Neutraubling Aug 1, 2020 (Thomson StreetEvents) — Edited Transcript of Krones AG earnings conference call or presentation Thursday, July 30, 2020 at 12:00:00pm GMT
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 call is yours, gentlemen.
Yes. Good afternoon, and a warm welcome, ladies and gentlemen, on behalf of Krones, Norbert Broger and myself. Before we start with the presentation, a short remark from my side before we jump into. Of course, we have all COVID-19 in our mind. And of course, it’s the major issue for Krones at the moment to deal with short and midterm. Of course, short term, we have to manage the underutilization with all its consequences. And you will hear today a lot how we did that and how we are doing that. Of course, in midterm, we have to manage the recovery and how we achieve, at least for the profitability, our midterm targets.
At present, it is too early from our point of view to give a reliable forecast for 2020. We have still a very dynamic development of COVID-19 in the individual regions as you might see by the figures you receive every day from individual countries.
On the other side, however, and despite a bit from the presentation, at present, it looks like that we have already seen the bottom for order intake in April and May, since June was slightly better than April and May. And with the July order intake, which is on the June level, it’s only 1 day to go, we see that confirmed. And we believe that’s an important message that we see a little bit — I wouldn’t say light at the end of the tunnel because, again, it’s too early to see 2 months as being really the turnaround. However, we see confirmed that we have most probably reached the bottom. And this is, let me say, a good fundamental to start the presentation, which I’m handing over now to Norbert Broger. And I would assume we would talk about in the Q&A later on more about how we see the future. Thank you. And Norbert?
Yes. Good afternoon, ladies and gentlemen. For Q2 and at the same time the first half year of 2020. In a nutshell, our revenues in the second quarter fell by 16.5% compared to last year. And due to a better first quarter, which was not so much affected by corona, for the total first 6 months it’s a decline of 10.1% compared to the same period last year, EUR 1.698 billion. As Christoph said, there is still quite some uncertainty in the market at this point of time. However, we hope and we think after a better June and, let’s say, also a promising July that April and May were the bottom in our order intake situation. And that impacted our Q2 dramatically. So the total order intake decreased in Q2 by 38%, after 19% in Q1. And that totals the first half year with minus 28% or EUR 1.457 billion.
Thanks to the cost reduction measures that were started last year already, with reducing personnel costs and headcount and many activities to reduce material costs, we were able, despite the sales reduction to keep the EBITDA on the same level as last year at this point of time. For the first 6 months the EBT is, after a loss of EUR 21 million in the second quarter, at EUR 38 million (sic) [EUR 31.8 million]. And I will come to that in more detail, of course, later on.
So the next slide just shows the final figures. Again, EBITDA margin after 6 months, 7.0%, despite the lower sales. Order intake, as I said already for 6 months, minus 28%. And sales, minus 10%. You know that in our business and in machine building, in general, we have a time lag between order intake and sales between for Krones 3 and 5 months, on average. Free cash flow in the first 6 months, minus EUR 65 million. This is still not satisfying. However, compared to the same period of last year, an improvement of EUR 195 million. So the next slide shows you on the left side, the order intake situation by quarter. The first quarter was minus 19% and the second quarter was minus 38%. And as Christoph said already, we think that we have reached the bottom of the low order intake situation since we have seen a slight improvement in June that will continue in July. So April and May were really the lowest order intake that we have seen, and hopefully, we’ll not see again in the future.
Sales, minus 16% in the second quarter. Overall, minus 10%. All regions were affected by the decrease in order intake and sales. However, until this point of time, the regions Africa, Asia Pacific and North America had a lower decrease in our business activities than the other regions, which were affected by more than minus 30% in order intake.
And you can see on the next side. This is a year-by-year comparison, the first 6 months when we start at the left side, North America compared to last year. And this shows the share of our total order — of our total sales, sorry, activity in the first 6 months. So North America was declining, but compared to doing better — to the others, doing much better. So their relative share in our sales increased up to 17.5%. Europe decreased from 41% to 37%. Central Asia, 2.3%, a slight increase similar level, relatively speaking, as 2018. China, 5.8% after 8.2%. But China picked up starting in April already. So they were hit faster in January, February and March. And since April, we see increasing positive business activities in China. Asia Pacific, almost the same ratio as last year. Africa and Middle East for the first 6 months compared to last year, stronger, relatively. And South America, a slightly higher ratio compared to last year.
Okay. Our major cost blocks are personnel and material costs. And due to the reduction in sales, the percentage personnel cost to sales increased compared to the same period last year from 33.6% to 34.9%. However, when you look on top on the actual figures, you see a reduction of EUR 47 million in the 6-month period compared to last year, minus 7%. And I’m not long enough in the company to evaluate this, but I’m sure that this is the first time for many years that the absolute figure for personnel costs decreased. And this, despite the fact that in the period last year, there were no less personnel costs included for Hungary because the ramp-up of Hungary basically started middle of last year. So we have right now, 300, 350 people more in Hungary than last year in that period. Same applies for China, the ramp-up in China. Last year, we had less people there than this year. And also the acquisition of IPS in Dubai last year was 240 employees, were not in the personnel costs only partially last year. And this year, they are completely in.
So despite those changes, still a reduction of EUR 47 million in personnel expenses. And this is due to several reasons. Reason #1, we reduced on a worldwide scale since December 31, 450 headcount at Krones. At the same time, of course, we did all other activities which go along with lower business. Cutting over time, reducing time banks, sending people into furloughs and short time programs in Germany and things like that.
The material costs decreased, of course, as well, which is not so surprising when the business and sales go down. However, the ratio also decreased from last year 51% to currently year-to-date, 47.7%. And that’s a combination of several things. One portion is a change in mix because the new machine business decreased significantly more in the first 6 months than the service business, and new machine business includes more material costs.
Second positive item is that in the second half of last year, Krones was able to increase prices. So the sales we are realizing in the first 6 months this year, a big share that includes projects with increased price levels from last year. So that also reduces the material quote.
