Krones AG (KRN) Earnings Call Transcript

Good afternoon, and welcome to the conference call of Krones AG. At our customer's request, this conference will be recorded. May I now hand you over to Christoph Klenk, CEO.

Yes. Good afternoon, ladies and gentlemen. A warm welcome on behalf of Krones to the today's presentation of the preliminary figures for the financial year 2019. I will jump immediately to the first page because today, we are here on a teamwork, Norbert Broger, our new CFO, and myself, to present you the figures. At this point, a warm welcome to Norbert Broger, to the Krones team because he's joining for the first time a conference call of Krones. I can say, onboarding of Norbert was extremely easy since he has been for some years with Krones in the past. But I think the best way would be if Norbert would shortly introduce himself.

Thank you very much, Christoph. Welcome, everyone, here in the conference. I'm the new CFO of Krones since January 1. So 7 weeks, right, into my new responsibility here. I'm 52 years old. For my professional life, the first 16 years, I worked in different functions in the Schaeffler Groups in Germany and abroad. Between 2006 and 2012, as Christoph just mentioned, I was responsible for controlling corporate development and risk management for Krones. In the last 7 years, I was the responsible CFO for the Schuler AG in Goppingen, also a machine building company in the automotive industry with EUR 1.2 billion in revenues. And since 7 weeks here now at Krones and I jumped right into the annual closing process. And I can mention that the closing of the year 2019 was a joint effort between Christoph and myself, and we worked so close together like one CFO.

Yes. Thanks a lot for that introduction. Now I said it already, he was deeply involved in the consolidated financial statements for the year 2019 and was actually leading it. He led it because we were of the opinion that's the best way that he can see deep into our figures and in the circumstances at Krones. And that's the best possible way to get Norbert as quick as possible into the picture and ensures no surprises. I'm coming to the next page, where you see actually the targets for 2019 and what we have achieved. And I can say we have met on the point our forecast for the intake and for sales. And we have met the reduced guidance for profitability, as guided in the second half of 2019. We will come, of course, to everything in detail. But one remark in the beginning seems to be for me important. For me, personal, it was important to have accounting, again, more on the conservative side. You will see later on some remarks where we have been more, let me say, on the conservative side and which will explain you some of the points you might ask later on. But Norbert will go through that in detail, so you will get later on a good understanding of it. Just one more brief look on the things we have achieved. You see that the revenue has increased to EUR 3.96 billion. This is an increase to the previous year of 2.7%. Order intake at -- for the first time, exceeding the EUR 4 billion, so at EUR 4.08 billion. And this is growth of 3.2% year-on-year. For the profitability, of course, extremely low and beyond the planning we had. And of course, you know, during the year, all the communication we had. We are ending up with an EBT margin at 1.1%, which was in the prior year, 5.3%. And we go through that in detail later on as well. Without the onetime effects, we would be at 2.8% EBT margin, and this is in line with the guidance of around 3%. We are aware of that we are short on 2 points -- on 0.2 points. And we will give you a bit of an insight into that later on. Last bullet point here on the page is that we are making good progress in implementing our structural measures for the sustained improvements in the earnings. And I would say this is something I would like to at least stay a bit on that point because I would like to emphasize, even here in the beginning that, number one, we have full alignment with the measures with our Supervisory Board. So we are in the position to execute and there's absolutely clarity that those measures which we have introduced in October last year are necessary to carry out. And I would say, the support we get there is essential, and everybody is extremely clear that these are the things which needed to be made for Krones to get ahead. These structural measures, you are aware of. And we are getting ahead in terms of the head count reduction we have announced. In Krones AG, that's the biggest entity in Germany, we have reduced by 200 people by the end of the year. And in addition, we have reduced internationally in the second half of 2019, 150 people. So you see that there is a move forward. And you are aware of -- we are still talking about the next 300 here in Germany next in 2020 and 200 internationally to be reduced. So that's one thing, which is going ahead in accordance to plan. And the same will be true for 2020. The second thing I want to mention is the big change. We have the Hungary and China. This is going ahead, as we have introduced. So even there, nothing which is a major drawback. Of course, some problems as always, but we are going ahead and making those changes. I'm coming to that later on. Heading to the next page, here you see the highlights again about the orders, up 3.2%. And of course, the EBT margin at 1.1%. Revenue on the right-hand side mentioned, and then there is one critical figure here, where you see a minus of EUR 95 million for the free cash flow, which is, in particular, when you look to the EUR 120 million free cash flow last year, a kind of a surprise, but we are going to explain that in detail later on. Know that we'll do that because if you see that normalized, based on the more conservative accounting, it might look different for everyone. Now changing to the next page where you have revenue growth and order intake. You see that we have on order intake, a quite strong Q4. You see that the -- that's in the green colors. You see on the left-hand side, the EUR 4.08 billion and the increase of 3.2%. And that has to do, of course, with a very strong Q4 with a growth of 10% compared to the Q4 last year. I have to say here we have to be careful because if you translate that immediately into revenues in the following year, this might not exactly account for that. Why is that? Because we had, as an example, bigger orders in. There is one significant one for bottling and packaging, our core business. This was quite a big one. And this will be splitted into 3 consignments. One will be in Q3 next year. The next one will be in Q4. And even one will go of those consignments in Q1 in 2021. So not everything which is here in that order intake will go into revenues immediately. And the same is true. We had 2 big orders for system logistics into our logistics, and they need around 12 to 18 months for completion of those orders. So I just wanted to mention that does not translate immediately in revenue. If you look now to the revenues. On the right-hand side, the sales, as we have indicated, you see that the last quarter compared to last year is down. We have been aware of that it would be not as, let me say, [ peaky ] as last year. And good or bad, I would say, of course, that has slightly impacted on the profitability of the core on one side. But on the other side, in the Q4 of 2018, it was almost over-challenged what we had here to push through. And I would say that's more normalized. Whatever you see here in Q4 is in accordance with the expectations we had and let me say, the things we had in mind. One last remark to the order intake. I state it all the time that the pipeline is good in the previous calls and that I was extremely careful to make statements on whether it's coming or not. Fortunately, it came. So we were very lucky on that. However, I would say the uncertainty will -- is still remaining in the market. And we see at the moment a lot of postponement in order intake and decision-making. Last point I want to mention here is life cycle services. This went good at the end of the year. So good order intake in life cycle service, where we are in line with the forecast we have made. And this is on the level that the -- let me say, the fundamental for the first 3 months is okay. So far to order intake and sales. Now I hand over to Norbert. He is going to explain about the profitability.

