Krones AG (KRN) Earnings Call Transcript

Welcome to the conference call of Krones AG. At our customers' request, this conference will be recorded. May I now hand you over to Mr. Christoph Klenk, CEO; and Mr. Norbert Broger, CFO. The line is yours.

Yes, good afternoon, ladies and gentlemen. Warm welcome on behalf of Krones to our first conference call in 2021. Norbert Broger and myself will present you the preliminary figures for 2020 today. And of course, we'll answer your questions at the end of the presentation. Before Norbert starts with the presentation, some general remarks. After year with revenues decreased by roughly EUR 600 million and negative EBT in the P&L, of course, nobody can be satisfied. However, in the light of COVID-19 and the operational EBT and EBITDA and as well, very important, the executed measures, the result is, from our point of view, quite good. The measures and action and those to come will give us a good fundament for the 2021 profitability and a good fundament for our midterm targets. In addition, order intake was quite robust in the first weeks of 2021. And again, this gives a very solid fundament for the 2021 targets. Summarizing our statements, even as everybody is suffering from the COVID-19 situation, we, the Krones team, are going with optimism into 2021. Now we'll hand over to Norbert , who will run you through the presentation.

Thank you. Thank you, Christoph. Good afternoon, ladies and gentlemen. This is Norbert Broger speaking. Preliminary figures 2020, you all got the presentation. From my perspective, the summary should be that, at least for those of you who were with us during the last year and in constant contact with us, there should be no surprise in this set of figures. Since we are all within our guidelines and guidance what we gave to you. As Christoph said, our revenue fell in 2020. So we have technical. Okay. That's okay. Just a few technical problems. Revenue fell by 16% to EUR 3.3 billion. And our guidance was EUR 3.3 billion. Order intake was also significantly affected by minus 19%, ended up at EUR 3.3 billion. However, and that's the positive sign. What we see the last quarter was better than what we expected, so in September and also January was a good start. Krones profitability on EBITDA level was affected by EUR 72 million onetime impact for restructuring costs to adjust our structure to the lower volume. And the EBITDA decreased from EUR 227 million prior year to EUR 133 million, which is based on EBITDA margin, 4%, versus 5.7%. Without the onetime impact, it's 6.2%, and our guidance was between 5.5% and 6.0% without onetime impacts. To be fair, also in 2019, we had onetime impacts and EBITDA margin 2019, excluding onetime was 6.6%. So without the one-offs, 6.2% with a significant volume reduction versus 6.6% the year before. On the positive side, our generated free cash flow of EUR 221 million versus minus EUR 94 million the year before. And based on the current situation, we expect that the business will pick up. And we our guidance for this year, even though it's very early. And of course, there is some insecurity in the markets we expect growth between 2.5% and 3.5% and EBITDA margin of 6.5% to 7.5% which is in line what we communicated in the Capital Markets Day in November. Okay. Let's go to order intake. Order intake, you see the comparison quarter-by-quarter. And the start last year was rather weak. First quarter was partially affected by China, COVID-19 already. And then there was a real huge hit in Q2 with almost minus 40%. And then first, let's say, small improvements, but still significantly below the year before. And we ended up, as already mentioned, at EUR 3.3 billion or minus 19%, however, with the last quarter of EUR 1 billion and also a good January for this year. Order backlog EUR 1.2 billion. Now some of you might think, well, if sales and order intake are very close, why is the order backlog lower because technically, there is a gap when you calculate it of around EUR 160 million. And this is because we cleaned up old let's say, orders that were placed before corona times already and where the projects did not materialize for several reasons. And we cleaned this up during the year. So this was not a cleanup action in the last quarter already at Q3, we had around EUR 120 million variance where we cleaned up very old orders that never came true and the orders are from 2019 and '18. Okay. Revenue development, as you know, we have between 3 to 5 months time lag between order intake and revenue recognition. And here, you see a similar development, what you see in order intake with a time lag. And of course, not as -- with a very strong peaks, what we have seen in order intake. But overall, minus 16% compared to the record year before 2019. When we look at the revenue spread across the world of our business, it's -- overall, Krones is very well balanced with sales in all regions in the world. Last year, all regions were down volume-wise, except one, which was Middle East, Africa. And here, it was primarily Middle East that was the only area where we had growth last year compared to the year before of around 6%. That's why the share of total sales of Middle East, Africa increased from 11.4% to 14.4%. And Middle East, Africa, in the long run, is a big opportunity for Krones, and here, we are very well positioned. All other regions, in absolute figures had sales declines. North America compared to other regions, still good. That's also why their share of total sales increased from 17% to 19%. But in absolute figures, it was minus 6%. And since overall, sales were minus 16%. Now with minus 6%, the region compared -- or their share increased. So those were the 2 regions with positive or moderate negative impact. And then we have 2 regions that had more than 16% decline, which is Europe, on the one hand side. That's why their share of total revenues dropped from almost 39% to 35%. And also China dropped from 8% to 6.5% of total sales. When we look at the EBITDA development, last year, of course, it's a significant decline from EUR 227 million or 5.7% reported the year before to EUR 133 million and 4.0% reported this year of 2020. Both figures are affected by one-offs. If maybe you remember, in 2019, on EBITDA level, we had EUR 33 million one-offs because we already started with efficiency increasing with programs -- sorry, to increase efficiency in 2019 before corona. And on 2020, of course, we put programs on top to increase efficiency, but also for capacity adjustment. So last year, the figure is impacted by EUR 72 million, one-off for restructuring costs. And if you want to compare the figures without one-off, then 2019 would be 6.6% EBITDA and 2020 is 6.2% EBITDA. On bottom line, EBT level on EBT margin, unfortunately, and that's the first time since the financial crisis, where Krones also reported a loss on EBT level in 2009. We have to report a loss of almost EUR 37 million, which includes EUR 80 million one-offs. So the EUR 72 million restructuring, which is part of EBITDA plus an additional EUR 8 million for impairments and evaluation. So reported EBT level, minus 1.1%, without the one-offs, 1.3% on EBT level. Okay. Okay, our major cost drivers are personnel and material. And here, you see why we have to do a lot in restructuring. Because our personnel expense ratio increased dramatically from 29.5%, 2018 to 32% last year. And now 35% this year. Of course, this figure includes the restructuring expenses that we have in there. And we will see a decline starting this year, of course, and 2022, we are through with our measures, and then we will have the full benefit of the restructuring. Material expenses is okay or quite good. The development, our material ratio is decreasing. Of course, material goes a lot together with a volume decrease. That's clear. The improvement in the ratio consists of 2 parts. Half of the improvement is positive mix effect because the new machine business was hit harder from the volume decline then the after-sales service business, with services and spare parts. And the second -- or the other half of the improvement are cost savings in material, which we could materialize and achieve in the last 2 years, especially last year. When we look at our 2 segments, what we -- that we also report in our annual report, you see the main segment, Product Filling and Decoration reported EBITDA level of 6.1% in the last year versus 6.7% from the EUR 72 million one-offs, you can consider EUR 66 million in this segment. Yes, so the 6.1% without the one-offs is 8.5% adjustment. And here, we had the best impact on cost savings, material. And also the mix helped to a certain extent. Our problem child, as you know, is Beverage Production and Process Technology, where we had a real hit last year of EUR 38 million, EUR 6 million of that is onetime. But that's still at least EUR 32 million loss. Adjusted and EUR 20 million of that is process technology in the beer area, where we do the carve-out in Germany, okay. And here, our measure is to increase profitability will show significant impact this year. Working capital, the next slide, on average, we have an increase and the problem we had is that the reduction in sales and order intake was much faster than the reaction speeds that we had on adjusting working capital. Actually, in the first few months, we increased inventory because we were afraid that our supply chain would get into travel when corona came up, during the year, we were able to adjust those things. So at least at year-end, we were at 25.7%, which is similar to the year before. But during the year, on average, it was a matter of speed that the sales reduction came faster than the reduction in working capital that had a time delayed, okay. Development of employees. Last year, you can see the reduction in the group, 16,736 to 17,353. So minus 617, 60% of the reduction in Germany and 40% outside Germany. Outside Germany, we are basically through, maybe some minor things in Germany, of course, what you do not see in those numbers is the reduction that we did through our voluntary program of around 400 until the end of last year, but those numbers are still in the year-end figures in December. So those headcounts will go out in Germany this year, plus the additional 350 that we announced in December that we also have to do this year. So those figures are not included in the figures, December. Liquidity and financial stability. Here, you know that we are on the safe side. We still have an equity ratio of around 40%. And we have 3 credit lines of around EUR 1 billion. So that gives us all, let's say, freedom and security that we need in difficult times. We didn't take advantage of government loans, KFW [dial-ins ], loans or something like that. And our net cash position at year-end was EUR 185 million versus EUR 38 million the year before. So also on the net cash side, plus EUR 150 million last year. And this brings me to the next slide, which is cash flow and free cash flow. And you can see that our free cash flow improved significantly from minus EUR 94 million the year before to plus EUR 221 million. And the major drivers were the change in working capital. In 2019, there was still an increase. 2020, of course, a decrease, not as fast as we would have liked it to keep our percentage, but definitely a significant decrease. And the other major driver was the reduced CapEx from roughly EUR 170 million to EUR 94 million. So both together created basically free cash flow of EUR 220 million or an improvement of EUR 315 million compared to the year before. And that almost concludes my presentation for 2020. The last few, again, on this year, and you can see at the right side, what we said on Capital Markets Day in November. And our growth target for this year, our expectation is between 2.5% and 3.5%. And yes, I can imagine that some of you might think isn't that too conservative, we had this discussion internally. And right now, we see that the corona situation is still kind of fragile. On the one hand side, the question is the progress and speed to vaccinate the people all over the world, which will definitely make improvements. On the other hand, we have an uncertain situation with new mutations in, English. Okay, so you all know that, so altogether, we said at this point of time, we are rather a little bit careful. We are very confident with this growth also with the EBITDA margin and our working capital guidance for this year. And then we see, let's say, in a few months, maybe a little bit clearer how the situation will develop. So that was 2020 from my side and perspective. Thank you very much for your patience and attention. And now we are ready and available to answer your questions.

