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Risk and Opportunity Report - Keeping an Eye on All Aspects |
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- Countering Price and Rate Risks Based on Innovations with Measurable Customer Benefits
- Economic Uncertainty and Financial Market Crisis Entail Risks
- Long-Term Hedging of Exchange Rate Risks
General Statement on Overall Risk and Opportunities: Change in Priorities
There is no recognizable risk that could threaten the existence of the Heidelberg Group - either currently or for the foreseeable future. This applies to both the results of the business activities that we have completed as well as for operations that we are planning or have already initiated.
The Heidelberg Group's overall risk situation has remained at the previous year's level. Several of the risks that we had described in the previous year's report have occurred and are therefore being fully taken into account in our planning process. However, other risks have worsened. For example, the exchange rate situation has developed to the disadvantage of European suppliers to a much greater degree than had been feared by Heidelberg and in general. As we had projected, this has had a considerable impact on competitive conditions in the sheetfed offset area. In the finishing area for packaging solutions, our principal competitor, Bobst, could thereby pursue even more aggressively its strategy of defending its market shares. The risk of an economic downswing in the US, which we had mentioned the previous year, has also taken place.
Overall risk priorities have therefore shifted. We currently view a potential worsening of overall economic conditions as our greatest risk. It is unclear how long the financial crisis will continue and how strong its impact will be on overall economy and business conditions in our industry. There continues to be a danger on the one hand that our Japanese competitors could gain additional market shares due to the exchange rate situation, and on the other hand, that market prices could deteriorate further due to the tough competition for market share.
At least once a year, we examine the need to make adjustments to our overall strategy as well as to the strategy of the individual divisions. Our strategic risks are manageable. In the Postpress Division, risks are greater, among others because we have a less dominant market position in this segment. Barriers to market entry are lower here as well. We minimize risks arising from sales financing by means of a well-balanced risk management system. We limit the financing arrangements that are taken on by Heidelberg to the greatest possible extent. Moreover, we only assume financing arrangements following a comprehensive examination that includes the customer's business model and credit standing.
Our principal opportunities are better than expected economic developments and a possible change in exchange rate structures in our favor.
Risks Arising from the Economy and the Market: Country Risks in Some Emerging Markets
Whereas the emerging markets are expected to continue their rapid growth, the future developments in the industrialized countries are shaped by considerable uncertainty. Our business development would be severely burdened should actual economic developments fall considerably behind the already restrained expectations. We are consequently vigorously pursuing our goal of limiting the impact of weak economic periods on the earnings of the Heidelberg Group. We reduced our structural costs and continue to focus on a high degree of regional diversification. We are also focusing on our relatively non-cyclical business units.
Industry and Competition Risks: Further Countering the Price Risk
The general price level for print shop equipment could weaken further due to aggressive behavior on the part of our competitors. Moreover, there is a danger that Japanese competitors could expand their market shares, as for many years they have been able to take considerable advantage of the exchange rate structures. In addition, they might use these competitive advantages to acquire market shares in format categories in which they were hardly active in the past.
Should the competitive structure change in one of the areas - for example, because competitors disappear or merge - in addition to risks, we could also enjoy opportunities due to a potential expansion of our market position. A change in exchange rates in favor of suppliers from the European region would have a favorable impact on our business development.
Product Risks Down Considerably from the Previous Year
We took part in drupa with a new product portfolio, and we introduced significant new developments for our customers. Nevertheless, there continue to be risks in this area. Since the new products are about to be launched in the market, it remains to be seen how well they are accepted by our customers and how successful they are in the market. Our new generation of printing presses, the Speedmaster XL145 and the XL162, which we introduced at drupa and which address a new customer segment, might be more quickly accepted by the market than we expect.
Overall Financial Environment Risks Unchanged
We are subject to credit risks resulting from the sales financing business. On the one hand, payment losses may arise under financing contracts with customers, while on the other hand, claims may also arise against Heidelberg under recourse liabilities for financing contracts with finance companies for our customers. Risks from sales financing are declining. Whereas we assess the further progress of this activity more critically, the scope of the financing arrangements that we assumed directly has decreased considerably.
We are striving to reduce our foreign currency exposure and thereby also our dependency on exchange rate structures. More emphatically than in the past, we have hedged in the medium term - for up to 36 months - against the risk that the exchange rates of our principal foreign currencies, whose volumes will be declining in the future, will continue to fall. Nevertheless, although risks exist in this area, we would also have opportunities should the exchange rate situation improve.
Risks Arising from the Performance below Previous Year's Level
There is currently a risk that the start-up costs for the production of our new products could be higher than originally planned. The highly regarded quality of our products and the high degree of supply reliability are key prerequisites for our business success. We minimize environmental risks through an efficient environmental management system - both in product design as well as in the manufacturing process.
We reduce the risk of making bad investments by including all planned investments as part of our worldwide uniform planning system. This system forms the basis for our focused financial management.
Overall, the risks arising from the performance declined from the previous year - among others because we systematically minimize risks arising from corporate functional areas. We have the opportunity of realizing clear cost reductions in the production area by improving processes. Furthermore, the prices for raw materials and energy could decline again, as a result of which the price level in our procurement markets could fall as well.
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As at: July 2008
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