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Krones Group Annual Report 2016
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Krones Group Annual Report 2016

    2016 Highlights

    • Krones met its growth and earnings targets for 2016

    • Revenue increased 6.9% to €3.39 billion, order intake increased 7.9%

    • Profitability was stable, with the EBT margin once again at 7.0%

    • Krones intends to increase dividend to €1.55 per share for 2016 (previous year: €1.45)

        2016 2015 Change
    Revenue € million 3,391.3 3,173.5 + 6.9%
    New orders € million 3,441.3 3,189.0 + 7.9%
    Orders on hand at 31 December € million 1,144.7 1,094.6 + 4.6%
             
    EBITDA € million 320.8 305.3 + 5.1%
    EBIT € million 228.0 216.9 + 5.1%
    EBT € million 237.6 223.3 + 6.4%
    EBT margin % 7.0 7.0
    Consolidated net income € million 169.1 156.3 + 8.2%
    Earnings per share 5.40 4.98 + 8.4%
    Dividend per share 1.55* 1.45 + 6.9%
             
    Capital expenditure for PP&E and intangible assets € million 111.3 102.6 +€ 8.7 million
    Free cash flow € million 49.2 70.7 –€ 21.5 million
    Net cash and cash equivalents** at 31 December € million 368.9 364.6 +€4.3 million
    ROCE   17.0 17.7
             
    Employees at 31 December        
    Worldwide   14,443 13,346 + 1,097
    Germany   10,061 9,767 + 294
    Outside Germany   4,382 3,579 + 803

    * As per proposal for the appropriation of retained earnings
    ** Cash and cash equivalents less debt

    Letter from the Executive Board

    Dear shareholders and friends of Krones,

    We certainly faced no lack of challenges in 2016. Political unrest in the Middle East, low commodity and energy prices, and the Brexit vote in the UK are just some of the factors that continually created a sense of uncertainty worldwide. All of that didn’t make business any easier for Krones. Competition was stiff on our markets and customers were highly sensitive to prices.

    Krones did well despite the difficult environment

    With the Value strategy programme we launched in 2011, we took early action to prepare for difficult markets. It is thanks primarily to Value that we were able to achieve our growth and earnings targets in 2016. Consolidated revenue rose 6.9% to €3.39 billion. Earnings before taxes (EBT) for the group improved 6.4% to €237.6 million. And at 7.0%, our EBT margin was as forecast. We will do everything we can to continue to provide our customers with added value and thus ensure our own continued success.

    For example, Krones is strengthening its process technology operations. At €1.5 million, earnings before taxes in the company’s second-largest segment were in slightly positive territory for 2016, as expected. To increase profitability for the long term, Krones began implementing a range of structural measures in late 2015. For example, we are doing more engineering and procurement locally, in our customers’ regions. Krones’ internationalisation efforts have already advanced even further in our machines and lines for product filling and decoration segment. In 2016, we strengthened our international service network and now offer local products that are technologically aligned with the regionally-specific needs of our customers. Our smallest segment, machines and lines for the compact class, which bundles the activities of Kosme and Gernep, made good progress. With an EBT margin of 5.2%, the segment exceeded its forecast profit for 2016 by a small margin. (All figures above relate to the group.)

    Continuity provides a solid foundation

    The election of Volker Kronseder as Chairman of the Supervisory Board in June 2016 ensures continuity at Krones. That is an essential factor for the company’s long-term development. Our long-time Executive Board Chairman possesses valuable expertise and decades of experience in our markets. As Chairman of the Supervisory Board, Volker Kronseder also has the ability to make important suggestions to the Executive Board while maintaining the necessary distance from business operations. His predecessor, Ernst Baumann, also possessed the same skill. On behalf of the entire Executive Board, I would like to once again express my deep gratitude to Mr. Baumann for his excellent, very effective collaboration over the years.

    Expanding our expertise worldwide

    Krones wants to continually improve the products and services we offer to customers in order to provide clear added value. To accomplish this, we are expanding our expertise worldwide. Some examples of this can be found on pages 36 to 67 of this Annual Report. All of our innovative efforts are guided by a commitment to sustainability. Our enviro sustainability programme has become a benchmark for the entire industry.

