Expected macroeconomic and industry conditions
The smouldering Ukrainian-Russian conflict came to a head on 24 February 2022 when Russia invaded Ukraine. The currently unforeseeable consequences and their impact have not yet been factored into the forecast issued by the International Monetary Fund (IMF). The IMF stated on 10 March 2022, that it would be lowering its forecast for global economic growth next month because of the fallout from Russia’s war of aggression in Ukraine. In addition to human suffering, the war is causing massive economic dislocation — for Ukraine, Russia and beyond — and will lead to higher commodity prices, additionally spur inflation, adversely affect business confidence and result in more difficult financing conditions, according to the IMF.
The outlook for 2022 is exposed to great uncertainties. In January 2022, the IMF had already revised its forecast downwards by 0.5 percentage points compared with October 2021 and believes that global economic growth of 4.4% is possible. The global recovery process emerging in 2021 in the wake of the Covid-19 pandemic will continue in 2022, although the first quarter of 2022 will be more muted than initially expected due to the spread of the omicron variant of the coronavirus and the outbreak of war. The outlook for the further quarters of 2022 is also subject to great uncertainties given the protracted pandemic and the far-reaching sanctions imposed on Russia. Supply chain disruptions, high energy prices and strong inflation will continue this year. Monetary tightening in the United States and the continued contraction of the Chinese real estate sector will also exert pressure on the prospects for growth in 2022. In addition, labour shortages in many different countries are increasingly posing an obstacle to the current recovery. However, there could be strong stimulus for growth provided that households spend part of the savings they have accumulated. This would happen if the pandemic-related restrictions were lifted, thus boosting consumer confidence. The US economy is expected to grow by 4.0% and the eurozone economy by 3.9% this year. Both forecasts have been revised downwards compared to the October 2021 estimate (USA: -1.2 percentage points; Eurozone: -0.4 percentage points). On the other hand, the estimate for Japan was raised by 0.1 percentage points to an increase of 3.3%. The paths to recovery are also disparate in the emerging and developing countries. At 4.8%, China is expected to continue growing significantly despite various problems, albeit at a slower pace (-0.8 percentage points). After the difficult previous year, growth in the ASEAN countries should reach an average of 5.6% (-0.2 percentage points). By contrast, the outlook for Latin America is subdued at 2.4% (-0.6 percentage points), also due to what are expected to be almost flat conditions in Brazil. Sub-Saharan Africa is set to see an average increase of 3.7% (-0.1 percentage points) in economic output. The situation in the Middle East, including North Africa, could improve somewhat, with growth accelerating to 4.4% (0.3 percentage points). Source: VDMA, GDP figures: IMF World Economic Outlook Update January 2022; differences from the October 2021 estimate in brackets.
According to publications by the German Engineering Federation (VDMA), however, the war in Ukraine — in addition to other risks such as inflation, new waves of pandemics or the China-USA dispute — poses incalculable risks to further economic growth in the current year. Trade disruptions and the sharp rise in energy prices will dampen the economic recovery at the very least. Although Russia now ranks only ninth in German machinery and plant engineering exports (Ukraine: 31st, Belarus: 53rd), all three countries jointly account for total exports of €7.0bn (2021). The VDMA states that, in all likelihood, significant cutbacks to the point of complete loss of business are possible. In addition, it says that the indirect consequences of the Ukraine war, i.e. mutual sanctions, the severance of business relationships as well as a fundamental change in geopolitical and economic conditions, would weigh even more heavily. As a consequence of this and due to a comparatively weak fourth quarter in 2021, the VDMA economists are lowering their previous full-year forecast for real production growth in 2022 from 7% to 4%. Moreover, VDMA states that its forecast does not cover extreme scenarios such as the expansion of warlike actions to other countries, the consequences of which cannot be predicted. However, the VDMA economists caution that this forecast is subject to a high degree of uncertainty as further economic trends depend on many factors that are difficult to estimate. Although almost three quarters of the population in Germany are now fully vaccinated, there is still no sign of an end to the pandemic. On the contrary, the highly contagious yet presumably predominantly weaker omicron variant has led to a record number of incidences. What is more, the emergence of further variants cannot be ruled out, likewise resulting in higher absences and disruptions to company processes. Similarly, the possibility of renewed lockdowns cannot be excluded in many countries, while travel and residence restrictions may continue to pose problems. Future economic trends will also hinge closely on how long it takes for material and supply bottlenecks to be resolved. The generally positive picture painted by order intake so far could continue to consolidate over the next few months, albeit in a regionally disparate manner. The United States should continue to generate impetus. However, the same thing cannot be said of China, where the economy has been faltering for several months due to worsening supply chain constraints and as a result of the ongoing problems in the real estate sector. Accordingly, China is not likely to be a source of much stimulus. The situation in the EU is considerably more positive. Compared to China and the United States, it is lagging behind the cycle. The EU Recovery Fund, together with some national stimulus programmes, should provide impetus.
Forecast
The expected macroeconomic, political and industry-specific conditions in the markets addressed by the Koenig & Bauer Group provide the basis for the forecast for 2022 (1 January 2022 to 31 December 2022) and subsequent years.
The following estimates are based on the assumption that no further setbacks or intensified restrictions compared with the current situation arise from the Ukraine-Russia crisis, the resulting war and the sanctions imposed on Russia and Belarus as a result, and the fight against the pandemic. In addition, supply chain bottlenecks and the associated material price increases as well as increased energy costs continue to burden the Company and are not foreseeable due to the limited forward visibility with regard to the effects of the Russia-Ukraine conflict.
Koenig & Bauer expects a slight increase over the previous year in Group revenue and operating EBIT margin in 2022.
At the date on which the consolidated financial statements were completed, a reliable assessment of the extent of the impact of the aforementioned risks was not possible due to the limited forward visibility, meaning that no precise statement on future development for 2022 can be made.
Medium-term goals confirmed
The Koenig & Bauer Group reaffirms its medium-term targets based on its “Exceeding Print” strategy. Following the implementation of the cost and structural adjustments that have been initiated, Group revenue should rise to around €1.3bn by 2024 accompanied by annual cost-reduction effects in the order of €100m by then, while all innovation processes as well as process and product developments will be continued and stepped up. In the medium term, a return on sales (relative to EBIT) of at least 7% is being targeted. A further objective is to reduce net working capital to a maximum of 25% of annual revenue.
As no dividend distributions are permitted during the term of the KfW loan, the Management Board and the Supervisory Board will be proposing to the Annual General Meeting that the net profit generated by the holding company Koenig & Bauer AG be retained. For this reason, we aim to discharge the KfW loan as quickly as possible so that we can resume dividend distributions, as we attach great importance to ensuring that our shareholders benefit appropriately from our business success.