[Operator Instructions] Sebastian Growe from Commerzbank.

This is Sebastian on. We have a few questions, please. Mr. Klenk. The first one is around the layoffs that you last talked about in 2020. And to start with, can you give us proper sense of when you would expect the 150 plus to leave the payroll? Would it be fair to assume but the full cash outflow is going to take place in fiscal '21 as well? And ideally, you could also give us eventually quarterly guidance on when this is unlikely to happen [indiscernible].

Okay. Thank you for the question, Mr. Growe. The 750. 400 out of that are assigned contracts already. And they will leave, I would say, 95% until the middle of this year. And the remaining 350 basically in the second half of this year and probably also a few in the first quarter 2022 and that is then also the schedule for the cash flow. So 90% of the overall reduction, cash flow will be in 2021.

Okay. That's helpful. And the second one is around restructuring, and have to be really 100% clear. Is it a fair assumption that the setup that you now have is really where you want to have it? Or is there anything we should be prepared for when it comes to, for instance, the Steinecker carve-out? Is there anything else we should keep in mind which might lead to more nonrecurring charges in '21?

Thank you for the question. That's the setup we want to have. Where we are very convinced that once it's all done, that we can achieve our midterm profitability target. And we don't see any further onetime costs, further restructuring in the next 2 years.

Okay. Good. And then let's talk about the, hopefully more positive things really. That's on the demand side, the quarter 4 obviously played very, very nicely. Can you also give us a sense on how pricing has developed, especially in the quarter 4 compared to prior quarters?

Yes. I would say pricing, of course, in this situation is slightly under pressure, and this was even true in the last quarter 2020, but it was definitely not as much under pressure as we assumed in the beginning. So that's a positive momentum for us. And when we look to gross margins, which we have now execute in 2021. This is all in plan. I would say pricing as such. Of course, it's always in those situations is under pressure, but it's on the level as we have calculated and if we are entering further in 2021 and maintain the price levels we have, what we do expect, then we are again in line with our planning.

Okay. That's good. And then lastly, really on January because you made the comment that, that was a good at would it be kind of a pro rata the same level as you exited the year 2020? Are you around EUR 300 million, EUR 350 million on a monthly basis?

