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Edited Transcript of KRN.DE earnings conference call or presentation 29-Apr-20 12:00pm GMT

Q1 2020 Krones AG Earnings Call

Neutraubling May 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Krones AG earnings conference call or presentation Wednesday, April 29, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christoph Klenk

Krones AG - Chairman of Executive Board & CEO

* Norbert Broger

Krones AG - CFO & Member of Executive Board

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Presentation

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Operator [1]

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

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Christoph Klenk, Krones AG - Chairman of Executive Board & CEO [2]

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Yes. Thank you. Warm welcome, ladies and gentlemen, to the conference call on behalf of Krones for our Q1 results. Norbert Broger and myself will give you a presentation where we are and at least try to look into the future. One remark in the beginning, first time, we have a journalist from a financial newspaper with us to have transparency in our communication.

We will start with the first slide, and you see here the highlights we have to mention. First of all, revenue has decreased, of course, initially affected by COVID-19 by 4.2% to EUR 942 million in the first 3 months. The second point is the economic uncertainties, of course, have significantly increased and impacted as well our customer investment confidence. We will talk about that later in detail. And you see that the order intake has decreased by almost 20% in the first quarter.

Point #3, and this is something which is very important for us, is that our structural measures are taking even more effect than in the last quarter. And remember, in Q4, we had an operational result of 4.8%, this time in -- on EBT level. And we are heading to having 5.6% EBT level in Q1 of 2020, which equals on EBITDA level on 9.5%. And this shows clearly that the actions we have taken are delivering results and that's consistently now over 2 quarters.

And of course, very difficult to predict 2020. I don't have to mention that the coronavirus is everywhere, and you will see that later on in our presentation. So that's a rough overview from me in the beginning, and I hand over now to Norbert. Norbert, please?

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Norbert Broger, Krones AG - CFO & Member of Executive Board [3]

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Good afternoon. This is Norbert Broger speaking. Next slide, Christoph, can you please continue, it's just a summary of the key financial indicators. As mentioned already, order intake, minus 19.3% with a decent order intake, January, February, but then starting with a significant drop in March with minus 30% in March versus March last year.

And normally, Krones usually has a strong March with seasonality. And in March, we really could see the impact on order intake. Revenue, minus 4%. Of course, we're still living from our order backlog situation that is decreasing. And the positive news is the improvement in EBT margin to 5.6% and also improvement in free cash flow, minus EUR 16 million versus minus EUR 136 million in the same period last year.

When we look at the next slide, you see to the left, the EBT margin first quarter this year, EUR 53 million versus last year. And also the EBITDA margin, EUR 89.5 million versus EUR 86 million. The margins both increased despite the 4% reduction in sales. And the measures started in the second half of last year, as Christoph Klenk mentioned, show effect. The measures primarily are a reduction in workforce in Germany. Last year, minus 200. This year, playing minus 300 so far end of the quarter. Not in the figures yet, but signed agreements with employees, roughly minus 140. So there's still a way to go.

Savings and material costs, reduction also in purchased services. Other savings, also a favorable product mix because the decline in revenues is only on the new machine business side, whereas the service business was stable or had even a small increase compared to the first quarter last year.

And also important, much better resource management to manage our, let's say, especially labor force in production to reduce tendencies hours with lower volumes that we were facing already and also, of course, impacts from price increases that were put through last year that show also impact in the first quarter this year.

When we come to the next slide. Order intake, the minus 19% for the total first quarter is roughly plus 6%, 7% in the service business and minus 30% in the new machine and project business for the first quarter. And we see the dynamics of the corona crisis because individually, March itself was a much -- a very steep drop of roughly 50% less new machine order intake.

Revenue side, minus 4%. The segment filling technology is still rather stable, minus 2%, whereas the beverage production and process technology is at about minus 15% or 16% compared to the first quarter last year.

From a regional perspective, North America, the first quarter was still very strong. You see the portion of the Krones Group revenue overall increased from 11.8% first quarter 2019 to 16.8% 2020. So very strong. Also, Africa/Middle East was quite good, an improvement to previous year; as well as Eastern Europe and Central Asia, small improvement. And also South America with an improvement from 10% share to 11.8%. Negative development, of course, in China. The portion in 2019 was 9.3%. 2020, 4.9%. So there was a significant drop because there, as we all know, the situation started in January -- late January already. And also Europe, significantly lower compared to the strong quarter the year before. And Asia Pacific, more or less on the same level.

