- Global economic outlook stable at a low level but subject to many uncertainties
- Krones focusing in 2020 on increasing profitability
- From 2020, the EBITDA margin is Krones’ key performance indicator for profitability
Global economy expected to grow 3.3% in 2020
In January 2020, the International Monetary Fund (IMF) slightly lowered its forecast for global economic growth in the full year 2020 from 3.4% to 3.3% (previous year: 2.9%). This was mainly due to a slowdown in some emerging markets – especially India – and to social unrest in a number of regions. According to the IMF, positive effects on the global economy will come in 2020 as the trade dispute eases between China and the USA and the main central banks continue to apply very loose monetary policy. The experts see further downside risks most of all in a worsening of the political conflict between the USA and Iran and in further tariff disputes between the USA and its trading partners.
Growth in emerging and developing economies is likely to pick up again compared with the weak prior year, at 4.4% in 2020 (previous year: 3.7%). In October 2019, however, the IMF experts had still expected growth of 4.6%. The slight markdown mainly related to India. India’s gross domestic product (GDP) is now expected to increase by only 5.8% in 2020 (previous year: 4.8%), compared with the October 2019 forecast of 7.0%. While the IMF expects the Chinese economy to see a slight decline in GDP growth to 6.0% in 2020 (previous year: 6.1%), its forecast for the Middle East/Central Asia region is for a significant increase to 2.8% (previous year: 0.8%). The growth rate in Latin America is likewise expected to accelerate, with GDP growth of 1.6% relative to 2019 (previous year: +0.1%).
For industrialised economies, the IMF forecasts 1.6% GDP growth in 2020 (previous year: 1.7%). The experts expect growth to accelerate in Germany especially, where they forecast a 1.1% GDP increase in 2020 after only 0.5% in the previous year. For the euro area, the IMF forecasts 1.3% growth (previous year: 1.2%). As the effects of the fiscal incentives in the USA taper off, the world’s largest economy is expected to increase GDP by only 2.0% in 2020 (previous year: 2.3%). For Japan, the IMF is forecasting 0.7% growth (previous year: 1.0%).
Strong employment and moderate inflation rates support consumer spending
In the medium and long term, the propensity to consume and therefore demand for packaged beverages depends on purchasing power. Low unemployment and inflation rates have a positive effect on consumer’s buying power. This supports demand for packaged food and beverages and indirectly influences demand for Krones’ products and services. If more beverages and liquid foods have to be packaged, beverage and food producers need suitable and efficient technology for the purpose. We do not expect the unemployment rate and inflation to have any negative effect on Krones’ business overall in 2020. However, due to the many overall economic uncertainties, Krones’ customers are postponing investment decisions despite rising end consumer demand.
Further downturn expected in German machinery and industrial equipment output
The German Mechanical Engineering Industry Association (VDMA) once again does not expect a significant improvement in the situation in 2020, with machinery and equipment output decreasing 2% in value as in the previous year. Factors affecting the industry this year continue to be the relatively weak global economy, simmering trade conflicts and the radical structural change in the automotive industry. Potential impacts of the coronavirus are not yet taken into account here.
Krones expecting no growth for 2020
After a difficult year in 2019, Krones is making a moderate start to the 2020 financial year with a view to the short-term demand trend. There are sufficient reasons for exercising a degree of caution. While the economic forecasts for this year are still positive overall, 2020 will once again be marked by political and economic uncertainties. In particular, it is not yet possible to predict the negative impacts of the coronavirus on the global economy. These uncertainties are also affecting order placement by Krones customers. Although consumer demand for packaged beverages is expected to continue rising in 2020, companies in the international beverage industry are temporarily holding back on investment due to the unstable overall economic situation. We therefore expect no short-term growth in the global market for bottling and packaging equipment for the full year 2020. For the same reason, both competition in our markets and cost pressure will remain strong this financial year.
However, Krones only expects the market to stay flat for the short term. The medium and long-term outlooks remain positive. This is because consumer demand for packaged beverages and liquid foods is steadily growing due to a number of megatrends such as the growing world population. Food and beverage providers need suitable technology to meet the increasing demand. For this reason, the market for packaging machinery is growing at a relatively stable rate in the medium and long term.
Focus in 2020 on improving profitability in both segments
Due to the adopted structural measures, Krones will initiate a sustained turnaround in profitability in 2020. The clear-cut goal is to increase profitability in both segments. A major contribution to this will come from further expansion of the global footprint and from cost reductions. No major acquisitions are planned in either segment for 2020. Efforts are focused on integrating the acquisitions made in the group in previous years.
The focus in the core Machines and Lines for Product Filling and Decoration segment in 2020 is on the start of production at the new plant in Hungary. The new plant will go into full operation at the end of 2020. The new production facility is expected to save Krones about €5–10 million in 2020. Annual cost savings of €20 million are expected when it is fully established. We will expand the core segment with further attractive products and rid the portfolio of less profitable activities and technologies. A continued focus is also on countering the rising cost of material.
For the core segment in 2020, Krones does not expect any increase in revenue, especially considering the short-term uncertainty among our clients. It is not currently possible to predict the full impacts of the coronavirus on the global economy. This could have a further substantial effect on the targets for 2020. The EBITDA margin is expected to be around 7.5% to 8.0% (equivalent to an EBT margin of around 4.0–4.5%).
Implementing the structural measures is likewise the focus in the Machines and Lines for Beverage Production/Process Technology segment. The carve-out of the beverage production business has priority here. We are going to make this a legally independent unit. This enables us to better assess how the individual businesses, specifically with regard to the different types of beverages, are developing on a standalone basis. Krones will leverage additional revenue and earnings potential from the full integration and positive business development of, the acquisitions made in the preceding years. Intralogistics continues to see good demand for our products and services. We will push ahead with the further internationalisation of our business in 2020. For this purpose, we have pooled all intralogistics activities in System Logistics and made this a legally independent unit.
In all, for the Process Technology segment in 2020, we plan stable revenue with an EBITDA margin of around 2.5% to 3.5% (equivalent to an EBT margin of around 0% to 1%). It is not currently possible to predict the full impacts of the coronavirus on the global economy. This could have a further substantial effect on the targets for 2020.
Based on the prevailing macroeconomic outlook and the current expected development of the markets relevant to Krones, which is affected in the short term by reluctance by customers to invest, the company expects that consolidated revenue in 2020 will match the previous year’s level. We only expect the market to stay flat temporarily. The medium and long-term growth trend remains intact. Our customers’ short-term reluctance to invest due to the many uncertainties will mainly be noticeable in the first half of 2020. It is not currently possible to predict the full impacts of the coronavirus on the global economy. This could have a further substantial effect on the targets for 2020.
EBITDA replaces EBT as key performance indicator for profitability – EBITDA margin of around 6.7% to 7.2% targeted for 2020
Krones is now positioned in such a way that the expected zero revenue growth will not fully affect profitability. We plan to improve profitability this year as a result of the measures taken. From 2020, Krones manages profitability using the EBITDA margin instead of the EBT margin. This is because EBITDA (earnings before interest, taxes, depreciation and amortisation) is closer to cash flow and more comparable because it does not include depreciation and amortisation, financial income/expense and taxes.
For the group in 2020, Krones expects an EBITDA margin of around 6.7% to 7.2%. That is equivalent to an EBT margin of around 3.2% to 3.7%.
For its third performance target, working capital to revenue, Krones expects a figure of 26%. We intend to improve on this target this year by means of more intensive receivables management.