The next stage of modularising our products is aimed at countering the rising prices we pay for materials. On the one hand, we will further increase the degree of modularisation of our machines and lines and thus reduce their complexity. On the other, we will simplify the design of our modules. That will enable more suppliers in the regions to meet our specifications. That, in turn, will increase competition among suppliers and improve our purchasing prices.
In order to increase Krones’ profitability for the long term, we will also further expand our after-sales service business. Proximity to customers is crucial for Krones’ success in this business line. That is why we will further increase the number of service and sales offices. To make this work, we must recruit and retain enough sufficiently qualified people in the regions. We are investing heavily in training and continuing education for employees in the regions in order to reduce the relatively high rate of employee turnover in the emerging markets.
Reducing working capital – unlocking capital
Of our three core targets, the third is working capital to revenue. At 27.3%, we still have a ways to go to reach our 22% target. We have developed a number of short and medium-term measures to achieve our target and reduce working capital. These include cutting lead times, accelerating the process of commissioning lines at customers’ plants, and reducing inventories. Reducing the ratio of working capital to revenue in the years ahead will directly increase the capital available for investment.
Solid financial position enables us to invest in growth in Germany and abroad.
With net cash and equivalents of around €157 million and an equity ratio of 43.8%, Krones is in excellent financial health. Combined with operating profits, that gives the company enough money to invest in growth, acquire additional companies, and pay out dividends. Our dividend strategy is to pay out 25% to 30% of consolidated net income to shareholders.
To remain competitive for the long term, Krones must invest – in its German sites as well as in its international presence. In Germany, we will invest around €200 million in the years ahead. A large share of that money will go towards the factory of the future, in which we intend to digitalise our own internal processes and stages of production as far as possible – as at our customers’ plants – and thereby increase our own productivity and efficiency. Germany will remain the development and innovation headquarters for Krones machines and lines. But we will also invest substantially in resources abroad. Besides establishing and expanding our international service centres and engineering hubs, we will also invest in production facilities. In addition to the new factory in Hungary, mentioned previously, we are also growing our site in Taicang, China, substantially. There, we will manufacture machines specifically for the local market, particularly for bottling and packaging water. We will also expand our Franklin plant in the USA and produce labellers there using components made in Germany. It is important to us that these investments abroad not come at the expense of our core workforce in Germany but rather that we continue to maintain and create jobs in Germany as well.
Employees are the key to growth and long-term success
Every one of our employees is important for our company. Any strategy is only as good as the people implementing it. Our 15,300-strong team is moving Krones forward every day. They are essential to Krones’ long-term success. We will have to expand our team even further in order to handle the growth we are forecasting. Thus, it is important that Krones establish a reputation as an attractive employer – worldwide. Particularly at our sites abroad, we will step up these efforts and further expand the training centres in Africa, China, Southeast Asia, and South America as they enable us to build skills and expertise within our global value chain. This close proximity helps us to better understand our customers, market, trends, and developments and ultimately increases customer satisfaction. In Germany and Europe, workforce growth will be less dramatic. But, here too, we will continue to invest in our team and provide ongoing training and continuing education.
Krones’ management system
Krones’ management primarily uses the following financial performance indicators to steer the group and its three segments:
- EBT margin (earnings before taxes in relation to revenue)
- Ratio of working capital to revenue (at the group level)
In order 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 investments and capital expenditures.
Profitability, measured as the EBT margin, is among our key targets and parameters. It indicates the return on revenue (earnings before taxes in relation to revenue). For the group, we calculate the target margin as the weighted average of the three segments.
Another major performance indicator is working capital to revenue, which is calculated at the group level. Working capital is calculated as follows: (inventories + trade receivables + prepayments) – (trade payables + advances received). The result indicates how much capital is needed to finance the generation of 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 something else.
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) and Roce (return on capital employed, the ratio of EBIT to average
capital employed) as a guide.