Thank you, Christoph. Regarding the profitability. Of course, it's -- 2019 is not satisfying for everybody. And the EBT, what we are going to report, is EUR 41.7 million compared to EUR 204 million in the 2018. What had a very negative impact on the result was: one, high personnel expenses, which I will explain later on; also, a negative product mix impact in the first half of 2019; then in the end, in the last quarter, the onetime costs that were announced also middle of last year, and then realized in December with a separate -- what is it in English -- ad hoc memo, ad hoc information. On EBT, the difference you can see between EUR 41.7 million and the EUR 112.6 million is the EUR 71 million, which were published in December. And the EUR 71 million, one big portion of it are additional costs to reduce head count in Germany in 2019 and '20. And then we have a reduction of EUR 20 million, our impairment in technology, and EUR 17 million different write-offs of goodwill impairments, where we took a rather conservative approach. So without this EUR 71 million, the EBT is what is shown above the gray bar to the left side, EUR 112.6 million, which is 2.8%. Actually, just a few hours before the closing and the final goal, we were at 3%, but then our auditors requested that we make a final posting for a partial retirement, a partial retirement program of EUR 4 million. And we could have argued it, debated it, but we decided to book it in December and to avoid the costs in the first quarter 2020. On the EBITDA side, you see EUR 306 million, 2018 versus reported EUR 227 million in 2019. Here, only the EUR 33 million provision for restructuring and reducing head count is the difference to the EUR 260 million. So EBITDA reported is 5.7% versus 7.9% the year before. And without the restructuring costs for reducing staff in Germany, it would be 6.6%. Interesting is definitely the last quarter. If you compare the fourth quarter in EBITDA, EUR 99.8 million 2018 versus EUR 63 million 2019. In the last quarter 2019, we took the EUR 33 million hit for the costs to reduce head count. So when you consider this, from an operational point of view, the last quarter 2019, without the onetime restructuring costs to reduce staff, would also be close to the EUR 99 million in Q4 the year before. Okay. Then Christoph, can you take over?

