replacement capital investments during the next financial year. We will continue to actively manage our free cash flow and thereby ensure that our capital structure remains sound and that our already achieved financial stability is maintained. For the medium term, our funding is secure, due to the fact that we reorganized our financing structure at the beginning of April 2011. The line of credit from a bank underwriting syndicate has a period of validity that runs through the end of 2014. Our high yield bond has a term to maturity of seven years, in other words, to 2018.
In the heidelberg equipment division, we expect above-average growth in sales because print shops will work through their investment backlog. During the current financial year, we will gradually further expand our marketing of the digital printing press from our partner Ricoh – our customers can count on benefiting from our cooperation with Ricoh worldwide up to drupa 2012. In preparation for the most important trade show for our industry, we will invest in demonstration printing presses in the current and the next financial year. We will also invest in expanding our Qingpu production site in order to continue to extensively benefit from the growth of the Chinese market. Thanks to the attained cost reduction effects, the expected favorable sales mix, and higher capacity utilization, we are confident that our result will further improve and this division will exceed the break-even point in the year of the drupa trade show.
We assume that the sales of the heidelberg services Division will continue to show solid growth – primarily in consumables. During the current reporting year, we plan to invest in a manufacturing facility in the US for the production of our own coatings. Growth in sales and cost reduction effects will cause an improved result of operating activities before special items also in this division.
In the heidelberg financial services Division, we will continue to follow our policy of focusing primarily on the mediation of financing arrangements with external service providers. This division will continue to make a favorable contribution to the result of operating activities.