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