2019 was very challenging for Krones. Due to various factors, we had to lower our earnings guidance mid-year. In response, the Executive Board introduced far-reaching structural measures to strengthen profitability and keep the company set on success.
Krones continues stable growth despite weakening economy
Forecasts for the economy gradually worsened over the course of the year. The US trade disputes with China and Europe and the long-unresolved Brexit weighed down on the economy. International Monetary Fund (IMF) experts had to revise their global growth forecast downwards several times in 2019, from at first 3.5% to 2.9%. The sometimes highly emotionally charged plastics debate also did not benefit our business.
Despite these uncertainties, demand in our markets serving the international beverage and packaging industry was satisfactory. Krones was able to use the relatively stable demand and increased revenue during the reporting period by 2.7% to €3.96 billion. This means we met our 3% growth forecast. Order intake grew similarly, improving by 3.2% to €4.08 billion.
Profitability in 2019 significantly below target
In contrast to revenue and order intake, profitability did not develop as planned at the beginning of 2019. Krones’ profitability was hit unexpectedly hard during the reporting period by significant rises in labour costs. In addition an unfavourable product mix leading to capacity underutilisation in plastics technology and temporarily weak demand in parts of the after-sales business also had a negative impact, primarily in the second quarter. In total, the EBT margin fell in the reporting period from 5.3% to 1.1%. It should also be noted that we recognised €70 million in expenses for provisions and writedowns in 2019. Adjusted for these expenses for structural measures, the EBT margin was 2.8%. Krones therefore attained the target of around 3%, which had been reduced mid-year (from originally around 6%).
Structural measures launched – initial benefits visible
To stay competitive for the long term and attain the profitability needed for the purpose, we launched a package of short and medium-term measures in the second half of 2019. The aim is to improve cost structures, raise efficiency, review our portfolio and create new growth momentum. Many of the individual measures to be implemented in 2020 and 2021 are described in detail on pages 5 to 24.
Krones is already seeing initial benefits. We are progressing well with the cost savings. Selling prices have stabilised and are moving in the right direction. We are also making good progress with the expansion of our global footprint. The most important project here is our new plant in Hungary. After delays, the factory will be fully operational in the second half of 2020 and from then onwards will save some €20 million a year. We have also significantly strengthened our presence in China after expanding production and establishing completely regional procurement structures.
There is still much to be done in process technology, however, most of all in business with breweries. We have set ourselves clear targets here, together with a timescale for attaining them. If the beverage production business does not meet the required profitability target by 2021, we will make clear-cut decisions about the future of this business.
Continued high level of investment in innovation
As part of the action package, we are reducing the recently very high level of capital expenditure back to normal levels. This mainly relates to spending on property, plant and equipment and on acquisitions. Regarding acquisitions, we are going to concentrate on integrating the companies acquired in recent years. No major acquisitions are planned for the time being.
Technologically leading products and services are our company’s aspiration and future. Consequently, we are going to maintain our high level of investment in innovation and will not be cutting our research and development budget or expenditure on digital activities.
Krones has innovative products for global challenges such as reducing CO2 emissions and sustainability in plastic packaging. We will secure our technology leadership with further innovations in the years ahead. Some of our innovations from the reporting period are showcased on pages 58 to 63.
International workforce to grow – reduction in Germany
The number of employees in the Group increased in the reporting period by around 800 to 17,353. In Germany, the number employed decreased by 150. The job cuts in Germany are very painful but regrettably unavoidable. As difficult as those job cuts in Germany have been for us, we have to relocate parts of our value creation abroad in order to remain competitive as a strongly exportoriented company in our international markets. Especially in the current challenging and, for our company, unusual situation, I would like on behalf of the entire Executive Board to extend my sincere thanks to the entire Krones team for their hard work and commitment.
Targets for 2020 – delivering sustained turnaround in profitability
After the difficult year in 2019, Krones aims to achieve a rapid and sustained turnaround in profitability so that we meet our medium-term targets as soon as possible. Although we have set ambitious targets for 2020, we do not expect any growth in revenue with a view to the current uncertain situation in the markets. The EBITDA margin (see also page 49 following) is expected to improve to about 6.7–7.2%. For our third performance target, working capital to revenue, we will attain 26% this year and in doing so, in combination with lower capital expenditure, we will also increase free cash flow.
We are the market and technology leaders in a globally growing market. The task now is to continue implementing the structural aspects and the adopted measures together with our motivated global team. I firmly believe that together we can put Krones back on track for success.