Sustainable PET solutions are major growth drivers
Another key finding from the customer survey was that the beverage industry wants to actively address the plastic waste problem. A core component of this is the recycling of plastics, and most of all PET. Going beyond official targets – in the EU, recycled PET (rPET) is to account for at least 25% of the market by 2025 – many customers have adopted even more ambitious targets of their own. In some cases they aim for a 50% rPET share by 2025. Krones expects that by 2030, on average, rPET will account for 50% of PET packaging worldwide. That creates opportunities that we will make use of.
With its various Metapure lines, Krones has already provided high-quality -recycling solutions for true bottle-to-bottle recycling for many years. Krones plans to expand this still relatively small business within the group in the years ahead, in order to tap into the rising demand for recycling lines. This will not produce a significant jump in revenue over the short to medium term, however, because of the long project lead times.
Although rPET is chemically identical to virgin PET, there are differences in processing. Krones possesses comprehensive expertise in all facets of manufacturing and processing rPET containers. It will support customers in refitting their production lines for the circular economy of the future. In addition, by 2025, all new Krones PET filling lines will be able to process up to 100% rPET.
CO2 reduction a clear goal of Krones customers
A further important concern for our customers alongside resource-conserving PET recycling is reducing CO2. Krones has set itself the ambitious target for the ecoefficiency of the machines and lines it produces to reduce the carbon footprint in the upstream and downstream value chain at the customer (Scope 3 emissions) by 25% from 2019 to 2030. We are ideally placed to achieve this goal. As long ago as 2008, Krones launched the enviro sustainability programme with the focus on conserving resources and increasing the energy efficiency of our machines and lines. Krones was ahead of its time with enviro and is now in a very good position. In addition, we have set ourselves the target of an 80% reduction in our own (Scope 1 and 2) CO2 emissions by 2030.
Internationalisation increases customer satisfaction and reduces risks
The travel restrictions during the corona pandemic show the importance of local presence for Krones in the world’s regions. Growing trade conflicts, too, underpin our efforts to expand our global production, sales and above all service network. The rapidly growing African and Asian markets are particularly important here. Krones will continue to expand its workforce and local presence in these emerging markets. The closer Krones is to customers with its team, the faster it can meet their requirements and increase customer satisfaction.
Selling prices to recover in the medium term
The corona crisis and the resulting weakness in demand put pressure on selling prices in the reporting period. Krones focused on maintaining a good balance between capacity utilisation and price quality. This year, the company expects prices to remain stable compared to 2020 due to a projected slight increase in demand. In subsequent years, more rapid market growth should be reflected in rising prices.
Innovation secures the company’s future growth
For the long term, price quality will also be supported by innovations. These must provide customers with clear and measurable added value in terms of costs, versatility, environmental compatibility, and product and production safety and reliability. An example is equipment that enhances the sustainability of packaging. The greater the benefit for customers, the more willing they will be to accept higher prices. Digitalisation especially harbours major potential for adding value.
The workforce is the decisive factor in the company’s success
The decision to cut several hundred jobs was not easy for either the Executive Board or the Supervisory Board. Most of all because of the many years and decades of outstanding work delivered by our employees. We nevertheless had to adjust workforce capacity so as not to put the future of the company at risk. These measures in no way diminish our appreciation of the workforce. The Executive Board knows the huge importance of the employees for the company’s success. It is they who ensure that customers are satisfied with Krones products and services.
Looking to the future, we continue to need motivated and dedicated employees. Krones will continue to invest above-average in training and employee development. These remain the basis for our future expertise and Krones’ long-term viability.
Stable financial and capital structure
In a crisis, it is of paramount importance to have sufficient liquidity. Krones continued to do so throughout the difficult 2020 financial year. The company maintained liquidity reserves of around €1 billion for almost the entire year. This meant that the group retained its capacity for action at all times and had enough reserves to survive a prolonged downturn. At the end of 2020, Krones even had a net cash position of some €185 million. Combined with a very solid equity ratio of 39.4%, this adds up to a stable financial and capital structure. This gives the company sufficient financial headroom both to invest in growth and the future 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.
Strong focus on working capital and free cash flow
Krones generated a positive free cash flow of €221.3 million in the reporting period. That is a good outcome considering the difficult year in 2020. Going forward, we will further improve free cash flow in order to strengthen our capital base and internal financing capability.
The most important parameter here is lower working capital. In 2020, average working capital over the past four quarters as a percentage of revenue stood at 28.3% which is some way from our medium-term target of 24% to 26%. Less capital tied up in the operating business means more capital for other purposes. For each percentage point by which we lower this ratio, our free cash flow and therefore our available resources grow by around €35 million.
The main burden on working capital is the high level of customer receivables. Among measures to reduce these, Krones will shorten the timespan from delivery to invoicing. To this end, on-site assembly and acceptance are to be completed sooner. Using a variety of other measures, it is planned for trade -receivables to grow below average in the next few years relative to revenue. Centralising inventory management and the supplier financing programme launched in the final quarter of 2020 will have further positive impacts on working capital.