The core bottling and packaging equipment segment is affected by the critical plastics debate. In our opinion, PET has a wrongly bad reputation. PET plastic has a major advantage over other types of packaging such as glass: It is significantly lighter than other materials and PET bottles have a correspondingly smaller ecological footprint in long-distance transportation. This is a key reason why PET continues to be the fastest growing packaging material worldwide.
It is often overlooked that plastic packaging can in fact be sustainable. This requires packaging materials to be produced in a resource-efficient manner and kept in a closed cycle. Krones’ technologies and products meet both of these criteria. We provide material-saving container design, low-energy production and used plastics recycling. With our high-quality PET recycling -systems that turn used PET bottles into raw material for new ones, we support a sustainable material cycle.
Extending the company’s good position in glass and cans
In its core segment, Krones will continue to strengthen the glass and cans product portfolio. As the megatrend towards packaged beverages continues, weak demand for PET packaging would mean greater demand for other types of packaging such as glass and cans. Krones has always been well positioned here with a broad product range for both packaging types. The company added a key innovation to the glass portfolio during the reporting year with the Craftmate G glass bottle filler.
As well as expanding the broad-based bottling and packaging segment with further attractive products, we are also going to strip the portfolio of less profitable activities and technologies in order to focus our capital on the most attractive investments.
The third pillar of the House of Krones, intralogistics, continues to see good -demand for our products and services. Intralogistics is a major element of the digital beverage plant. It is an important area for our customers because it -allows them to optimise material flow management. The priority in this area is on managing the rapid rate of growth and pushing ahead with internationalisation. For this purpose, we have pooled all intralogistics activities in System Logistics and made this a legally independent unit. This enables us to react quickly and flexibly to market requirements.
Price increases important for sustained business performance
Price increases are necessary in order to partially offset rising labour and material costs. We will implement our goals here by means of increased price discipline. For 2020, we consider an earnings contribution of €10–20 million to be realistic from higher prices.
Digitalisation offers huge opportunities in the medium to long term
In digitalization, Krones has the major advantage as a full-service supplier of being able to capture all material and data flows around the clock throughout the entire beverage plant production process. Combining the captured data with the knowhow of our workforce, some of whom have decades of experience, we develop new products and services – primarily for the life cycle services (LCS) subsegment – that significantly improve plant efficiency. In this way we create lasting added value for customers. The aim is to develop digital business models and establish them as quickly as possible in the food and beverage industry.
Overall, investment in digitalization will continue to impact profitability in the next few years. Krones sees good market opportunities here in the medium to long term.
High-growth service business strengthens profitability
Our service business is important to the profitability of Krones. The key success factor for the LCS business is and remains availability, meaning how quickly the service team can solve a customer’s problems on the spot. That means both technicians and spare parts must be as close to the customer as possible. To ensure this, we will further reinforce our global network of service and sales offices. Alongside availability, another major growth driver for the service business takes the form of innovative products and services supported by innovation in digitalization.
The service market has considerable further growth potential for Krones in the medium to long term. A major asset for Krones is the large installed base of about 40,000 machines in customers’ factories. Our LCS team so far serve about 60% of our installed base. We are going to raise this figure in the years ahead by convincing customers of the benefits of our services, which enable them to significantly increase productivity.
Capital expenditure returning to normal levels
To remain competitive for the long term, Krones must invest – both in its German locations and in its global footprint. In contrast to the strong growth investment of the preceding years, capital expenditure will be scaled back to normal levels in the short to medium term. Most capital expenditure in Germany is to be on IT infrastructure. Germany remains Krones’ central location for the development of innovative machines, lines and services.
Elsewhere, Krones will invest in the organisation and in integrating the acquisitions made in recent years. We will also further expand our IT internationally.
Innovations: key investment for the future
Innovations secure our company’s future and are the basis for sustained growth. For this reason, even in economically more challenging times, Krones will maintain its comparatively high spending on research and development.
New products and services must provide added value for customers in order to be a market success. Close contact with our customers gives us important input for innovations and improvements. Based on customer needs, we work together to develop ideas for new products and services. We also generate ideas of our own by thinking out of the box. Close contact and good working relationships with universities, research institutions and startups also help us in this regard.
Alongside digital innovations, solutions at Krones focus on environmentally compatible, cost-cutting, flexible and operator-friendly machines and products.
Security from solid financial and capital structure
With insufficient cash flow from operating activities in 2019, free cash flow and net cash and cash equivalents also decreased significantly due to the high level of capital expenditure. The equity ratio was a comparatively satisfactory 41.3%. Krones therefore retains a robust financial and capital structure. The company has sufficient financial headroom to finance growth investment and potential acquisitions and to accord shareholders their due share of the company’s success in the form of dividends. Krones’ dividend strategy is to pay out 25% to 30% of consolidated net income to shareholders.
Ongoing strong focus on free cash flow
Krones continues to focus on free cash flow. This fell significantly in 2019 because of the decline in the operating business, above-average capital expenditure and a rise in working capital. We will work hard on all three of those --parameters in the coming years. First of all, as described earlier, we will regain our former profitability. After several years of strong growth investment, we will return capital expenditure to normal levels. A clear focus in future capital expenditure will be on whether business units are generating sufficient cash. This criterion will also be a deciding factor in portfolio streamlining. We are holding back on acquisitions. No major acquisitions are planned for the short or medium term. However, we have the capacity to act on attractive acquisition opportunities at any time.
The greatest potential for improving free cash flow consists of reducing working capital. Krones is not satisfied with working capital as a percentage of revenue, which is our third target. This came to 26.9% in 2019, which is well short of our 22–24% medium-term target. The lower our working capital, the more capital we have available for other uses. For each percentage point by which we improve this ratio, our free cash flow and therefore our available resources grow by around €40 million.
The main burden on working capital is the high level of customer receivables and contract assets. Krones will shorten the timespan from delivery to invoicing. First of all, on-site assembly and acceptance are to be completed sooner. Secondly, contracts with customers need to be drafted in such a way that performance rendered can still be invoiced in the event of delays for which we are not responsible. Overall, it is planned for trade receivables to grow below average in the next few years relative to revenue. There is also room for improvement in trade payables, but not on the same scale as in receivables.
Workforce the foundation of lasting success
The workforce is pivotal to Krones’ success – especially at times when conditions become more challenging and there is a break in the continuous upward trend. Our customers buy from Krones because they trust in the company and its workforce. It is the workforce who are responsible for customers’ satisfaction with our products and services. And customer satisfaction is a highly decisive factor when competing for orders.
We had to take various measures due to negative developments during the reporting period – including major job cuts affecting several hundred employees in Germany and elsewhere.
The company will continue to invest heavily in employee training and development in order to maintain workforce knowhow at the same very high level.
Krones will further expand the workforce in the years ahead where this contributes to profitability. To take advantage of market growth opportunities in emerging economies, we need more employees in the regions where customers are located. We currently employ about 24% of the workforce in emerging -markets. Given corresponding market growth, we will further increase that percentage.