Let me go to the next slide. Personnel cost of EUR 321 million versus EUR 323 million the year before. More or less the same amount, EUR 2 million less. However, in the first quarter 2019, the head count was different because during the year, there was a strong increase of the workforce in Hungary, which was not reflected yet in the first quarter last year. Also the increase, what we did in China, which came through the year and also several acquisitions like IPS in Dubai; and a company in Guatemala, a service company; and in India. In the figures reflected is despite, let's say, the increase in personnel in -- outside Germany, the decrease in personnel with a reduction of roughly 200. And we will see a further decline here in the future. Also the -- let's say, the 0 increase in Germany as agreed between the unions and the employers will help.

Material cost, there is a significant drop from 49.7% -- or the year before, 50% to 46.1% compared to the total performance. And in absolute amount, it's EUR 53 million less material expenses. Out of the EUR 53 million, roughly EUR 20 million is just because of the lower volume because of the lower revenues, and the remaining EUR 33 million divides in half of it positive mix, more service business, less new machine business. 25% of the savings are real cost reduction in material, and the other 25% roughly is the impact of the price increase on our product that has a positive impact on the material cost ratio.

Okay. On the next slide, we see our 2 segments: the big segment, Product Filling and Decoration has a 2% decrease in revenues and improved its EBITDA margin from 11.2% to 11.9%. And the smaller -- much smaller Beverage Production/Process Technology has decreasing revenue of 16% compared to last year and EBITDA margin of minus 7.5%. So no improvement, the same margin with 16% lower volume.

And to the right. I mean, outlook, but we will come to that later. At this point of time, we will not give outlook on revenue and result for this year. The free cash flow improved primarily because of a lower working capital increase compared to the year before. And the free cash flow is minus EUR 16 million and was minus EUR 136 million. One thing that definitely changed in the last month and also compared to last year are our financing activities. We were quite active to secure more liquidity in the last months to get very safe through this crisis. And you can see here in the line financing activities, plus EUR 251 million. And we also increased our cash reserve to end of March, EUR 345 million.

The working capital compared to the previous quarter, in ratio to sales or revenue, 27.1%. There's a slight increase, and that's because with the decreasing business, our trade liabilities went down significantly. And they went more down than the decrease in our receivables to the customer side. From the inventory side, it's pretty much stable. And the ROCE for the first quarter is 11.9%, also slightly lower than the previous year.

Next slide, I think, is quite important in the situation. On the left-hand side, you see our liquidity reserves. We have up to date EUR 1 billion committed credit lines plus an additional roughly EUR 150 million uncommitted. But EUR 1 billion are committed. At this point of time, end of March, we utilized EUR 345 million. But at the same time, we have cash in our books of EUR 345 million. So net cash is plus EUR 10 million. And in addition to the EUR 345 million cash that we are holding right now, there are 3 credit lines of EUR 665 million, yes. But with a EUR 1 billion liquidity, we feel very safe and strong to get through this situation.

And in addition, as you know, we have strong equity, EUR 1.4 billion. The equity ratio dropped a little bit, yes, but it's still 40%.

So far to first quarter, despite all the discussions we have everywhere about corona and how it will continue, nevertheless, there will be a life after corona. We see our markets stable midterm, long term even though the customer behavior might change in some areas. And therefore, we stay with our growth corridor of 2% to 5% midterm as well as with our EBITDA margin, 9% to 12%. Most of you remember the EBT corridor of 6% to 8%. Now as we switch to EBITDA margin from a pure mathematical point of view, the 6% to 8% calculated into 9.5% to 11.5% EBITDA margin. And we thought this is -- the uneven numbers are not good. So we opened it from 9.5% downward to 9% and increased it from 11.5% to 12%. So that's why it's 9% to 12%. And the working capital ratio to revenue, 22% to 24%, still our target.

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Christoph Klenk, Krones AG - Chairman of Executive Board & CEO [4]

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Yes, Norbert. Thank you. Norbert, thank you. Just one further word on the midterm targets. Norbert and myself, we have just been in a video conference with around 80 of our managers globally, and we have all the time 3 parts of this presentation. Number one, of course, manage the crisis with COVID-19. The second big proportion is prepare for the futures in scenarios because despite the scenarios -- and we have no clue which one is the baseline scenario, we are talking in scenarios. But the strongest point we put into that meeting is still keep your focus on our midterm targets and that we have maintained the commitment to our midterm targets in front of the public. This, we believe, is very important because with the crisis management, you easily can take away your focus, and we are aware of that. We have to do more to get stabilized to the 9% to 12% EBITDA margin. So I wanted to say that in the beginning that you have a bit a sense of how we communicate internally.