Norbert, thank you. And just a few on the markets and how the revenue split was around the world. So there is no big surprises compared to the last discussions we had. I mean, a couple of remarks. North America was extremely doing well. So we are pleased that we see that up to 17%, where we had an average usually of 13% to 14%. This has to do with a lot of investments going on there, and it's still keeping on. At the moment, we see there a quite good market. China, I want to mention because there is a big recovery in gaining market share again. You see we are slightly up. Good business there. Of course, even with the national competition we have, I think we have made our way and investments into the localization of our products is paying off to some extent. The same thing is true for Asia Pacific on the right-hand lower corner with 13% because we have lost a bit of market share there. Now we -- since there have been good projects being around, we are doing well in Asia Pacific, which we see as one of the most important markets at all. Let me say, the downturns we have is, of course, South America, which was going down from an average of 12% to 13%, where we are at 9% down. And this is related to, let me say, the economy there because we have a couple of countries which are more or less dead. Venezuela, I don't have to mention. Argentina, I don't have to mention. And even Chile are not as good as it should be. So actually, mainly Brazil remains and Central America. However, they could not compensate for those things we have lost of the other countries I have just mentioned. I would say the economic environment in South America is not so investment driven. And of course, you see a bit of a downswing in Africa/Middle East. That has to do, of course, with not the big breweries anymore we have there because since AB InBev has bought South African Breweries, there's a lot of consolidation going on and less investments. And second, of course, we are hit to an extent to the Middle East crisis. So there is not only effect from, of course, Syria, which has never calmed, but don't forget, we have had in the past, sustainable business in Iran, which is going to 0 or not existing anymore. So those are the points why we see effects here. Going to the next page and having a short look on the extraordinary challenges we have. I would say the first days of the year have been pretty much occupied with the conflict between the U.S., Iran and Iraq because, in particular, in Iraq, we have installations going on, and we had to ask ourselves whether we can apply the right security measures there. And fortunately, with the security team we have, we have quite experienced international security advisers employed by Krones. And one of them was even in the region to observe whether we can guarantee safety levels for our service people there was the biggest discussion. The same is related to Libya where you all know that some turmoil has started, and we have around 10 installations in Libya as well to execute. Most of them are going now okay. Same questions, can we maintain security for our people. So that was mainly the first 2 weeks of this new year still affected, and we have still a close look to that. And we have [ suspended ] some of the traveling into the region in some countries. Then once we had that slightly under control, corona started within all the impact you have seen in all the newspapers. Certainly, I might answer more questions to corona and how far are we exposed to that later on, once you have questions to that. But what I can say is, since we are in the Shanghai area, we are heavily affected from it. We have, at the moment -- from our around 1,000 people in China, we have around, I would say, 90% affected from them. Some are working from home, if they are white collar. Those being in production are, to some extent, in production, but not all of them. And we have some more issues since we have installations in China going on. We have some supplies going out from China. But all of that, if that is of your interest later on, the only thing I want to state here clearly is, yes, we will have an effect out of the corona and China crisis. But yet, we have not determined exactly how big the effects will be. We are -- maybe that's as well something important. We have own doctors for tropical and disease issues, so are in constant contact with the World Health Organization so that we have our own picture from our own people. And of course, we have scheduled every second, third day, videoconferences with our Chinese workforce to exactly figure out how we can help them because that's the first point we have. We suffer together with them. And second, of course, how we can manage to a certain extent, the business in China. Now handing over back to Norbert.

Yes, coming back to P&L and the 2 major cost drivers at Krones. One, material cost, you see on the upper left side, the green bars. The material cost increased slightly, EUR 9 million. As a comparison, sales or revenue increase is EUR 105 million. So the ratio, material cost to sales decreased compared to 2018. So this is a development that is going in the right direction. But of course, it's below what has been planned for 2019 and also below the expectations that were built in the plan and budget 2019. But it's going into the right direction and the measures that were taken in the second half started to show impact in the last quarter, specifically, and will continue to show results this year. The other major cost driver is personnel costs. And here, you can see that the ratio, the sales increased significantly from 29.5% to 32.2%. And when you look at the actual number, EUR 1.275 billion compared to the year before. And the increase in personnel cost is EUR 138 million, and the increase in sales is only EUR 105 million. So here is a clear mismatch. And as stated to the right here, there are 3 major reasons for the personnel cost increase. One is the head count increase of approximately 800 worldwide. Thereof, round numbers, 1,000 outside Germany and all of them in emerging markets country and a reduction in Germany of 200 in Krones AG. Second cost driver was significant increase in labor costs worldwide. Most of you know the tariff agreements that were closed between the unions and the employers in Germany last year and also the year before were quite high, and the productivity gains were not enough to compensate those increases. And then, of course, also this number includes the EUR 33 million costs to reduce head count in Germany. Most of you know that we are in a process to reduce at Krones AG additional 300 people this year. So for 2 consecutive years, personnel expenses and head count increase were above the sales growth. We are aware of this. And we are -- already took determined actions to shift and change the situation. Next slide. Working capital. Headline says Working Capital Improved Slightly. Return on capital employed influenced by extraordinary costs. The working capital improved slightly, yes, that 26.9% versus 27.3%. This is calculated on an average, so we take the 4 quarters every year, and we take the average out of the 4 quarters. But it's clear that 26.9% is not what the target was. Target was 26%. So we have not achieved this target. And we will focus more on this target. I would give some explanations also on the cash flow calculations that -- where you will understand that the numbers here need to be interpreted a little bit. The ROCE, of course, is down because the EBIT is down. First of all, the operational result is not good. And on top of that, the EUR 71 million already explained has an impact also on that.