And the third point is that we significantly reduced temporary labor because of the lower business volume. That also has a positive impact on material costs, as well as purchased services. And then in addition, material cost savings in direct material because due to this economic situation, of course, on the purchasing and supplier side, there are good opportunities to reduce purchase costs. So all those impacts together helped to reduce the material quote from 51% to 47.7%.
And next slide, please. And that combination made it possible that despite the sales reduction, the EBITDA stayed stable for the first 6 months. Last year, EUR 117 million; this year, EUR 118 million. The percentage of the EBITDA increased because of the lower sales. And on the EBT side, we see for the first 6 months, of EUR 32 million EBIT versus EUR 48 million last year. What you do not see here is that in the second quarter, we booked impairments of EUR 13 million for 3 legal entities because corona is a triggering event, and we evaluated our goodwill in the different companies and booked EUR 16 million (sic) [EUR 13 million] impairment. And in addition, we increased our, let’s say, provisions for credit risk by EUR 3 million. In total — sorry, the impairments in total are EUR 13 million, plus EUR 3 million credit risk is EUR 16 million. So if you consider those onetime impacts, then that’s the difference why we are EBT wise, lower than last year versus EBITDA more or less on the same level. All this does not yet or — this includes also an increase of EUR 15 million in other provisions that we booked in the first 6 months compared to end of last year, December 31.
When we look on our 2 segments that we report also in our annual report, you can see in the core segment, product filling and decoration, minus 7% in sales. At the same time, we were able to increase our EBITDA margin from 7.7% to 9.8% or in absolute figures, plus EUR 21 million EBITDA. In the smaller segment, beverage production and process technology. We have a 26% reduction in sales and a EUR 20 million deterioration in a EBITDA compared to last year. Out of this EUR 20 million, we have EUR 11 million impairment for 2 companies in the U.S. that belong to that segment. And we also have in the intralogistic, that was the only entity in our group that had a complete shutdown in Italy, North Italy for several weeks, where they could not produce and complete their projects. However, in that segment, we are absolutely sure that the loss that occurred of EUR 12 million in the first 6 months will be transformed in profit until year-end.
Continue. Working capital, 27.6%. This is an increase compared to the 26% June last year. Not so much that the working capital increased. That was rather stable, but the sales decreased, and that increases the ratio. Compared to year-end, our working capital increased by EUR 40 million, EUR 20 million inventory. We did that on purpose because we build up safety stock in February, March, April, May, to make sure that our supply chain continues to work and that we have no problems on that side, which was successful. So we had no business interruptions. We could continue to work on our projects. However, the price was EUR 20 million higher inventory. And overall, the working capital was EUR 40 million more than year end, which compared to EUR 1 billion is, I think, reasonable. But we are working on this topic in the sense that we reduce now dramatically our purchases to reduce the inventory again, which, at least in short term, has a negative impact because the liabilities go down. But this overall will improve until year-end also, again. It’s just that inventory receivables liabilities do not act as quickly as the reduction in sales that we have seen.
On the free cash flow side, the free cash flow from operating activities still slightly negative. We are not satisfied with this, but at least an improvement compared to last year on that level from operating activities of EUR 124 million. And when you look at free cash flow, including CapEx, M&A activities, others, then it’s still EUR 65 million, which is still not what we are aiming for. Of course, we are working on positive free cash flow, but compared to the period last year, it’s an improvement of EUR 195 million in free cash flow.
Okay.
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [4]
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Thank you, Norbert. I run you through now briefly the — let me say, the impact on the beverage industry and how we charge things. The first slide we are going to show you is, first of all, a world economic outlook. And I don’t want to reflect to the figures because you see that from everybody and everywhere, but we would like to give you a bit of an insight of how we think. And there is an important point on it, that’s the base case scenario with no more lockdowns. And let me say, vaccine which will be available at least in Q1 or in the first half of 2020, we have some bets going on here, but it’s already in Q4. We, Norbert and myself, we believe it’s more in 2021 that we get vaccine to solve the issues or to get the issues better.
But even more important, you see here a worst-case scenario with more lockdowns and deciding, let me say, legislation that things are going again into the old status. And we wanted to reflect that because that’s the reason why we are so careful with an outlook for 2021 and if — for 2020. And if you look to, for example, for South Africa. At the moment, they are discussing to close down the breweries again. They have been reopened there. And this might be a role model maybe for other countries as well, which we cannot predict how things were going. So this is 1 of the points why we wanted to show that slide that we have a lot of uncertainty going around the world.
In the next slide, we have tried to catch up with the beverage consumption around the world by regions that you get an insight into that. Of course, that looks quite dramatic in case you refer to that. And the question is, of course, how much does this effect Krones. Not all of it is affecting Krones because don’t forget that we have, in particular, in beer, we have a lot of draft beer, which we call in our industry, the keg. And we have the same being true for, let me say, a good example is Coca-Cola. If you have in the U.S., for example, a coke at McDonald’s, it’s out of the keg, which is called post-mix. It’s not bottled. It’s mixed at the site. And this is included in those figures as well. Today, we can’t really differentiate them in detail. We are working on that, that we have in September, October, a better view on it. But it explains a bit why, for example, North America is so much reduced, and that has simply to do with that the on the go consumption is as well very much reduced in North America. That’s 1 of the reasons for it. And it’s not harming us with the full effect you see here with the minus 14% because a lot of it is, as I said, post-mix or draft beer, so both are either used on the go or in bars and restaurants. But all in all, we can’t deny that this is a serious situation. In case we look on the shrink of the beverage market and the beverage consumption in the regions.
We have, of course, predictions for 2021, and there will be a recovery, but the figures are not yet reliable again, 1 of the reasons why we have not done our outlook so far.
On the next slide, you see the reduction by products. And you see, of course, that wine and spirits and beer is affected the most. Again, don’t forget, it’s as well, some of it is draft beer. But the breweries, and this is for us 1 of the major issues, have a very hard hit.
If you look to South America and to Africa, some of them are closed down or even not in operation because of hygienic reasons. So that’s 1 of the reasons why you see worldwide such a strong decline. If you look to CSD, carbonated soft drinks, the standard Coke, Pepsi, as well a quite strong hit. Because the percentage which of those products as well, which is consumed in the bars and restaurants and on the go is quite big. That’s the reason why so much decreasing.