I would say it's difficult for Krones to put that all on a monthly days because, I mean, some of the projects are shifting. I would say, yes, we have been slightly above target, but if we look to February right now, I would say it's coming a bit down. It has a bit to do with uncertainty, but I would say the order pipeline, and this is the promising thing is good. And we don't see that the customers are completely moving away from their deals. They maintain their schedules roughly. It's not coming as quick as we do assume. So we have basically some uncertainty at the moment in, but we have no worries that the order intake might not come on the expected level. I would say that's the good thing. And again, there is enough in the pipeline for everybody that we believe we can maintain both order intake and price levels because that's as well as important there having the order intake.

Okay. That sounds good. And sorry, if I may, the last question, [indiscernible] on service, because you mentioned in the Quarter 4, positive impact from mix, obviously, with service being less down than the [indiscernible] equipment piece. Can you just give us a sense where service needs trended in the full year 2020 in terms of revenue decline and especially also in quarter 4 with the rate of decline? Or was rather flattening already? So that would be very helpful.

I would say, of course, we say that the service part has been not hit as hard as the new machine business. However, it had a hit so -- and the positive momentum in the mix was coming more from the strong decrease in the new machine business. So I would see it from this angle. But if you look to 2021 we maintained in the fourth quarter, a quite good level. That's seasonality, of course. And this moves into 2021 for the first quarter as well, again, seasonality. But all in all, we see a stable level on services for 2021 coming from Q4 last year. It's not on the old levels, of course, but it's -- let me say, it's in the expectations we had.

Okay, I mean the reason why you are not so far, at least strengthening a higher pickup in the service business, you just really remaining at this quarter 4, run rate is due to still the looming uncertainties around COVID, et cetera?

Yes. I would say that has 2 factors actually, while we are not running fast on that. Number one is that we have still on the brewing side, with all the big brew strong impact with all the bars and restaurants being closed down around the world is number one. And second is certainly the ability of traveling. I mean we have a lot of service people close to the customers and in the regions, but not all of that can be served just out of that workforce. And we have a problem still to bring people, let me say, quickly to a spot if there is something to do in the long run for installation and commissioning of the license, it's not so big problem, it's a burden, but it's possible. But in particular, the service is still suffering from the missing ability of quick traveling.

Peter Rothenaicher from Baader Bank AG.

Some questions. Let's start with process technology in this segment. So the loss in 2020 was really, I would say, much higher than we had expected. You mentioned from the beer side, it's around EUR 20 million loss. In the last call, I remember you mentioned that intralogistics, the expectations were positive for the fourth quarter. So what happened in here? Did your expectations fulfill? And has intralogistics been positive in results?

Yes. Thanks for the questions. To the intralogistics, I mean, we had -- we said that we had in the, let me say, first 9 months, significant losses because of the closed out situation. Of COVID-19. And we picked up from September onwards with intralogistics side we have been positive. And I would say, on the planned level. However, this couldn't compensate for the full year for the profitability. So overall, intralogistics was negative in 2020. No worries at the moment because we are continuing on a good order intake and have good order backlog. So we would expect even this goes okay for the first 9 months because this is the biggest backlog we have at the moment and with the longest view. So that's okay. In terms of Process Technology, if you ask it, Norbert said it before, the major loss is generated by the brewing section. I can say, just with the ironic smile, no surprise with that. The positive thing here is that the other daughter companies we have around the world, they have overall not negative, they have been not significant positive since they were suffering during the year significantly, but they picked up. And overall outside of the beer section, we were slightly positive. I hope that answers your question.

Yes. And with that, clearly, it's early in the year, but do you see is the opportunity that this Process Technology segment overall might be slightly earnings positive or at least breakeven in the current year?

Yes. Clearly, yes. We have done a lot of restructuring, had to take a lot of measures, and that should lead us, in case not everything goes wrong with the COVID and the order intake should lead us definitely into positive results.

Okay. Then I think there some people were wondering why did you have such a huge tax -- negative tax position in 2020?

Okay. We have a couple of issues. On the one hand side, the first topic is that our service companies in the world are, of course, positive. I mean, that would be very unusual if service business would be negative. So their entities are positive, and they have to pay taxes in their countries. Second part. Can you hear me, Mr. Rothenaicher?