Yes. Norbert, thank you. I'm continuing to give you a short view on our segments. First, the other segment, product filling and decoration. You see on the left-hand side, how the sales have developed and we see here a 2.8% growth, which is actually exactly the same number as you see in the group. What went here good is life cycle services sales was okay. Even new machine was not decreasing, which is important, I would say, for the time being. So things are, on this side, okay. If you look then on the right-hand side to the EBT margin, that looks extremely bad with 1.7% . And we have indicated here on the lower line in white with the stars on the left-hand side that you see how much of the EUR 70 million onetime expenses are related to which segment. So we have actually in the segment for bottling and packaging, a EUR 58 million contribution to the onetime expenses. The overall result would be then, of course, EUR 114 million, still significantly below expectation. And this is clearly showing that the problem lies definitely in the middle of bottling and packaging. And here, in particular, in our new machine business with the high material and high personnel cost. On the lower line, you see the segment for production -- beverage production and processing technology, where you have as well included the intralogistics. And that looks, once again, not good, but in the EUR 14.3 million, we have EUR 13 million onetime expenses related to those things you know. In particular, there are EUR 9 million related to the impairment write-offs we have for 2 of the entities we have bought. This is Sprinkman in the U.S. and it's Trans-Market in the U.S. Again, here, conservative accounting is coming into play, why we did that. The others, the difference between the EUR 9 million and the EUR 14 million is related to our efficiency of organization program. That means simply head count reduction. And for the system logistics put call option, we had to bring as well some costs in that [ EUR 0.09 ] range. We are explaining that a bit more in detail. We had that last year already. Has to do with good results. So that's one of the points you see here as well. So if you see that operationally, we would be here at a 0. And compared to last year, that's a good improvement. However, not at all where we should be and we stay with the statement here that we have a clear view on how should we handle the portfolio in the future. And we said it last time in our conference call that we are going to review portfolio. Action is going on here. So we are doing a split up of -- completely of the beverage production and processing technology that we see that independent, and we promised to make a time line behind it. We are still working on that and you get the answers in the next couple of weeks because when we see each other on the Capital Markets Day, we will say more to that. So far to the segments, now I'm handing back to Norbert because he's going to explain the working capital and the free cash flow.

Yes. Thank you very much, Christoph. You all know the saying, profit is opinion, cash is fact. But I will try to explain that even cash flow has -- let's say, needs to be explained once in a while. When you look at the left side of the calculation, earnings before tax is clear. We explained that already. Second line, other noncash changes, 2018, plus EUR 19 million; and 2020, EUR 309 million. And here, you see what Christoph said, a significant change in what I would say was an aggressive approach in balancing in 2018 versus a more conservative approach this year. The EUR 19 million in 2018 consisted of, round numbers, EUR 100 million depreciation and amortization positive and a reduction of EUR 85 million of provisions and accruals. The EUR 309 million on the left side consists of EUR 180 million, depreciation, amortization, so an increase of EUR 80 million in depreciation and amortization. Half of that is due to the new IFRS 16 standard of leasing where leasing had to be reclassed. And the other half, we already explained, write-off of goodwills and R&D topics. But then an additional EUR 110 million in this number of EUR 309 million is increase in provisions versus the year before, reduction of provisions of EUR 85 million. So 2019, increase of EUR 110 million. The EUR 33 million, which we will need, of course, is for the reduction of head count in Germany. Then we have accruals increased for outstanding invoices, EUR 30 million. Bonuses, compensation topics where you know everybody has -- let's say, it's an estimate, very often, and you can estimate more optimistic and aggressive or a little bit more conservative. So in this line, you see, I think, very clearly, the change. And I personally, as a CFO, in the past, always took it that way. I'm a fan of operational performance and be aggressive in operational performance, but not in creative accounting. Next line, other assets and liabilities are reduced. That's simply because we have lower tax provisions because of the lower result. And then you see cash flow from operating activities. And here, you see also a big change, partially -- I'm sorry, I skipped one important line, change in working capital, sorry. Change in working capital. And here, to the right, you see we wrote special sale and buyback program for receivables. The years are wrong in the document here. I just saw that. This was 2018 and '19, not '19 and '20 as stated in here. And I need to explain this briefly. And in 2018, my predecessor saw it before year-end, EUR 102 million of receivables, but it was not a regular factoring business where you get rid of the receivables, and you pay for it. The receivables had to be purchased back in 2019. So it went off out of the receivables year-end December and then it came back in April or May. Now this onetime business was decided by the Management Board and Supervisory Board already before I joined the company that we will not do that again. Yes, but the EUR 315 million last 2018, you have in your mind, reduces by the EUR 102 million to see the operational figure without creative accounting. And on the other hand, the EUR 93 million in 2019 is also affected in the other way with EUR 102 million. So in reality, 2019 would be EUR 195 million, sorry, and 2018, EUR 213 million. So this was a onetime thing that will never happen again. CapEx, slightly below EUR 10 million. And we will further reduce it this year. M&A activities, similar to the year before. No change there. And the free cash flow, minus EUR 94 million versus plus EUR 120 million includes also on -- in both sides, the EUR 102 million deal with selling receivables and purchasing them back that you have to consider. So the EUR 120 million plus in reality, from operational perspective without this onetime impact, is EUR 18 million. And the EUR 94 million minus would be a plus EUR 6 million. But besides this whole onetime deal, it's clear that for both years, the cash flow -- free cash flow is definitely not sufficient, and we are not satisfied with that. Okay. I think this is all what needs to be explained this side. Can you take over?