The next category above that, RTD, tea coffee as ready-to-drink, tea and coffee in cans or in bottles. Again, this is simply something which is very much reduced because of on the go. The rest is, let me say, medium and okay, so I don’t think that’s really to name too much. Dairy is growing, and this is something I should name. It’s liquid dairy and solid dairy products as well. So yogurt is included in that as well. It has a lot to do with drinking coffee at home and taking a yogurt maybe at home, which you would usually not use on the go. So that’s the reason why we see a growth in the dairy products.
To sum that up, how do we see things being connected out of society and the COVID pandemic and how is that affecting consumer behavior. I mean, on the society, we all know what happened. I mean, there are the reasons what we see at the moment on the consumer side, that they are more price sensitive, no doubt. And this will, from our point of view, increase a bit even further in case we get more unemployment and we get, let me say, more in economic troubles, in particular in the emerging markets. We have significantly reduced on-the-go consumption. And I would say, we can even say worldwide, we saw Coca-Cola study saying that there will be a long-term trend for home office working, which will reduce the on-the-go to a certain extent. And of course, we see, because of that the higher consumption at home, which is, at the moment, more the water, tea and coffee, the home brewed things or just water out of the tap. And this leads to, of course, a decline volume at our customers. Of course, reduced profit margins, which is maybe even more difficult for them because profitability in the bar restaurant sector has been better than on the supermarket level. At the moment, what they are doing as next point, they reduced their number of SKUs, stock keeping units. That means they have less different product types and it’s simply because they do not produce the smaller ones, the 0.5 or the 0.2 liter bottle. They are looking more for the high-volume bottles for the supermarkets for home consuming.
Of course, our customers are using their existing, and we can say too, at the moment, at least in CSD, the overcapacities. And due to that, they postpone their investments. And of course, this leads to then the difficult situation we have that the investments are not on the level we have — used to be. And if you look all of that, this slide we showed already last time that we showed how much is the percentage on the, let me say, darker, on the left-hand side, on the darker boxes in blue, how much is the level of bars and restaurants you see there. And our customers are to put it very simply, strongly affected by COVID-19. Of course, some are more, if you look to those having as a sales channel, mainly bars and restaurants and having the premium products. Some are less, if they are suppliers of the big supermarket chains around the world, then it’s, of course, less. But on average, the on-the-go bar and restaurant business is between 15% to 30%, depending on customer category. In particular, the beer industry has been affected.
I said it previously that the breweries have to face shutdowns in some regions, and this is mainly in Africa and in South America that is affected hardly. Some other regions are doing a bit better. And here, even in Europe, we see very different developments. Some of them doing quite good. Some of them on the brewing side, which are related to, let me say, their own restaurants and bars and gasthaus in Germany, they are more affected than those having, let me say, the bigger quantities being shipped to the supermarkets. And all of that will lead to — and we have to name it, significant cuts in CapEx for new lines and as well for OpEx because they have to save some money. For OpEx, we believe that this will come back by the end of the year because lines are running without overhauls or let me say, maintenance at the moment, even COVID-19 had hindered the customers and us a lot to do the right maintenance to the line. So we do expect that comes back at the end of the year, but we have to face it, there is even some impact on our service business.
And what we’d try to do in this slide, looks quite busy. You see on top the individual regions. And you see actually in the next slide, the number of sales in percent we have in the individual regions. And we try to give you, at least, a guess how we see the activities at present. It’s not an outlook. It’s how we see it at the moment. And I would like to run you region by region through it because it gives you a bit of feeling where we are with our business and where the limitations are.
If we start first with the EU, you see order activities on CapEx are extremely low. Surprisingly because it looks like that COVID-19 in Europe is on the decline at least at the moment compared to the U.S., where it’s on the incline. And the U.S. order activities are better than the European ones at the moment.
The next row below, and you see the traffic lights there. This is order activities in OpEx. That’s our aftersales business. While that’s affected in Europe, I would say, medium at the moment. In the U.S., coincidently, it’s running pretty well. It’s on target. And below those lines, you see then the challenges. Do we have enough customer contact, not only by video or teams or whatever, but even personal contact. And where you see the green marks, we are in good contact with the customers. The next level below that is service technicians local, and this might be most — probably the biggest help we have at the moment in our after sales business that we have invested over the last 5 years heavily in local service technicians. And you see that we have green tick marks, at least, for Europe and North America. And then you see the service technicians international. We have around 2,100 service technicians international. I would say, 70% out of this 2,100 are in Germany. The rest is either in Middle America or on the Philippines because we have larger service pools there as well, which cannot travel significantly at the moment as well. So we see out of this 2,100, around 450, that’s on the lowest line you see below the chart. 450 out of the 2,100 are sitting idle at the moment, which cannot travel. Of course, sitting idle means being at home, and we are using them because these are the high qualified technicians, level 3 and 4. We are using them for a remote services, which, again, this is something where we have invested over the last year significantly, helps us now a lot to run the projects.
And when you see on the next slide, 40% of all projects are considerably affected. And project wins in that sense, that’s projects for new machine installations where we install new bottling lines, or new breweries or even bigger changeover projects in the aftersales business. So 40% of the projects are affected.
And if you look to our new machine business in the first half of the year, 25% of our installations have been postponed because of COVID-19, and 50% of the acceptance tests have been postponed. And this is, of course, something we have to deal with because this is actually the last action in an order, and there is some payment related to it.
If we run through the regions furthermore, North America, I said it’s not heavily affected. We have a good service technician pool over there. And we have huge installations to do because business was not bad then in the first half year, in particular, in the pre-corona times. So there are a lot of installations, huge ones coming up in North America, and we believe we can handle them.
Then on South Africa — South America is the next one. This is affected heavily at the moment. So traveling is very limited, and you see red marks in the lower boxes so customer contact service technicians even local is difficult, and service technician international is very difficult. So this market, South America, is very difficult to deal with at the moment.