    We are buying in some of our new expertise. For example, last year we acquired a 60% stake in System Logistics by way of our Italian subsidiary. The Northern Italian company is a leading supplier of innovative solutions for intralogistics, material flows, and warehousing for the food and beverage industry. By acquiring this stake in System Logistics, we have taken a great step towards capturing and analysing the critical flows of materials and data along customers’ entire value chains. That gives Krones a strong basis from which to lead the way in the digitalisation of beverage plants. We will expand our software expertise and develop new digital business models. These various paths converge in our subsidiary Syskron, which is focused on giving our customers optimum solutions for intelligent factories.

    Our acquisition of 80% of the business operations of the US company Trans-Market has significantly strengthened Krones’ process technology business in the USA. This acquisition, made by our US subsidiary, has enabled us to expand our local engineering and procurement capacities.

    We also invested heavily in existing structures in 2016. For example, we approved funding to significantly expand our production site at Raubling near Rosenheim, Germany, in 2017. Our German sites remain important for Krones. However, the lion’s share of planned new hiring will take place at our sites around the world as we strive to be closer to our customers. Recruiting and winning the loyalty of qualified people is a major challenge in this respect. That is why we are investing heavily in our workforce, not only in Germany but also at our sites worldwide. Our employees are the keystone of Krones’ success. On behalf of the entire Executive Board, I would like to thank every member of the Krones team for their dedication and accomplishments.

    Ambitious growth targets

    We will continue to work together to safeguard our strong market position. From today’s perspective, market conditions appear unlikely to improve in the near future. Nevertheless, we have set ourselves ambitious goals for 2017 and beyond. We aim to further increase Krones’ revenue and earnings. For 2017, we are forecasting revenue growth of 4%. We intend to keep our EBT margin steady at 7%. For revenue, our medium-term target is to grow 7% on average each year through 2020. We aim to increase our EBT margin to 8% in the same period (all figures above refer to the group). We invite you to read more about our medium-term targets on pages 30 to 35. Given the competitive environment, it will not be easy to achieve these goals. However, I firmly believe that, by working together, we can continue to write Krones’ success story.

     

    Christoph Klenk
    CEO

    Strategy

    Krones operates in the market of machinery and equipment for producing, filling, and packaging beverages and other liquid food. This market is growing at a relatively stable rate of around 4% to 5% each year, driven by megatrends such as steady population growth, rising standards of living in the emerging markets, and urbanisation. Another factor driving growth is the rapidly increasing number and variety of packaging forms and beverage types.

    Krones serves this market as a one-stop shop. We offer customers in the liquid food industry everything they need from a single source, from beverage production to filling to packaging. Intralogistics and global after-sales service round out our portfolio. We offer products and services to cover everything from “simple” to “highly sophisticated”.

    Besides our big European competitors, a number of smaller providers are also active in our market. A growing number of those are in China. Most of our competitors only offer specific parts of a beverage plant or operate only in certain regions. Krones’ turnkey approach puts the company in an excellent position and we intend to defend our strong market position in our core segment and considerably strengthen our position in our two smaller segments.

    Just as the market offers opportunities, it also presents many challenges. Volatility in the global economy and at times acute crises in individual countries and regions are becoming almost standard. As a result, we must become more flexible, faster, and more regionally focused. The Value strategy programme we launched in 2011 helped us to offset fluctuations in demand and meet our forecasts for revenue and earnings once again in 2016. All three segments contributed.

    7/8/22 is our new medium-target through 2020

    To keep moving the company forward for the long term, the Krones team has set new medium-term targets. 7/8/22 stands for:

    • 7% revenue growth per year on average
    • 8% EBT margin
    • 22% working capital to revenue ratio

    As of 2017, working capital to revenue is Krones’ new third target, replacing ROCE. The main reason for the change is that the new target provides greater transparency. In addition, the individual components that are used to calculate this performance indicator can be mapped well and directly.

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    These targets are certainly ambitious given the existing market challenges. The fight for orders remains intense. On the customers’ side of things, mergers and acquisitions are delaying capital investments and increasing customers’ buying power. Therefore, we do not expect prices to improve in the short or medium term. Moreover, increasing digitalisation and integration of production will forever change our market and its business models and require capital investment.

    Seizing opportunities for growth

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    According to our estimates, the market for Krones’ products is growing by 3%. To achieve our target of 7% annual revenue growth, we must systematically seize the opportunities the market presents. That is why Krones intends to achieve its strongest growth in markets where beverage consumption is growing the fastest. For this reason, we will continue to significantly expand our business in the Africa/Middle East, Asia-Pacific, and China sales regions.