Yes. Norbert, thank you. You see on this page, the workforce we have around the world and give you a little bit of insight what happened. You see, first of all, the increase from 2018 to 2019 of around 800 people in total, and we are talking here about consolidated figures. And when you look to that, you see on the lower dark blue, you see actually the workforce in Germany, and you have to keep in mind that we have around 1,200 people outside of Krones AG in Germany, and that's the reason why you don't see the 200 decrease in Krones AG fully in the German workforce. You see only 150. That has to do that we have still employed, 2019, 50 people in Germany. And this is related to -- mainly to our service company, Service Europe. That's a German-based company with affiliates in Eastern Europe, where we're serving the European service market. Let me call it, it's the Eurowings of Krones, just to get there a better setup. The second, around 10 to 15 people we hired in our subsidiary, Syskron, for logistics and digitalization. That's the reason why you don't see the 200 head count reduction in Germany. Now on the right-hand side, you see the summary of the, let me say, the bigger numbers we have where we have increased head count. And I just want to give you a brief view on that, that you understand how can we increase head count by 800 in those critical times. And I go just roughly through that. You see India, 130, that's an acquisition for processing with 8% profitability coming on board with the closing in the mid of the year, sometimes in August. Then Automata is related to life cycle business. That's our long-term partner, where we own already a small stock in for a long, long time, based in Guatemala, and they are serving mainly the North American market with 120 people. Then we bought IPS Dubai, which is our agency in Africa and Middle East, more in Middle East, with 240 people once we bought them. Actually, there have been 270 because we have already 30 reduced. So that's the agent in the Middle East. The majority of the people are, again, life cycle and service people. The same is true for Pakistan. There, we bought our agency as well. Out of the 40, 30 are service technicians. And then the 2 next ones coming. Hungary is definitely -- the number of employees we hired in 2019 to start up our plant in Debrecen in Hungary. 450 people came on board. And that's a kind of transition you see, and one of the reasons why the personnel costs are so high because those people are in training. 200 of them are at the moment operational. 120 in Hungary, 80 here in Germany for -- in the production for training purposes but working as temps here. And then, of course, we had the increase in China, same thing. China will supply our whole conveying technology for China and Asia in the future. So we have swapped on the 1st of January completely the orders coming on conveying technology out of Asia and China into that entity. And that you see here in the 100 people head count. So if you add all of that up, and keeping with the big numbers, we have around 1,200 hired and got them on board. We have 200 released here in Germany, and we have already in the second half of 2019 released 150 abroad of Germany, where we reduced head count. All in all, of course, net is plus of 800. But you see in the second half, things are going already as promised in the right direction. And we are reducing people. For Hungary, we still need to hire people once we are at around 80% of the performance of the Hungary plant. But this will be then, let me say, somewhere in the middle of the year 2020. And it's a smaller number, not anymore as big as you see here. So that's, so far, to the head count we have on board. In the other line, you see then the distribution of the markets where we've hired how many people. Yes. And that brings us to the end of our presentation and the numbers we have provided. So now we are up for questions on your side and looking forward to hear your questions. Norbert and myself will share that again. Thank you.

[Operator Instructions] So the first question we got is coming from Mr. Sven Weier from UBS.

It's Sven from UBS. I just have a question regarding when we think about the outlook beyond 2020. I mean, you give the guidance with March. And we wait for that, but I guess I think there are still some doubts in the market about the trajectory to your 6% to 7% old margin level that the measures you're doing currently might not be enough. And I just wanted to know if you feel at management that you have enough backing from the family to do whatever is needed and even if that includes a further reduction in the permanent staff to get back to where you were in an acceptable amount of time? That's the first question.

Yes. Sven, thanks a lot for the question. Yes, you're absolutely right. First of all, if we want to go to the 6% to 7%, we believe the measures are yet into place are not enough and more needs to come to get that on a sustainable level. And I would say Norbert brought up and named it very nice that if we go to 6% to 7%, that needs to be sustainable. And then in a better year, even higher, that we've maintained in a critical year the same numbers. And this needs additional measures. And I can say it here, we had in between a discussion together with you, Mr. Weier, to reflect that. In the meantime, we had reflection with the family and partially with our Supervisory Board, to be absolutely clear on that track that measures taken today might not enough, and we made it quite clear that we go further in analysis, what the next measures will be and they might be not pleasant in the sense of getting the right footprint and the right things done for Krones. And we got full backup from those parties you just mentioned. So it's not a question of whether we can do it because there was a very simple statement. Krones needs to be in a good shape. And good shape means good profitability. And this is fully supported by the family and the Supervisory Board. So when there is somebody to blame, it's us and the Board.