The next point is Middle East Africa. And you see we have splitted that in 2. On the left-hand side, you see in that row is Middle East, which is coincidently doing quite well. Most of it works out well. However, Africa is very critical. We have the many shutdowns for breweries there. Traveling is very limited, and a lot of customers do not allow for any foreign company to enter their premises. So even our service technicians and our sales folks cannot really go in touch with the customer.
APAC, I would say, is doing not bad. We have — despite from India and Bangladesh, Indonesia starts not so heavy infections at the moment. So things are working out well at the moment. We have to see how that develops. And lastly, China on the right-hand side, you see actually 2 traffic lights already on green. So everything is doing well. And even service is — and installations are working well because this is most probably the best service force we have. Trained for all kinds of technologies around the world without support from Germany, they can do their job. And that’s the reason why we have the lights in China, more or less, on green.
So that’s now a few of our markets. And you hear us talking, let me say, with all the difficulties we have, with a kind of optimism because we believe we can handle the issues in the market. And I said it earlier, 1 of the most critical things we reflect is the second wave. However, we are thinking even there out of the box, because we believe we need to maintain our service operations even on the second wave, and there will be different measures. Some of them we might not have thought so far today that we might use them. But we are thinking beyond the current approach just in order to be on a level that we can even serve our customers if a second wave would arrive, because we are absolutely sure, even our customers will deal different then, and we would like to support them with that.
Then last point, I just wanted to mention for the sake of having a full picture. The plant in Hungary, which has been under discussion in many of the calls we had. On the left-hand side, you see the latest update we gave in the conference call on October 30 last year, where we said the Hungary plant is later than indicated. And, we actually indicated last year, in autumn, that we will have it in full operation by Q2 2020. Now of course, we have, let me say, postponed that further. You see on the right-hand side, the update. We believe the plant will be in full operation by Q1 2021. We expect even in the fourth quarter of this year that things are going okay. However, we had some delays — some others built in. You see that the major reason for the delay is that we had a problem to relocate manufacturing machines, which are moving from Germany to Hungary, and which was not able to do. And subsequent to that, you see that the assemblies, which are behind the manufacturing machines that they have been not started yet because we have simply the production machines not over there.
And of course, we had a problem in training our people. We have the full staff on board. Norbert said it earlier, around 470 at the moment, no further — or just a bit increase, but no big numbers to be increased to reach our capacity which we need. And this is 1 of the maybe bad things. We have reduced capacity from originally 36,000 hours in the plant to 30,000 hours just because for the sake of being prepared if the capacity is not fully utilized. So at the moment, we are running only to the 30,000 hours, but this is just a question of how many manpower we have on board. And currently, we are operating at 9,000 hours. If we would have not reduced capacity, it would be slightly above 10,000 hours we operate currently in the plant.
So you see that we have 2/3 of the way still to go, but we don’t see a problem since. And this is important. We have, for the first time, fully established S/4HANA in that plant, and this is running with all the new processes already over there, and the implementation is finished. So it’s now a matter of, let me say, executing the job and getting things in production.
So that’s just a rough overview about the world and where we are. And again, this is our statement that we are critical on the outlook at the moment. And we give you a bit of insight most probably in Q&A, how we see things.
Thank you. And now we are coming to the Q&A.
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Questions and Answers
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Operator [1]
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(Operator Instructions) The first question is coming from Felicitas von-Bismarck, Deutsche Bank.
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Felicitas von-Bismarck, Deutsche Bank AG, Research Division – Research Analyst [2]
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I have 3 questions, first, please. The first 1 would be on your order intake development. Could you give us an indication how much of the order for was in your core business versus in process technology? That would be my first question, please.
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [3]
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Frau von-Bismarck, I would say the order intake in the call was stronger than in processing. I mean, the first one, I have really to say was when I look back the last 3 months was processing, which the order intake in intralogistics was okay. And certainly we come later on to the questions of the segments, just to make that already a clear statement here. The order intake we have in intralogistics is so far, okay, that we have even the order backlog for 2020 to get to the revenues we need. And again, in the core, I would say, April, May was quite weak, but an increase in July, and has the biggest proportion in the order intake.
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Felicitas von-Bismarck, Deutsche Bank AG, Research Division – Research Analyst [4]
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Okay. And could you maybe give a sequential order intake you mentioned it before in June, like in compared to April and May?
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Norbert Broger, Krones AG – CFO & Member of Executive Board [5]
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June compared to April and May was about, in total, plus 20%, 25%, compared to…
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Felicitas von-Bismarck, Deutsche Bank AG, Research Division – Research Analyst [6]
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25% higher than the other months, right?
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Norbert Broger, Krones AG – CFO & Member of Executive Board [7]
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Than the other months, yes. But as you know, a project business, there are always some fluctuations, but it’s about 25% higher than the other months.
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Felicitas von-Bismarck, Deutsche Bank AG, Research Division – Research Analyst [8]
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Okay. And 1 question you mentioned before was that pricing was pretty strong in the first half year, given the order book of last year. How is pricing now in the order book? How is that development for this second half of this year?
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Norbert Broger, Krones AG – CFO & Member of Executive Board [9]
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Okay. Pricing in, let’s say, 1 — roughly 1/3 of our business, which is service is stable, it’s good. The new machine business, about minus 2.5%, minus 3% in the first half.
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Felicitas von-Bismarck, Deutsche Bank AG, Research Division – Research Analyst [10]
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And is that normal like price decline? Or is that far above what you normally say?
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Norbert Broger, Krones AG – CFO & Member of Executive Board [11]
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Let’s say, it’s not what we have planned. When you remember the plan that Krones had with EUR 150 million profit improvement over 2 years, a portion of that was price increase. So for this year, we have planned an increase of 1%, roughly EUR 20 million. And now we see so far for 6 months, a decrease of about 2% in the new machine business.
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Felicitas von-Bismarck, Deutsche Bank AG, Research Division – Research Analyst [12]
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And that will come into effect in H2…
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Norbert Broger, Krones AG – CFO & Member of Executive Board [13]
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Percentage points.
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Felicitas von-Bismarck, Deutsche Bank AG, Research Division – Research Analyst [14]
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Yes. And then H2 and Q1, probably next year, right?