    The rapidly increasing diversity of products and packaging is another growth driver as it requires extremely versatile machines and lines. Krones intends to leverage this trend by offering the most advanced technology and products like the Varioline packaging line and the Contiform AseptBloc.

    Acquisitions will be another major part of our future growth. In 2016, Krones acquired majority ownership of the Italian company SYSTEM LOGISTICS, which operates worldwide. In so doing, we significantly grew our product portfolio in the strategically important field of intralogistics. Acquiring the majority of the business operations of TRANS-MARKET has strengthened our presence and engineering expertise in process technology in North America. Krones intends to continue to look at profitable companies with revenue in the €20 million to €70 million range. We expect acquisitions to account for around 2% of our annual revenue growth through 2020.

    Expanding our own product range

    Our business model is precisely tailored to our customers’ needs.

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    To further increase customer satisfaction, Krones will strengthen its core business areas (beverage production, filling and packaging, intralogistics, IT solutions, and lifecycle service) with new products and solutions. These innovations will also contribute to our forecast growth. In beverage production/process technology, we will continue to implement the measures initiated at the end of 2015 to promote growth. Our focus will be on establishing and growing international hubs so that we can respond to customers’ wishes even more quickly and cost-effectively. From these well-connected international hubs, Krones will expand its local supplier structure and after-sales business and complete more smaller-scale projects.

    In bottling and packaging equipment, we see strong potential for growth in mid-range business, that is, less complex lines operating at high outputs. Krones currently covers customers’ complex needs perfectly in both the high and low output ranges. In order to achieve further growth in our core segment, we will now develop more simple, cost-optimised products and solutions. The ErgoBloc LC, which we developed and successfully launched specifically for the needs of customers in the emerging markets, is an excellent example. It is a highly simplified, compact variant of our successful all-in-one ErgoBloc L system.

    Intralogistics is extremely important to customers and, therefore, to Krones. Our expertise across the entire value chain makes Krones the best partner for intralogistics solutions. Our acquisition of SYSTEM LOGISTICS and the expansion of SYSKRON put Krones in an excellent position to seize the markets’ great potential for growth. We intend to further strengthen Krones’ position in intralogistics in the years ahead, in terms of both regional presence and product technology.

    The digitalisation of production in beverage plants opens up considerable potential for growth in the medium and long terms. Krones is able to capture and analyse all flows of materials and data along customers’ entire production process. That in turn serves as the base from which to develop new business models. Krones is working on a number of different products and solutions that give customers added value. For example, our SitePilot software enables customers to plan, monitor, analyse, and document all of their production processes. In 2015 we purchased TRIACOS, an experienced SAP integrator whose expertise in SAP significantly enhances our own IT capabilities and offers a suitable platform for new products.

    Increasing profitability

    In order to further increase profitability in all three of our segments, Krones will expand its global footprint. To this end, we plan to expand procurement, engineering, and some parts of production in the regions in which our customers operate their plants. That will enable us to quickly and capably offer regionally-specific products at competitive prices in the emerging markets. A cost-optimised supplier structure in the respective regions will play an important role.

    The price of materials is a major cost factor for Krones. In the next phase of modularisation, we will streamline our modules to make them simpler and easier for more suppliers – including those in low-cost countries – to meet our specifications. The increased competition will yield better purchasing prices.

    Further expanding our lifecycle service business will strengthen Krones’ profitability for the longer term. Recruiting enough qualified employees locally will be key to this effort. To reduce employee turnover rates, which are comparatively high in the emerging markets, we are investing heavily in on-site training and continuing education. Other HR policy measures are also aimed at increasing loyalty among our service employees in the regions. Such measures are essential to Krones’ ability to seize the opportunities that the highly profitable after-sales segment presents.

    Optimising working capital

    Growing our global footprint, purchasing locally, and modularising our products will all help to improve our working capital. Lower inventories and shorter lead times across the board help reduce working capital, as do better receivables management and faster installation and commissioning on site. Only by working at it every day will we reduce working capital relative to revenue and achieve our target of 22% for this indicator.