And those measures would come once the current measures are put through? And so at a later point? Or would you expect something like that still to be decided during the current year?

Still to be decided during the current year. We don't think that we have the time that we can wait for, let me say, that those measures which are in place now fully executed. We believe that we have to think, actually, right now, beyond those measures what would be the right next steps. And once -- I don't want to put a time line behind that. That -- but at least within 2020, we will be crystal clear on that.

Okay, understood. And the second question is, obviously, you spoke about corona and Iran situation, which is well understood. I was just wondering how the order pipeline was developing outside those regions. Are you still happy with it? And also how your efforts on pricing are going.

I mean, if we look back to 2019, I would say, the second half was in all the regions going to the expectations we had. And the good thing is we maintained pricing, in the sense, we applied it as a governance that we maintain profitability. So we will have positive effects out of that. That's for sure. And for the new year, I would -- I'm very hesitating to give already indications on that. Usually, the year starts slow. So we see that as well for this year. And of course, the uncertainty around the world is big. We have, for example, a Coca-Cola deal, which is pending in Southeast Asia. None of the Coca-Cola guys is allowed to travel there, even if it has nothing to do with corona. However, just as precaution, they don't travel. And because of that, we can't get deals closed with the Coke folks. So that's just one example how things are related, in particular, in Asia, to get orders on board. I would say, a clear view, we have another 4 to 5 weeks in the year that we see how things are developing. I would say 2 things on that. Number one, markets are still fundamental, okay, and we maintain that statement. Second, uncertainty is around everywhere, and we need to have more time in the year that we really can justify that. I hope that answers your question.

Yes, that's fine. And the last question is just on cash flow. You mentioned about the Capital Markets Day and the focus on process technology, but I was also wondering if we get a better deep dive understanding about -- especially with what Mr. Broger is intending to do on improving working capital and free cash flow.

Yes. I was afraid this question would come.

I'm sorry for that.

No, no, it's okay. To be honest, I mean, I'm 7 weeks here, and when I look at the figures, for example, working capital development, yes: 2015, 25%; 2016, 26.7%; 2017, 27.3%; '18, also '20, 7.3%, actually higher than reported because of those EUR 102 million; last year, 26.9%. And I read the 22% target in the annual report of the previous years, then I have a question mark here. Our DSO are 150 days. And 22% working capital is roughly 80 days for the total working capital. And with 150 days in receivables, DSO, this is not possible. So I have no solutions yet. I think that we definitely can achieve 24%, 25% in the next 2 years because that's the level that Krones had a few years ago. But to be honest, after 7 weeks, I do not have the answer how to get to the 22% on working capital. But cash flow is not only working capital, so it's also CapEx investment that we have to consider and also, let's say, our production footprint worldwide. The question, what do we need to produce in-house, what is core business and needs capital, and what is -- what can be purchased with lower capital investment on our side and also maybe more flexibility if the markets go up and down, but this is something we are discussing right now.

Okay. Well, that's a bit early for the CMD then, yes?

Yes. But sorry for not giving you a clear answer how we will achieve 22% working capital or free cash flow of EUR 200 million or EUR 300 million. But we...

But you think 24% to 25% would be already a start. Yes?

Yes. And what we try to achieve until the Capital Market is that we get as much transparency into that whole subject that we can go deeper and have a whole better understanding where we are with that and where the targets are, then as a consequence out of that.

Ms. Felicitas von-Bismarck from Deutsche Bank.

Sorry, yes. I have -- could you maybe comment on the different ways that the coronavirus could impact you. You mentioned that, for example, Coca-Cola is not going there anymore. But are there also concerns about the way they could pay or not pay, consumer demand, these kind of things? That would be my first question.