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Norbert Broger, Krones AG – CFO & Member of Executive Board [15]
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Yes, exactly. So that has 3, 2 months — 3 to 6 months delay from order intake to sales.
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Felicitas von-Bismarck, Deutsche Bank AG, Research Division – Research Analyst [16]
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Okay. And then the last question I would have on your personnel cost improvements that were actually underlying seem to be pretty strong. But part of that will be temporary because of short-term work schemes and all that you mentioned. Yes. How do you see this developing in H2? Do we still have a benefit from the temporary because you’re still on the short term work? Or is that actually falling away?
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Norbert Broger, Krones AG – CFO & Member of Executive Board [17]
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No. We still have a benefit, actually, the short-time work, especially for our assembly and manufacturing areas started in June. In other areas, overhead areas, we started a short-time work in Germany in May. And it will increase because when you look at the order intake, second quarter, then it’s clear that the third quarter sales will be slightly lower, and we will increase our short-time and furlough activities in the third quarter compared to the second and first one.
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Felicitas von-Bismarck, Deutsche Bank AG, Research Division – Research Analyst [18]
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I would assume that the overtime is coming to an end.
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Norbert Broger, Krones AG – CFO & Member of Executive Board [19]
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Over time is coming to an end. That’s correct, yes.
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Felicitas von-Bismarck, Deutsche Bank AG, Research Division – Research Analyst [20]
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And then, okay, then — sorry, 1 follow-up question on that cost side. How much of your like structural, we have gotten rid a lot of people, kind of cost was coming through in H1. How much do you expect it to be in H2 to come?
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Norbert Broger, Krones AG – CFO & Member of Executive Board [21]
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I’m not sure whether I understood you correctly.
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Felicitas von-Bismarck, Deutsche Bank AG, Research Division – Research Analyst [22]
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Your headcount reduction, like the temp — like the sustainable percent, so to say.
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Norbert Broger, Krones AG – CFO & Member of Executive Board [23]
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For the sustainable. Okay, we have positive impact on the headcount reduction. That was done in Germany last year, 200 employees, where we have the full impact in the first half this year. And that will continue. So that will stay. And in addition, we reduced 450 FTEs this year. Where, let’s say, maybe 60% of that impact is in the P&L and the rest will come on top in the second half. There is nothing that’s going in the other direction that is not sustainable.
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Operator [24]
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Mr. Andre Finke from HSBC.
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Joerg-Andre Finke, HSBC, Research Division – Head of Equity Research Germany and Analyst [25]
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Yes. The first 1 is related to process technology and the strong headwinds you talked about, especially in the breweries business. Has this changed your approach to the whole business? And is there any kind of progress you can talk about with regards to disposing parts of the business?
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [26]
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Finke, does that change our approach to process technology? No, not at all. I mean, we have seen critical, the brewing section, as we mentioned in the last call. So doubt about that. And the view is still as critical as before. We are executing the strategy we have actually described last year that we are getting the brewing business independent. We are under the full way to do so. And of course, with now the decline in order intake, it’s even worse. That’s no doubt about it, and we have to react to that. I mean, we are in discussion on how to do so, but you can expect that we are acting accordingly to what we see in order intake. So no change in our view on that. It’s still critical.
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Joerg-Andre Finke, HSBC, Research Division – Head of Equity Research Germany and Analyst [27]
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Okay. The second question relates to the regional margin mix. I think you always indicated, or mostly indicated in the past, that margins across regions are relatively similar. I just wondered whether that’s still the case or whether that — this is some sort of a stronger mix effect over the past 1 to 2 years?
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [28]
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It’s even in the crisis, not different from, let me say, the previous times that we have, let me say, among the key accounts anyhow worldwide price level. So there is no difference between the individual areas. Of course, we have slight price differences between Asia and China, and let me say, the Western Hemisphere with the U.S. and South America. But all in all, I would say there is no significant change in terms of the pricing related to the regions than before. So that’s the same mix.
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Joerg-Andre Finke, HSBC, Research Division – Head of Equity Research Germany and Analyst [29]
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Okay. And then just 1 comment in the presentation on, I think, EUR 15 million additional provisions being built up in H1. Is there any kind of P&L impact on the back of that? I didn’t really understand what…
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Norbert Broger, Krones AG – CFO & Member of Executive Board [30]
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Yes, it has a negative P&L impact because we increased provisions compared to December 1 from roughly, other provisions from roughly EUR 65 million to EUR 80 million. Just to be a little bit more on the, let’s say, conservative careful side.
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Joerg-Andre Finke, HSBC, Research Division – Head of Equity Research Germany and Analyst [31]
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And that was mostly Q2? Or was that already partly the case in Q1?
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Norbert Broger, Krones AG – CFO & Member of Executive Board [32]
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In both quarters equal. We started already in Q1.
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Joerg-Andre Finke, HSBC, Research Division – Head of Equity Research Germany and Analyst [33]
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And what kind of provisions are we talking about, if I may ask?
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Norbert Broger, Krones AG – CFO & Member of Executive Board [34]
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General provisions, evaluation of projects and potential risks that could come, but where we just want to be a little bit more conservative in this, let’s say, uncertain times.
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Joerg-Andre Finke, HSBC, Research Division – Head of Equity Research Germany and Analyst [35]
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Okay. Understood. And then my last question would be on the credit risk provision. If you look at the current status of receivables, and I mean, you talked about difficulties at these parts of your customer base. How is the assessment of potential further credit risk provisions going forward?
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Norbert Broger, Krones AG – CFO & Member of Executive Board [36]
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Yes. I mean, we don’t see a concrete, let’s say, cases with where we are afraid customer is not able to pay or is going insolvent. But you never know what happens next year. We all read in the newspaper that, at least in Germany or Europe, insolvency wave is expected. But we don’t do that because, as you know, we have, in general, quite big, strong customers who can pay. What we rather see is that customers, of course, are trying now to pay later. So we have daily discussions and negotiations where customers, big and small, are saying now we have difficulties in the market. And yes, we know we have to pay, but we cannot pay. We pay 10, 15, 20, 30 days later. That’s discussions we have. But we don’t see any let’s say, bankruptcy or a situation where customers — where we have to write-off receivables because customer is going bankrupt or Chapter 11 or something like that.