What I'm doing now is a bit an update of corona, but don't worry, I don't want to run you through medical issues or figures, whatever. I just want to give you an understanding how we deal with it and what kind of analytics we have behind. The first slide is, of course, about what happens in the world. And we have later on a chart where you see how we deal with the new normality because we believe that we have to judge any country around the world since we are dealing actively with 154 countries around the world, and that's the reason why this map is so important for us.

One comparison which is, unfortunately, already 3 weeks old, is the comparison between the COVID-19 crisis and the 2009 crisis and the magnitude on GDP decrease. And you just see on the left-hand side the comparison between the decrease in GDP in the U.S., which is, from today's perspective, quite higher. On the blue color, the COVID-19 decrease. And on the orange color, the 2009 economy crisis decrease. And this gives you a kind of a smell of that we believe that this crisis has at least the magnitude on what we have seen in 2009. And this is something which we share internally, that we get a decent understanding what the base cases could be.

Now to our beverage industry. And of course, we had no shutdowns at our customers, which is good. And I don't want to run through that slide in specific. I mean if you want, you can read. But I would say the lower line, where you see on the left-hand side the green color with UHT dairy with liquid food, water, fresh dairy, soft drinks, and then going more into the red. That gives quite a reflection on how we believe the categories of our market are affected by COVID-19. And we still believe that people always eat and drink, however, with some restrictions, and you see them in the following slide. No, not yet. So coming to that a bit later, sorry. Two slides to wait.

This one here gives you a quite good overview on how we look on the countries. And we have actually divided the phases of COVID-19 in 4 phases, and this is not based on our research only. That's on a Nielsen report, which we are modifying with the input we have from our own data. And our point is that there's a preparation phase in case you get the infection started, then you are in restrictions, and then you get into the new normal, which we believe we have all to live with. And we believe that takes not months, that takes maybe years. And on this chart, you see that we consider China as being already in the new normal, and we see some recovery in our market. And then you see that Germany, I would say, parts of Western Europe are going into the new normal. And I would say in case we are waiting another 2 weeks, we will see this that even the U.S. is going into a new normal. Whatever that means, you will see later on that we have quite a good view on the individual markets that we have really a close link to our customers and the individual categories we have.

So this is our major map to justify what would be the right measures in the market, how soon can we approach customers again to get projects realized, how soon can we get our service financials in, in order to continue installation and commissioning on those lines already shipped.

So here is a smell of what our customers say, and you see that this is the capital market communication. So that's public available, nothing secret once they have done that. And you see at least Coca-Cola and AB InBev as the major players. And what I have said, and the summary you can take away from that, is that there's a huge uncertainty among our customer base how they should invest. And of course, they have made statements that investments are stopped for the time being. Some have stated that they are not doing investments in 2020 at all, which we believe is maybe a statement, but we have even heard from those having made that statement that they might look in 2 or 3 months different on that. But the point we want to make here is there's a huge uncertainty, and each company is actually stating that they can't predict because of COVID-19 how things would continue in the industry.

And I would say on this slide, this gives you quite a good smell why this is the case. We believe this is one of the most important ones to be considered when we see the development of our individual customers. On this slide, you see in dark blue how much of their volumes in liters goes into bars, restaurants and coffees. And in gray, you see what they do in supermarkets and in convenience stores. These are the 2 major channels we have to consider from our point of view. And we have this by region, that we get a clear understanding on where our customers are, but this is now by category. And you see even here that soft drinks are -- with 25% being traded in restaurants and bars, quite big. So even those are impacted.

And I just want to go roughly from beer to the right-hand side, to the -- up to the wine, how customers are affected. Beer is pretty much affected. And they can only -- a bit of it compensate through the off-trade channels and the supermarkets. Once you speak to the big ones, they are telling you 30% of their revenue is going through that channel. Maybe they can recover between 5% and 15%, but not totally. And there was an interesting number. They were saying they have done in several countries analysis in case they would respect the social distancing with 1.5 meters in a bar or in a restaurant. Despite -- from 100% -- or 100 people being in that bar and restaurant, today, they would expect only 30 people in that bar or restaurant. So that's a decrease of 70%. And even in the reopening with the social distancing, they see a slight recovery, but this is still severe. And this, we have to see.