Well, of course, again, we have not justified in euro the impact, since we cannot justify how long the whole crisis would take. I mean there is an estimate that by end of March, mid of April, things might be going back to a regular way. But I would classify that a bit, that you have an overview, which points we have and where we are looking into. Number one, we have production there. Production can be served only limited. I said it earlier because the people in production, they need to be physically there. And most of them, so that's around 60% to 70%, can't travel at the moment. White collar for production is in operation, and we have some -- let me say, we are classified as a reduction for emergency parts because our customer is supplying beverages. And because of that, we have this kind of a special exception that we can take some of the spare parts out of the stock. So this is running to a certain extent. Then, there is a second point that -- we said that, that we are doing for our aftermarket business part and some of the conveying technology we do in China, that's down at the moment. And the business has some impact there, not yet to the extent that we believe that might go somewhere into penalties in the orders and not to the extent that there is not a chance for catching up later on in the project. Then, we have a -- let me say, an overall business in China, this is installation of new machines all over the place. Those installations are usually on the peak after Chinese New Year, which are, of course, now not in operation. So why? Because we have, number one, a travel ban for every foreigner to China from our team, which they can't travel into China. And second, again, even if it's other areas than the Shanghai or Wuhan area, people are very limited in traveling. So those installations and commissionings are running idle at the moment. In China, we do not expect that customers will come up with any penalties because of that, because we see a lot of, let me say, get together teamwork. This is a crisis we have all managed together. So it might be that we are late in revenues, to a certain extent, but it's not that the projects are going south because of penalties, which I believe is very important. Order intake, of course, is low because nobody can do a deal at the moment. But on the other side, there is a pipeline, which is okay, and we believe that once traveling is allowed again, that the traveler -- that the pipeline could run. And then there's a last point that we get some of the parts delivered from China for our machines here and our components of our subsuppliers, our own parts, we can justify it quite well. We believe that in case things are going not longer than mid of April, we are okay for those parts. We are sourcing in China. If this takes longer, of course, this might have impact, but we do not believe so. And where we have a bit of a, let me say, a not clear view and where we are investigating at the moment deeper, what are our subsuppliers doing? Is there any electrical component, which we buy actually here in Germany, but has some components from the subsupplier than from China. So again, it's really, really difficult to justify the impact which we have at the moment. I would say, as soon as we have that, I would say, we are going to issue some of the information in some of the channels that you are aware of. But at the moment, it's really not quantifiable.

Okay. And the other question was still like a little bit in line with what Sven asked that if -- in terms of the alignment, the Supervisory Board with you and with the family, could there also be more structural decisions apart from restructuring, which would be closing down a division getting rid of one, selling one, something like that? Or how did that…

I would say, Norbert Broger could answer that because he was now joining all the meetings and could give you a feedback on that.

Is -- have your questions been answered, Ms. Bismarck?

You have on mute. Norbert's been talking, but he had his phone on mute.

I'm sorry. I'm sorry. I took over, but my phone was on mute, so I'm very sorry. Okay. I participated in the Board meeting of the Supervisory Board meeting November, as a guest, where the family is represented as well. And after that, I had several discussions alone and together with Christoph, with the family and the last one was yesterday, and I can assure you that the family, let's say, the spirit has changed compared to what I have seen when I was at Krones 2006 until 2012. I think the development last year opened also the eyes in the family that structural changes are needed. And my impression is, after the talks I had in the last weeks, that there will be no roadblocks from the family. It's up to us as a management to do the right things, whatever it takes.

And next question is coming from Sebastian Growe from Commerzbank.

On the free cash flow, if I may start with that for the fiscal '19, and I appreciate the comments that you made around the onetime effects and the aggressive accounting of your predecessor. Can you just give us a sense, how much of this reversal that you referred to in this noncash charges line might be structural? Because if I take your comments correctly, then it sounds that you are increasing the risk provision structurally? And if so, can you put a number behind that? And related to the fiscal '19 free cash flow, I would be interested in the comment on the bonus provisions. Can you give us a number? What has been provisioned? And how does it compare to 2018?

Okay. I can give you the number overall that we have an increase of provision for 2019 of around EUR 110 million. But I don't have the information what exactly the accruals for the bonuses are. I know that the accruals 2018 that were made, were too low, that had a negative impact in the result of 2019. I'm sure that 2019 we are covered on the provisions, but I don't have the exact number.

Okay. I was just a bit surprised, quite frankly, after the year and how it's played out. There are provisions for bonuses, but that's maybe a different topic.

No. It's not -- maybe I can -- if you -- we have bonuses for our nontariff employees.

Okay. And on the question around provisioning for risks and warranties?

Now I have to look at my colleague here, but between -- it's EUR 55 million provision for risks and warranties.

And that has been up quite significantly, it sounded at least, compared to what it used to be under...

Yes. Yes.

Can you chip in the number eventually?