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Operator [37]
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Next question is Mr. Sven Weier from UBS.
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Sven Weier, UBS Investment Bank, Research Division – Executive Director and Analyst [38]
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Yes. Yes. I have a couple, please. The first one, Mr. Klenk is on your comment regarding that order intake has bottomed in Q2. I guess, the order intake was really low enough for making that comment, I would assume. But what interest is it really, what’s happening generally, in the pipeline? I mean, before the crisis, obviously, we had a good one. And when you think about the pipeline outside, let’s say, the traditional beer customers, which, obviously, had an issue here. But also accounts like [UAB Klein], which coincidently also reported today, I mean, even they have a better-than-expected June.
So I was wondering if they came to the conclusion, maybe we’ve cut-off — too much when you would see that because, I guess, in July, that would be way too early. I could imagine that’s more for September, October when they start placing orders then for 2021. Sorry for the long first question.
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [39]
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Yes, no problem, Mr. Weier. First of all, pipeline, this is a very good question. I mean, we are a bit careful on elaborating on that. But I would like to give you a bit of smell how we see the whole thing. At present, we see a quite increase in inquiries. We have a record over last year, rolling forecast, that we can compare the quarters over the last 3 years with the current quarter. And what we see is how things are going down with corona, of course, significantly. And you see now that inquiries are rising. And from our point of view, that has to do with a couple of factors. I would say, our customers, like us, they have more clarity that this crisis would take longer and business would still continue. And if you are having some courage in that crisis that you can, with investments, maybe get a better position. That’s what we hear from many customers that they see that right now.
Secondly, we see that there’s a change in some of the beverage consumption categories. For example, beer in cans, in South America and in North America become stronger, and this leads to inquiries. Why is that? Because we believe some of this can business is replacing the keg or draft business. So this is something which leads as well to inquiries. And we see that in antiseptics, some of inquiries are rising up, which have been dead for a couple of months now because our customers see that this category is something which works out for the future. So we have indications and good reasons to believe that this increase of the pipeline and the inquiries we see is really sustainable.
On the other side, again, we are still careful, and I would give you a highlight on that as well, how we see that. We have a customer survey, which even some of it are doing personally with the CEO since September. Because in September, usually, our customer is making up their mind for the following year. This year from everybody, that they want to see the summer, how things are and how things continue. And we believe in end of September, we have a much better view on how really the industry is doing in 2021.
And I would believe then the order pipeline might be confirmed, and this is what we expect at the moment, in terms of what we have done in inquiries right now might materialize then. So that’s — sorry for the long answer for the long question.
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Sven Weier, UBS Investment Bank, Research Division – Executive Director and Analyst [40]
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That’s fine. And it’s fair to assume that September is always, by far, the strongest month in the Q3, I guess? Right so…
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [41]
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Yes.
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Sven Weier, UBS Investment Bank, Research Division – Executive Director and Analyst [42]
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Whatever you see in July orders is maybe not so relevant then?
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [43]
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Yes, absolutely correct.
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Sven Weier, UBS Investment Bank, Research Division – Executive Director and Analyst [44]
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And the second question was just when I think about sequentially, I mean you already now made a lot of comments how we think about sequential development on — we have more short time work, obviously, helping you on the factories floor, right. And you have, I guess, the sustained logistics and this EBIT comes in the second half. And I guess, also, you were delayed on the headcount reduction because of COVID-19 because you couldn’t have those personnel conversations?
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [45]
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Absolutely. Yes.
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Sven Weier, UBS Investment Bank, Research Division – Executive Director and Analyst [46]
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Which can take place. So again, somewhat of a long question, but I guess revenues will obviously be much lower in Q3. But is it fair to say that in Q3 sequentially on the profit side it shouldn’t be kind of a disaster then, because of the revenue fall because of the savings?
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Norbert Broger, Krones AG – CFO & Member of Executive Board [47]
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Norbert Broger, speaking. Mr. Weier, yes, you’re absolutely correct. Volume-wise because of the low order intake in Q2, we will definitely see lower sales in Q3. But we expect no disaster profit-wise, absolutely not. And the big question mark for us, and that is the reason why we do not give an outlook and a guideline for this year is Q4 because, as you know, Q4 is always the strongest for Krones. There are seasonal reasons. There is a lot of service business in Q4. And the service business is very, let’s say, good for us from a profitability point of view. And that depends a lot on this question: second wave restrictions to travel lockdowns, yes or no? And that’s why — because normally as a machine builder, at least in the summertime, you can give a guidance. But the uncertainty for the service business for Q4, that’s the reason why we are not giving the guidance. But for Q3, as you said, slower volume, but profitable-wise, I would assume that it will not be positive, but yet it will not be a disaster either.
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Sven Weier, UBS Investment Bank, Research Division – Executive Director and Analyst [48]
——————————————————————————–
Okay. And the last question is just in Q1, you gave us the breakdown for the quarter in terms of how much the OE business was down. I think it was 30% and the service business was up 6% to 7% I was just curious if you had that split also for Q2.
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [49]
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Yes. In Q1, as you mentioned, the new machine or OE business was minus 30%, and the service was actually plus 10%. We had a very good Q1. And in the second quarter, the OE or new machine business was minus 55% in order intake. And the service was minus 17%. And that — when you look at the 28% order intake reduction for the half year, both quarters combined, then we have new machine business, minus 45%. And service overall, minus 3%. It’s not the average of first and second quarter because also here, we have the seasonality that Q1 is much stronger, always Krones, as you know, Q1 and Q4. So the volumes are different. But second quarter, new machines, minus 55% and service minus 16 — 17%.
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Operator [50]
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The next slide is opening from Mr. Daniel Gleim from MainFirst.
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Daniel Gleim, MainFirst Bank AG, Research Division – Director [51]
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Can you hear me well?
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [52]
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Yes.