    Healthy financial and capital structure gives us leeway to invest

    Net cash and equivalents of nearly €370 million and an equity ratio of around 40% put us on a sound financial footing. That gives us the freedom we need to make investment decisions quickly without complication and without becoming dependent on borrowing. After a weak 2016, we intend to significantly increase our free cash flow in the years ahead in order to generate sufficient funds for investments in growth, for acquisitions, and for dividends. Krones’ cash management strategy includes distributing 25% to 30% of profits to shareholders in the form of dividends.

    We will continue to invest a large part of our cash in internal growth. Besides expanding our German sites, this also includes establishing and expanding our sites abroad. We will also invest in new products and technologies, particularly in digitalisation. We will also direct funds into building our workforce in growth regions.

    Our employees are the bedrock of our long-term success

    Behind every euro of revenue that Krones generates lies the hard work of Krones’ employees. They are the reason our customers are satisfied with our products and services. To accomplish our growth targets, we intend to recruit new employees and kindle enthusiasm for Krones among potential new employees. We must have a strong reputation as a great employer if we are to win over and retain the best people. Therefore, Krones will continue to invest heavily in our workforce and provide our people with ongoing training and continuing education. We will place special emphasis on our international sites, stepping up our efforts there and further expanding our training centres in Africa, China, South America, and the USA.

    Christoph Klenk
    CEO

     

    Krones’ management system

    Krones’ management primarily uses the following financial performance indicators to steer the group and its three segments:

    • Revenue
    • Earnings before taxes (EBT)
    • EBT margin (earnings before taxes in relation to revenue)
    • Working capital to revenue

    To strengthen our market position and utilise economies of scale, we aim to achieve revenue growth above the market average.

    Earnings before taxes (EBT) are an important earnings indicator. It is from EBT that the group pays out taxes and dividends and makes capital expenditures.

    Profitability, measured as the EBT margin, is among our key targets and parameters. It indicates the return on revenue. For the group, we calculate the target margin as the weighted average of the three segments.

    Our new major performance indicator is working capital to revenue. Working capital is calculated as follows: (inventories + trade receivables + prepayments) – (trade payables + advances received). The result indicates how much capital is needed to finance revenue. The lower the number, the less capital is tied up in operations and, thus, the more financial leeway the company has to use its cash and cash and cash equivalents for other purposes.

    In addition to these performance indicators, we also use the development of free cash flow (cash flow from operating activities less cash flow from investing activities) as a guide.

    Report on expected developments
    • Global economic growth to accelerate in 2017
    • General economic environment is good for Krones overall
    • Krones forecasts revenue and earnings growth for 2017

    IMF expects global growth of 3.4% in 2017

    The International Monetary Fund (IMF) updated its forecasts for world economic growth in January 2017. It now expects growth in both the advanced economies and the emerging markets and developing economies to be stronger this year than it was in 2016. In all, the IMF is forecasting global growth of 3.4% for 2017 (2016: 3.1%). However, IMF economists have pointed out that there are risks to the global growth outlook. For instance, the Trump administration’s new economic policy could lead to protectionism.

    Economic activity in the emerging markets and developing economies is expected to pick up considerably in 2017. In all, the IMF is forecasting 4.5% economic growth for the emerging markets (previous year: 4.1%). The large economies of Russia and Brazil are expected to emerge from recession in 2017. In the IMF’s view, the economic situation in China has stabilised. Government policy measures are providing additional support there. China’s gross domestic product (GDP) is expected to grow by 6.5% in 2017 (previous year: 6.7%). The IMF is projecting 7.2% economic growth for India in 2017 (previous year: 6.6%). The economists revised their expectations for the Middle East/Africa region downward slightly in January. The main reason is the cutback in oil production, which is likely to have a negative impact on Saudi Arabia’s economy. The IMF expects GDP in the Middle East/Africa region to increase 3.1% in 2017 (previous year: 3.8%).

    In January 2017, the IMF was seeing the growth outlook for the advanced economies somewhat more optimistically than before and revised its overall forecast upward from 1.8% to 1.9% (2016: 1.6%). US GDP is expected to increase by 2.3% in 2017 (previous year: 1.6%). The IMF expects that the US economy will benefit from the new administration’s government stimulus programmes. The IMF is forecasting euro area GDP growth of 1.6% (previous year: 1.7%). Germany’s economy will likely expand slightly less than the advanced economies overall, by 1.5% (previous year: 1.7%). For Japan, the IMF is forecasting 0.8% economic growth in 2017 (previous year: 0.9%).