Yes. Yes.

Okay. Yes. Because -- okay. Second point is that the restructuring provisions we cannot use to reduce taxes only when, let's say, the contracts are signed and it's done and completed. Then we get the tax credits but not by building the provision. And similar with the goodwill depreciation that we had -- in total, we had goodwill impairments of EUR 18 million that we can also not use to get tax credits. So those 3 points lead to the high tax rate.

Can we then assume that in the current year, the tax rate will be lower than normally? So normally, I think you have around 28%, 29%%.

Yes. Yes.

Okay. With the free cash flow, you had now a very high free cash flow in 2020, clearly due to the base effect in working capital. What is your expectation for the current year in terms of free cash flows?

Good question. I'm not in the position to give you a figure and say, okay, EUR 180 million or something. I mean we know, and as Mr. Growe already pointed out or asked that we had a negative impact on the severance payments that we will have during the year. On the other hand, we continue our, let's say, stronger focus on cash in the whole company worldwide. And if the business increases, of course, on the one hand side, we have to finance it. On the other hand, we get more down payments. So that should also, let's say, in combination with our efforts group-wide on cash help. So I certainly expect positive cash flows, of course, 2021. I cannot promise that it will be the same amount as last year. But it should be a good positive cash flow, definitely.

So in terms of capacity utilization. So you now had a relatively solid order intake in the fourth quarter. How does your capacity utilization now in Q1 and with the outlook for Q2 looks like? Are you satisfied here? And what is then the impact on your new plant in Hungary and here's the utilization?

So our capacity utilization for Q1 and Q2 should be quite decent, better than last year, especially Q2. And I mean, that's a normal result of a good order intake in Q4 and January. Hungary had picked up significantly. I mean, we are receiving right now between 12 and 15 big trucks every day of product. And right now, we are at around...

24.

24 trucks, but around 85% of the plant capacity that we are doing there already.

Next question is Sven Weier from UBS.

The first one is a follow-up on the current trading and the comments you made around it. So of course, I appreciate that you want to be conservative. On the other hand, I'm mindful of the fact that you were a bit cautious on the Q3 order intake, and then it came in quite nicely. I think you were originally expecting that Q4 order intake would be on the Q3 level, now you're like 20% above. So isn't really the ultimate driver for your order intake going to be the optimism on the vaccination and the reopening rather than the current situation that we have out there? And doesn't that mean that maybe you could be again positively surprised? That's number one.

Yes, that's a very good question, and a very good question at this particular point of time. We are a bit careful because of pricing. And I really to point that very straightforward out because what we try to do is keep a good balance between volume and price because if this is going to erode. I think we are going into travel in second half and this we don't want to do. On the other side, if things would continue as we see them right now, there would be no critical further impact on negative development of COVID-19, of course, there is room, a positive one. But I think it's really too early because we see from some bigger brewers, still some hesitation to put their investments now out in the game. They are there. We are aware of them, but they are not placed into negotiations. And we are not sure when they are really going to materialize. So that's the reason why we are a bit careful on the brewing side. The rest is okay. I would say all the rest of the business works quite well. And I would say, in all other areas, soft drinks, water is doing fine. So understand at this particular time of the year that we are still careful, I would say, at the end of Q1, beginning of Q2, we are in much better shape to give guidance where we are with that. And of course, there could be some positive effects. Sorry, we're not very clear, but we don't want to promise too much.

Yes, I guess there's a couple of more events where you could be more positive this year.

Right.

So it's early, yes. So fingers crossed. So the other one on pricing. I mean, I think that's an important issue here because I think that has maybe led to misunderstandings in the past. So when I go back to the Capital Markets Day presentation, right, I think you basically said we want to have pricing go back to kind of just before corona, but we don't need the pricing to go back really to the old days in a way of the major improvement in order to reach our margin targets, right? So it sounded to me like, yes, there will be an incremental improvement needed, but not really a major one, that's [ second ] right? And now you mentioned, yes, pricing is still a bit tough, but it has sequentially kind of improved. I mean is that -- are you kind of there where you need to be with regard to your margin targets already? Or is that something you see then happening during the course of 2021? Yes, that's the second one, please.