Just -- I'll go ahead. Just -- I'm jumping in here. So number one, we are doing what we said, a more conservative accounting. And there are -- is at least 1 or 2 biggest things in. I just want to make one example. And this has nothing to do with the quality or, let me say, how we perform in our machines in the market. We have some restrictions in terms of trade barriers and customs issues. And I would say, this is related to North America and to China. And for those things, we made provisions. I don't want to go deeper because this is not yet put in any way to the public. And we have done those provisions, let me say, carefully that if things are coming up, then we are prepared for it. And I would say the number we have put in is, I would say, in accordance with what we are going to see. And yes, there might be some room. But at least, we have done that carefully and I would say, that's most probably for more machine builders are coming up. That import into China and the U.S. has more hurdles than in the past and might have some costs associated which we have not seen in the past. Once we are [ people ] through that, we are, of course, giving you more details. But at the moment, I would say that, that would be counterproductive because we are not yet sure that things are really applying in the numbers where we have put into the provision. So that's the explanation for it. This takes maybe 1/3 of the whole thing. And the other thing is being more careful and being prepared for things which might come up. I hope that helps.

Yes, that is very helpful and alleviating some concerns, quite frankly. On the working capital, if I may then move on to that one. You said the 25% might be a realistic target. Well, we have been hearing that now for a while, going down, going down. And at the same time, obviously, the overall framework in the context with the very big customer that you are having business with, that hasn't changed and it's not going to change. So the question simply only looking -- yes, and the review and say, it used to be 24%, 25%, and that's then the reason why we can get there. I'm not quite sure if that is so convincing. So is there any granularity that you could add to that statement that you made before?

Maybe I add something here because, yes, you are right. I mean we have to look really into that very realistic. If we look to the payment behavior of our large key accounts, I don't think we really get numbers forward there. I would say, we could be happy in case we could maintain payment behavior as it is today because everybody comes back and wants to have improved payment conditions. Of course, we don't want to go further. But on the other side, we hesitate or we are really struggling to improve payment conditions significantly. So this would be not an area where we really get forward. So -- and that, we have to see crystal clear, realistic, and we are making up our mind on that part that we have a clear projection on that. Second, what we have in our hands is receivables because receivables has to do with how fast do we close out our installations and commissionings. And there, we have made changes in our contracts with sunset clauses. I mean we mentioned that several times. Those sunset clauses, they will take time until they are really applied because since we did that, is around 6 to 9 months ago, I would say, more 6 months, that we have them regularly in the contract, and we will see them after 9 to 12 months being really applied and giving us some tailwinds. So that's one thing. Second, we, of course, have to improve our commissioning of the machines in a fast way, again, in our hand. So there's room in. We have to be very realistic, and we have not made a figure behind that, how far we can go there. And then there's a last subject in the whole point. Our payments we have to do for our suppliers, we changed a bit. Why did we do that? Because, of course, bad for the working capital, but good for the discounts we get there. In the renegotiations, we use that tool for them improving a bit the payment conditions, let me say, to the offset of the working capital to get impact into the P&L. So that's roughly the summary. And I would say, our suppliers at the edge as well. So we can't see them with higher pressure being forced to better payment conditions. The only thing and this is what we are doing at the moment is can we put a factoring in between for them that we get on that particular part better conditions. But again, on suppliers, focus on getting better pricing and payment conditions effect, is that -- as you take that as a combination, we need to dig deeper, and you will have really a firm statement on which way we can go and what is achievable.

Yes, I understand. And 2 final questions, if I may. One is on pricing. Obviously, we have seen the orders going up and down in terms of growth rates year-on-year. Certainly, that this is comparison related. That is the nature of the business being lumpy simply. But nonetheless, can you just give us a sense of where you stand and then pushing through the price hikes? And if I may, then add to that question, another one, which brings me back to working capital. So maybe you are making some progress on the price side of things. Eventually, some of your salespeople are giving in on the working capital terms, at least. There's, obviously, no change to the good whatsoever as we speak now for the last 1.5 years, and that's where I'm coming from.

Yes. To pricing, I can answer that simply, we stayed firm. And from the other discussions we had, that I explained even, what orders we lost because of that. I would say, in the fourth quarter, I would say, we didn't see that to a bigger magnitude losing orders because of staying firm on pricing, but we stayed with our statement. Some pricing is essential that we -- getting our gross margins better. However, we can't see, and we do not expect miracles from that. So still, with the cost side will be the most important thing for us, however, we stayed firm on pricing, even in those difficult times. And we have a clear alignment with sales and internally that we are in saying in the coming challenging times firm on pricing because we cannot allow for further erosion on that. To the question whether this has hit working capital because payment conditions has been worse. No, it has not. Payment conditions are reviewed as critical as pricing. And at least, what we could manage is to at least maintain them. We didn't improve them, but we didn't decrease them. So there's a slight decrease, I would say, if you look into that the downpayments were a bit lower. But I would say, not in a magnitude that we are really seeing that as a payoff because of the pricing. So the same way, put pressure on, let me say, pricing as well as on downpayments and payment conditions. I hope that answers your question.

That's good to hear. And then the last one is just on service. Hopefully, a bit of a more positive one. We had obviously some reluctance in the earlier part of the year. Can you just give us a sense how the end of the year played out? And what your general expectation and planning eventually is for 2020 when it comes to service?