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Daniel Gleim, MainFirst Bank AG, Research Division – Director [53]
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My question, I’ve actually got 4 of them. The first one, you mentioned the relative size of the June order intake versus 3 or 2 months. Since you don’t have this granularity in your reporting, could you give us an indication how much the order intake in June and July has fallen year-over-year? So we can make a comparison with the second quarter overall to better understand how much the run rates have improved sequentially. That will be the first question.
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Norbert Broger, Krones AG – CFO & Member of Executive Board [54]
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Okay. Second? Or shall I answer first? Okay. I can tell you that June as an individual month was EUR 256 million order intake. So then you can deduct this from the EUR 616 million, and then you have April, May on average. But I don’t know exactly what June and the individual months are, I don’t know it, last year were, sorry.
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Daniel Gleim, MainFirst Bank AG, Research Division – Director [55]
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Do you know how much is has improved? So a rough ballpark number, I think, will do the trick for us. We don’t need to have the exact growth rate in June.
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [56]
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Actually, we — to last year, we tried to figure out right now from the numbers we have here. But what we usually not do is that we overestimate 1 month in particular. Why is that, because in case we have the projects booked in 1 month or the other, it might look very different. What we usually do is that we compare the quarters to each other. And for the quarters, we have the mathematics. So that’s the reason why we have been so careful with saying June and July order intake is not giving, let’s say, a full perspective how things really are going. So I don’t think even in case we would give you the number for June in detail and the run or the comparison to last year that this really would be improve the mathematics you have. Sorry, when we answered this way. Maybe we have a number which we — you say around? Okay. We have the number, it’s around 20 to — between 20% and 25% decrease this year compared to last year.
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Norbert Broger, Krones AG – CFO & Member of Executive Board [57]
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June to June.
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [58]
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June to June.
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Daniel Gleim, MainFirst Bank AG, Research Division – Director [59]
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That helps a lot. Thank you very much. You mentioned that in the last call, you were discussing the sequential development of the different quarters, and I understand that the third quarter might be still the worst in terms of volumes and profitability, probably comparable to the second one, if I read your commentary right. Speaking about the fourth quarter, and I understand there’s still a wildcard with the service. But would you firmly believe that the fourth quarter then will be purely positive again? Is that the right message from your commentary on this call?
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Norbert Broger, Krones AG – CFO & Member of Executive Board [60]
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Okay. I’m — let’s say, I’m bold here in this situation. If there is no big second wave, then definitely, we will have a positive fourth quarter without possible restructuring costs. Does that answer your question?
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Daniel Gleim, MainFirst Bank AG, Research Division – Director [61]
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Absolutely. This possible restructuring, would you like to elaborate on that a little bit? What could happen?
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Norbert Broger, Krones AG – CFO & Member of Executive Board [62]
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No, not at this point of time. I mean, it’s clear that we are thinking about our structure. But at this point of time, it’s too early to talk about it.
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [63]
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And I would give you a bit of background of how we think and what is the procedure on that. I mean, I named it earlier, in September, we are doing a huge customer survey again to see where are our customers. And in parallel, we, of course, have developed scenarios, how we believe the next 2 or 3 years are continuing. And based on those scenarios, we have prepared ourselves, what would that mean even in terms of what restructuring would be necessary.
And on the other side, we have to see that what, let me say, measures you can take. And 1 is obvious, which we are doing anyhow at the moment. This is a reduction of headcount. But there are some more and it’s too early to talk about them because we are in negotiations about those and in prenegotiations with the parties we need to talk to. You can be sure that we are prepared to execute, and we see the future crystal clear, once we have done that survey. So you can expect that we are acting fast with a pretty fast execution on those measures, if they are necessary. At the moment, I can say, we believe they are necessary. So there’s — it’s not based on hope because it’s based on reality. And we do believe that we will name that clearly in the fourth quarter, that we can really name the way we go. And then you would know exactly the financial numbers related to that, which we have then to do in 2020 as provisions, most probably.
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Norbert Broger, Krones AG – CFO & Member of Executive Board [64]
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And maybe if I can add the fact that we will have the talks with all our major customers worldwide in September and October, is the reason that we are postponing our planned Capital Market Day a little bit from October to November 12, because we want to give you also then the best and latest information we have from the market.
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Daniel Gleim, MainFirst Bank AG, Research Division – Director [65]
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Very clear. I’ll be looking forward to that. Maybe 1 last question on the Hungary plant. And you elaborated on your initial budget or plan for the plant and you gave us an update as to where we stand in terms of capacities. Could you give us a ballpark number, how much does this net costing at the moment? So I assume this is a negative for the current results and for the year, probably, as well?
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [66]
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At the moment, we see a 0 since we — it’s a black 0 at the moment. So no big impact for us because those who have been in the plant there and the 9,000 hours we are doing at the moment, this is okay. This is in accordance with the plan we had. We have no profitability out of that so far. But I would say it’s a 0-0 game at present.
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Daniel Gleim, MainFirst Bank AG, Research Division – Director [67]
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And it applies to the current quarter and for the full year?
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [68]
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Yes.
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Operator [69]
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(Operator Instructions) Mr. Peter Rothenaicher from Baader Bank.
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Peter Rothenaicher, Baader-Helvea Equity Research – Analyst [70]
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Could you please comment a little bit on the competitive environment? What is happening? Are the Chinese quite a bit active? What is happening with the Italian ones and your big competitors? Are customers perhaps more reluctant to place orders to smaller players, where there is the risk of insolvency? Can you comment on this?
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [71]
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Yes, Rothenaicher. How do we see competition? First of all, for the core business, which is, of course, the well-known player KHS, retail, the big ones and then the Italians and then the Chinese in that order. I would say, first of all, we are sitting all in the same boat. So there is no difference. We can’t see that anybody has an advantage or a disadvantage at the moment. For ourselves, we see that the service network around the world gives a lot of credibility to the customers at the moment, because they see that we can serve extremely well even in quite remote areas. So that’s helping a lot for us. And I would say, to a certain extent, it’s true for KHS and [CBL] as well because they have those networks, at least comparable. Not on the magnitude we have, but they are positioned in this way as well. There we see, let me say, the biggest weakness of our Italian competitors since they do not have these large service networks and they do rely in many areas on agencies. And this is — this might be really a point where, as far as we can see, we are preferred in the emerging markets if orders are placed. And if we then — I would name it even to the big ones. So there is a disadvantage for the smaller ones. And of course, we heard from several customers that were questioning the, let me say, the liquidity and the long-term stability of some of the smaller competitors. This comes, of course, soon in play as the company has a limited size.
