Our everyday life in 2020 was heavily affected by the Covid-19 pandemic. The corona crisis presented Krones with major challenges. From the beginning, our top priority was to protect people. As the virus spread, we responded very quickly and took all necessary precautions to avoid endangering the health of our employees and customers. We were helped in this by experience gained at our site in China, where the pandemic originated.
Krones benefits from its global footprint
Besides concern for the health of people in contact with Krones, the focus was on providing the best possible support for customers. Tough government measures, such as travel restrictions, made contacts more difficult. During this phase, Krones’ decentralised structure was a major advantage. We have locations and employees in over 70 countries around the world. This meant we were able to provide customers with the products and services they needed to keep their production going. In addition, we made use of digital products and solutions. This was especially helpful in service. It enabled us to provide customers with professional support in troubleshooting without always having to be on site ourselves.
Krones also impacted by the corona crisis
Krones managed well through the 2020 pandemic overall. The company’s stable foundations provided solid support throughout the crisis. Krones had sufficient financial resources at all times and had no need for government assistance. The corona crisis nevertheless impacted our business, and had a significant effect on the figures for 2020. Consolidated revenue was down 16% year-on-year to €3.3 billion in 2020, while the order intake decreased by 19% to €3.3 billion. On a positive note, after a weak first half year, the contract value of orders picked up significantly in the third and especially the fourth quarter.
Krones already launched extensive cost-cutting measures in 2019. This enabled us to contain the impact of the revenue shortfall on earnings. Earnings before interest, taxes, depreciation and amortisation (EBITDA) went down from €227.3 million in the previous year to €133.2 million. It should be noted, however, that Krones incurred just under €72 million in expenditure during 2020 for structural measures to adjust capacity. Excluding that expenditure, the EBITDA margin of 6.2% (previous year: 5.7%) was slightly above the most recent guidance range of 5.5% to 6.0%. In total, Krones incurred a consolidated loss of €79.7 million in the 2020 pandemic year (previous year: consolidated net income of €9.2 million). Free cash flow developed positively in the reporting year, increasing by €315.7 million to €221.3 million (previous year: –€94.4 million). Overall, considering the challenging circumstances, Krones delivered respectable results in 2020.
Krones’ long-term dividend policy is to pay out 25% to 30% of consolidated net income to shareholders. Due to the negative net income, the Executive Board and Supervisory Board will propose to the Annual General Meeting on 17 May 2021 that only the statutory minimum dividend, which is €0.06 per share, be distributed for the 2020 financial year and that the remaining earnings available for distribution from the 2020 financial year be carried forward.
Krones responding to customer trends
Provided that there are no new sweeping economic impacts, the company expects revenue to grow again from 2021. That does not mean, however, that Krones is expecting revenue to quickly regain pre-crisis levels. This is the most important insight from the customer surveys we conducted in the third quarter of 2020. Many of our customers were very guarded about planned capital expenditure over the next two years due to the Covid-19 pandemic. The already successful cost-cutting measures taken in 2019 are not enough to prepare the company for this situation. So that Krones stays competitive and successful in the long term, we have to adjust capacity to the business volume we expect in the short and medium term. Regrettably, this also requires us to reduce our workforce. That was an extremely difficult decision for the Executive Board, but it was unavoidable.
In addition to the reduction in force by 600 positions across the Group in the course of 2020, approximately 400 additional employees accepted individual and voluntary offers to terminate their contracts by the end of November 2020. The Executive Board made a further decision in December 2020 to reduce the workforce at German locations by a further 350 positions in the most socially responsible manner possible.
Saving the future…
Krones has already significantly enhanced its flexibility with a large variety of measures. We are taking advantage of international procurement markets and further expanding our global service and production network. This includes our plant in Hungary, which is fully operational from 2021. An additional important step is that we are splitting out the brewery business and bringing it under a separate legal entity. The new structure enables this business to operate more efficiently.
In 2021, the Covid-19 pandemic will continue to affect us worldwide and weigh on the investment climate. Nevertheless, we expect revenue to pick up slightly, and as a result of the structural measures we expect better profitability than in 2020. With a 2.5% to 3.5% revenue growth, we expect an EBITDA margin of around 6.5% to 7.5%. The target for the working capital to revenue ratio is 26% to 27%.
…and designing the future
To stay competitive, we will continue to work hard at the cost side. But focusing exclusively on cost-cutting measures would be short-sighted. Because in the long term, the market in which Krones operates is growing. When the corona crisis is over, the market will once again offer attractive opportunities. Accordingly, the company is pushing ahead with innovative products and services and, above all, digitalisation. We have invested heavily in this area in recent years, and that puts us in a good position. Krones will exploit this strength and take advantage of the great opportunities presented by digitalisation.
A further promising growth driver is sustainability. Our customers have adopted ambitious environmental and climate targets. To achieve them, they need resource-efficient production systems. Krones has many innovative machines and lines on offer in this regard. This strength has not come about by chance. The company introduced the enviro sustainability program as long ago as 2008. This externally audited management system placed an early focus on eco-efficiency in our product portfolio. With enviro, Krones was ahead of its time in terms of sustainability.
We will systematically focus on these competitive advantages and take advantage of the long-term growth opportunities in our markets.
Krones’ greatest strength is intangible and cannot be measured in numbers: Our corporate DNA. This is characterised by team spirit and collaboration. The reduction in the workforce in 2020 left our DNA intact. For us, this is the most important and most positive insight from an extremely difficult year. On behalf of the entire Management Board, I would like to thank all employees for their commitment in 2020. The highly qualified Krones team will continue to go from strength to strength.