On the CSD side it looks different. There we see at the moment with our customers that they changed their SKUs, stock keeping units. So they are using higher volume SKUs like the 1 or 2-liter bottles because it's going all in supermarket chains, and they are compensating significantly at least on the volume side, which is important for us. Not on the revenue side because you see that on the right-hand side, that the monetary value of that volume is, of course, different since prices in restaurants are higher and the margin per liter are significantly higher than in supermarkets. And that's the reason even in case the CSD producers are compensated quite a lot on the supermarket chains, that they can't compensate fully on the profitability and of course, on the revenue side. So that's something -- and this is different from the economic crisis in 2008 and '09. That we have this time really impact on our industry as well. And again, we say people drink always. But this time, it's -- to be honest, it's a bit lower than usually. We basically believe that the markets are fundamentally okay, and we see a recovering over the year of 2021 in that category.

Then there was another question which we believe was important, and this is all our own research. Fortunately, we have a lot of customers being as well stock-listed. So we had quite good access to their financial performance. And of course, we had a question, is there -- are there many which would run into trouble in case they cannot serve any more with the EBITDA level they have for their net debt? And this is just the indication how much beyond the EBITDA -- the annual EBITDA their net debt is as higher as the bar is, I would say, as versus the ratio in between. But if you look to that, we can't see that anybody of them is in a really critical situation. And you see that on the right-hand side, even confirmed that -- the interest rate and the interest coverage they have to do per year in comparison to their operational cash flow. And if you look to the numbers, if you would see, let's take the most left one, 18x higher operational cash flow than the -- they serve for the interest rate they have.

And on the right-hand side, of course, you see that they have doubled the operating cash flow in comparison to the interest rates they have to serve. And this was important for us because we want to have an understanding in this crisis whether we get a problem on the receivables, how secure they are and how they are running.

Now a bit more to, let me say, what we are doing and how we look to things. And I don't want to run through any bullet point here. We have actually, for each market, a group internally in place doing research, and we are looking all the time to those 3 categories you see here. And that's for all our 7 regions existing with a lot of more data. But we look on the consumer sentiment how this develops. We look on the beverage industry sediment, our customers, how they develop. And of course, of our own operations, how we do in that particular market. And the point I want to make here, that we have in China already a kind of a recovering phase. And you see definitely that, for example, even our life cycle business is in March, the best we ever had, that's really amazing. Of course, January, February was extremely low, and they are regaining some of the business, that at least you see that business is coming up.

And you see as well that we believe that customers are still going to order in China. We have orders -- quotations out under negotiations. And we are, let me say, in hope that those are going to materialize. Maybe one takeaway is that in the beverage industry, cans gain more importance because of e-commerce. And you will see the same thing, and that's for the North American view, that you see that on the consumer sediment that there is as well online shopping mentioned, and this is something we see in the crisis changing from all the regions that online distribution is becoming more of important. So that's at least one of the change we see already and where we have to react to.

I don't want to run you through all those specifics. Of course, the U.S., you all know, is in a different shape than China at the moment. But even there, the -- I can say, the aftermarket business is working quite well so far. We will see some impacts in the life cycle business there. However, we believe the market is so far okay, of course. New machine business will be very limited as uncertainty is playing the huge role in -- among our customers in North America. Again, this is existing for each region, and we are updating that every second week, as I mentioned earlier in a call and running through that, that everybody is aware of what happens in the markets.

So that brings me to my last slide. Just to give you a view on where we do have to focus at the moment, of course. We have to focus, number one, on minimizing the risk of infections of our employees. And we can say because of the early learnings in China, we implemented a lot of measures here. Our employees gave us an excellent feedback on how we treated the COVID-19 issue internally. They feel safe if they come to the company. Of course, 7,000 people in Germany we have in home offices, which is working well as well. So I would say, at the moment, we are really in a good shape with that. As long as we can be, you can be good shape in COVID-19.

Then, of course, the coordination of our task force to continue our business. I would say even this is quite good under control. We don't see big issues in the supply chain. We have the -- sorry, the home office is running quite well. The biggest limitation we see at the moment is our service technicians, which can't -- cannot travel at the moment. This is something we need to figure out how this works out over the next 3 months.

Then, of course, save liquidity. Norbert Broger mentioned that already. I mentioned the business scenarios we are developing at the moment. Because this is -- the learning from the last crisis, that going out of the crisis, it's in some areas more difficult then to go in. If the growth is strong and you have

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