I would say everybody’s aggressive to get orders. There’s no doubt that’s always when capacities are underbooked.
To the Chinese, we first thought they are being extremely aggressive, but we do not see that. I would say that’s even surprisingly because they have made investments in Africa, Middle East and Asia. But at present, it looks like that, in particular, again, the service area seems to be not as strong as customers are relying to that. Because that was order power, really, the weak area of those, not the pricing, it was more the service. And we have not lost significantly anything to one of those.
What we see in Asia, there is a tendency to buy more local. So we have seen in Taiwan, for example, an order to Taiwanese supplier, which we have not seen before, that had something to do with patriotism, I would say. We have seen the same thing in Korea, but on a very small magnitude so that we are not, let me say, afraid of that at all.
In China itself, I would say, of course, competition is strong as always, but that was ever the case, so that there’s no difference. And since we have now a much better footprint in China and have the ability out of our Chinese factory, at least, to deliver most of the dry end, which is packaging machines and the conveying technology that gives us a lift in that regard. And a lot of customers still requiring made in Germany or made in Europe. So that gives us a lift in the sense of we can do a good mixture to be competitive in the Chinese market as well. So I would say the environment has not basically changed.
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Peter Rothenaicher, Baader-Helvea Equity Research – Analyst [72]
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And my second question is on the North American process technology business. So I think the impairment charges were related to the companies in North America, report. Is this something where the business is running in the wrong direction and where you have a sustainable problem?
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [73]
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Let me say that I have to differentiate that because the 2 impairments we have done are 2 companies. One is related to the brewing industry in North America, and there we have a structural issue. Because up and a sudden, the very promising craft beer market break down in a sudden. And this had really an impact on that company. We are downsizing that at the moment. And that’s the reason why we have made the impairment for that.
The other one is on the soft drink in choose size. This has had a hard hit as well because of the low order intake. However, this 1 is going in the right direction. We received just this week, good orders and we have adjusted head count there as well. So we reduced almost by 40%, the headcount there, of course, keeping the right people. So the answer is, 1 was fundamental. The other 1 was just the COVID-19 hit, which we settled at the moment. And the other one, the structural one, we’re just doing that by restructuring, and this will be happening within this year. Is that a light on it?
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Operator [74]
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Next question is coming again from Andre Finke.
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Joerg-Andre Finke, HSBC, Research Division – Head of Equity Research Germany and Analyst [75]
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Just 2 small follow-up questions. The first 1 relates to the — to your comments on the acceptance periods, and that, I don’t know, about 50% of that’s not happening at the moment. What is the impact on cash and potentially P&L recognition? So is there any kind of pent-up cash inflow which we should expect here in the second half, maybe even on the P&L side?
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [76]
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Yes. I mean, of course, there is an impact on, let me say, on liquidity because, usually, with the final acceptance then we have 10% of the payment, and this is an issue. But thanks to the learnings of last year, we have sunset clauses in so they are becoming now, too. Not all of them, but some of them. And I would say the impact of that is quite limited.
Second, we might settle most of them in the second half of the year since traveling would be possible again. And we are on full speed to get those completed where possible. Some of it might remain because we have no access to the customers. But I would say, in terms of liquidity, it’s very limited at the moment, what we see. And the same is true for profitability. I mean, there is a small proportion of profitability related to that, but more on, let me say, that we cannot utilize the service rather than this is from the incoming money or realizing the profitability.
I would say the impact at the moment is handleable in case we can continue, as we assume right now.
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Joerg-Andre Finke, HSBC, Research Division – Head of Equity Research Germany and Analyst [77]
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Okay. And the second question just relates to 1 comment from Mr. Broger on the profit development in Q3. You said it will not be a disaster, but it will not be positive, is that meant on an absolute or on a year-on-year level?
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Norbert Broger, Krones AG – CFO & Member of Executive Board [78]
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It’s meant on an absolute. I mean, the volume we expect to go down, and this is primarily a new machine business. The service business should be, on minimum, on the same weak level as Q2. So the volume decrease will not hit the P&L as much as you would expect from, let’s say, overall sales decrease.
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Joerg-Andre Finke, HSBC, Research Division – Head of Equity Research Germany and Analyst [79]
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Okay. But you expect a Q3 loss, that’s what you meant in your comments, right?
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Norbert Broger, Krones AG – CFO & Member of Executive Board [80]
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I’m not 100% sure. It could also be a breakeven or a minor loss, we will see.
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Operator [81]
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We have no further questions.
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Christoph Klenk, Krones AG – Chairman of Executive Board & CEO [82]
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Okay. If there are no further questions, thank you, ladies and gentlemen, to be with us today. I hope we gave you a good overview where we are. And what I would like to state at the end of this meeting, that you’ll see us as being CFO and CEO. Let me say, crystal clear on what we have to say on 1 side, being careful with interpreting the future because we might see a second wave.
I would like to tell you as well, even for the second wave, we are going to prepare ourselves in terms of our service business that we can further execute and think beyond the normal that we can do that. And saying all of that, we have scenarios in front of us, where we are planning on and you can expect in autumn that we have a crisp, clear plan in place how we continue. And we have not lost our midterm targets out of the sight, that’s important. And we have communicated that everywhere that even with COVID, they are not going away, and we are coming back to those. And you see us with, even in these critical times with a kind of optimism that we are facing a future and getting Krones developed back to the level where we have been in the past. Not clearly when it happens, but at least, we see the potential to do so. Thank you very much for listening. It was a pleasure again. Thank you. Bye-bye. All the best for you.
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Operator [83]
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We want to thank all the participants of this conference. Goodbye.