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    Low unemployment and inflation rates strengthen purchasing power and consumer spending

    Consumer spending is a key factor determining the propensity of Krones customers to invest and, consequently, the level of demand for beverage filling and packaging equipment. Low unemployment and low inflation rates have a positive effect on consumer’s buying power and therefore support demand for packaged food and beverages. Thus, unemployment and inflation rates indirectly impact demand for Krones’ products. We do not expect either of these factors to have any negative effects on Krones’ business overall in 2017.

    German machinery sector is cautiously optimistic about 2017

    The German Engineering Federation (VDMA) is predicting that the industry will grow somewhat in 2017 despite several unresolved geopolitical crises. The VDMA expects that the crises in Russia and Brazil have both bottomed out and that demand from China will pick up. After posting zero growth in 2016, the value of machinery and equipment produced in 2017 is expected to rise by 1% in real terms year-on-year.

    The outlook is better for the food and packaging machinery subsector, to which Krones belongs. The VDMA expects this segment to grow by 3% to 4% in 2017.

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    Krones confident going into 2017

    Krones is optimistic about the 2017 financial year despite many political and economic uncertainties. The packaging machinery market is growing at a relatively stable pace. Driving this growth are megatrends such as the steady growth of the middle class and increasing urbanisation in the emerging markets. Both of these trends are resulting in rising demand for industrially packaged food and beverages. Moreover, food and beverage producers increasingly must rely on innovative packaging solutions to distinguish themselves from the competition. With that, the prospects are good overall for stable growth in demand for Krones’ products and services in 2017.

    Krones aims to improve earnings and revenue in all three segments in 2017

    Besides the opportunities, the market also presents a number of challenges. Our customers’ buying power is increasing as a result of mergers and acquisitions. Our competitors are ensuring that the fight for orders remains intense. For that reason, Krones expects no improvement in selling prices in 2017.

    Launching new products and services and further reducing costs remain important factors in our effort to grow further and increase earnings before taxes in all three segments in 2017. Moreover, Krones intends to considerably increase its presence worldwide and move even closer to customers. In the future, more procurement, engineering, and parts of production will take place in the regions in which our customers operate their plants. That will enable us to deliver regionally-adapted products faster and at competitive prices.

    In our core segment, machines and lines for product filling and decoration, Krones will also press ahead with the modularisation of our products in 2017. In the next project phase, we will simplify the design of modules in order to improve our own procurement terms. We will expand our international service structures and LCS Centres in the interest of further growth. We are also strengthening our mid-range business – that is, less complex lines with high performance. There is especially high demand for these lines in the emerging markets.

    Krones is projecting slightly lower-than-average revenue growth of 3% in 2017 for our core segment because we are intentionally forgoing low-margin orders. The EBT margin should once again be around 8%.

    In our “process technology” segment, we will continue to implement the raft of measures developed in 2015 and complete implementation of several parts in 2017. The measures are aimed at strengthening the segment’s profitability and growth for the long term. With our ownership of the majority of the business operations of Trans-Market, we will complete significantly more projects in North America in 2017.

    This year, we intend to seize upon the considerable growth opportunities in intralogistics, which are also part of the process technology segment. Our acquisition of majority ownership of SYSTEM LOGISTICS and the expansion of SYSKRON make us the ideal partner for intralogistics solutions. We will continue to strengthen this position in terms of both regional presence and product technology in the medium term.

    In all, we are forecasting revenue growth of around 10% and an EBT margin of 2% to 3% for the process technology segment for 2017.

    In our smallest segment, machines and lines for the compact class, which bundles the activities of KOSME and GERNEP, we intend to continue to benefit from strong demand for machines and lines designed for lower outputs. We expect around 5% revenue growth and an EBT margin of at least 5% this year.

    Based on the current macroeconomic prospects and expected development of the markets relevant to Krones, we are targeting consolidated revenue growth of 4% – excluding acquisitions – in 2017. The regional distribution of revenue in 2017 is likely to be little changed from the previous year.

    The company’s profitability should remain stable this year. Krones expects to achieve an EBT margin of 7.0% in 2017. Our forecast for our third financial performance target, working capital to revenue, is 27% for the current financial year. Our medium-term target for this new indicator is 22%.

      Forecast for 2017* Actual value 2016
    Revenue growth +4% +6.9%
    EBT margin 7.0% 7.0%
    ROCE 27% 26.7%

    * Excluding acquisitions

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