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Edited Transcript of KRN.DE earnings conference call or presentation 25-Jul-19 12:00pm GMT

Q2 2019 Krones AG Earnings Call

Neutraubling Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Krones AG earnings conference call or presentation Thursday, July 25, 2019 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 & Interim CFO

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Conference Call Participants

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* Daniel Gleim

MainFirst Bank AG, Research Division - Director

* Gordon Schönell

Bankhaus Lampe KG, Research Division - Analyst

* Joerg-Andre Finke

HSBC, Research Division - Head of Equity Research Germany and Analyst

* Peter Rothenaicher

Baader-Helvea Equity Research - Analyst

* Sebastian Growe

Commerzbank AG, Research Division - Team Head of Industrials

* Sven Weier

UBS Investment Bank, Research Division - Executive Director and Analyst

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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. I will now hand you over to Mr. Christoph Klenk, CEO.

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

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Good afternoon, ladies and gentlemen. Warm welcome to the Krones conference call. First of all, a short introduction of myself. I'm the CEO of Krones. However, I've been 4 years as well, the CFO. Olaf Scholz, the Head of Investor Relationship, is as well with me here on the phone.

First, I would like to start with the point that our CFO, until yesterday, Michael Andersen, has left Krones yesterday in mutual agreement. And at this point, I would like to thank you to Michael Andersen for what he has done for Krones and the engagement he has with Krones. We have some new investors in the call. So that's why I'm running later on, very briefly, a little bit through about what is Krones.

Before I start the presentation, we are running through the slides, I would like to make one remark before. Of course, after a profit warning, which we have done last week, and the drop of the share price of 20%, I would say, you become even more reflective than before, even as a CEO, reflective about the structural challenges, about the performance and about the speed of measures we have to take here at Krones. We will not give you the measures today and the actions that we are going to do in fall. But on the other side, what I would like to say as well is it generates, on the other side, a high degree of clarity about the necessity of change and the need for speed of actions for everybody in the organization.

That's the only good thing, in case you are in those times where things are not going the way they have been predicted. So that's why my remark in the beginning. Today, it's too early to say when we are back on track, of course. But on the other side, it's absolutely clear that all the actions taken are going fully in this direction that we bring Krones back on track.

So I'm running you now through the details of the presentation, hopefully, very briefly, between 15 to 20 minutes. So here, the highlights, or some of them at least, not all. We have received orders just slightly above EUR 2 billion. So with an increase of 1.2% in regard to last year, first half year. We have increased revenue by 5.5%. And of course, now the very bad thing, the EBT margin is, after 6 months, at 2.5% with a very bad 2Q -- sorry, Q2, where we had a slight loss. And even the free cash flow is not a very nice news, so with minus EUR 230 million as well, a strong deviation from last year. So I would say the 2 other figures are okay, of course, due to lower, are in not good shape.

So one read about Krones for those who are new in the call and are not familiar with Krones. So I would say, in the start dark gray area on the left-hand side, you see our core business, the bottling and packaging equipment and the life cycle service, which is included in that. Here in the call, we have even the PET business, which is one of the points we have to talk later on. The light gray area, processing technology, digitalization and intralogistics, is our second segment. With all those products and segments you see here on the house of Krones, we are able to serve the entire value chain of our customers in the beverage industry. And one last remark to that slide, in the core business, the bottling and packaging equipment, we are the #1 in the industry in terms of revenue and, hopefully, technology and customer perception as well.

And 2 words about our markets. We have a stable long-term growth in the market. You see on the left-hand side, the growth drivers we have, and I would say, these are the big mega trends. We have a world population which is growing by 80 million people a year, and they need to drink beverages. Then we have a strongly growing middle class, and I don't have to repeat the numbers, but by 2030, there will be over 1 billion people joining the middle class. So a big driver for our growth. And of course, we have urbanization. So people go to the cities, and this comes from people move to their -- where the work is and if -- as soon as they work in cities, they are starting to drink bottled beverages.

So these are, let me say, the mega trends. And you see on the right-hand side, all the fundamental growth rates in the prediction for our industry are okay. So this is a very good, stable fundament. However, PET's a point of discussion, which is, of course, point of the beverage industry. And I wanted just to jump very briefly to that. I would assume there will be later on questions to that. Of course, PET is under debate and a strong debate here in Europe. I would say this is the heart of the debate for PET. I would say it's less of a debate in other markets, but it's as well a debate. And I would say, on the level of where it's mixed, it's North America; where the debate is, I would say, in Asia, it's not on the level we feel here in Europe.

You see on the middle slide, we have here that PET is still predicted as the strongest-growing beverage packaging. As of today, it's difficult to judge that. We see that it's still growing fast. We don't know whether this figure is really correct. However, if the figure is not correct, you see on the right-hand side that with the product portfolio of Krones, even if PET might change to can and bottles, we are offering a full range of technologies to serve those areas of packaging as well. The one which we can't serve with our portfolio today is carton, where we are not in at all. But our belief is that, and you see that here on the slide, if it would go deeper into, that we have a really, really good chance in case things are shifting to other beverage packages that we can cover that. And actually, we see that already this year strongly in the portfolio.

Now after the first half of the year, how is the revenue and the top line splitted into the individual areas? You see there are no fundamental changes. If you see that, I would say, a positive trend is that North America is still increasing. It's doing well. South America, on the lower end, is decreasing slightly, but from a very high level. So that's as well okay. And I would say, Asia, Africa, quite stable. So no -- nothing to comment here. That's, I would say, within the range.

I would say, China is slightly a point we need to talk. First, it has recovered quite nicely. It covers a lot of potentials since their investment activities have been pretty low over the last 2, 3 years. So -- and you see in the figures that we have been catching up. But on the other side, now, we have really to see that, I would say, with all the debate we have on, let me say, on the economic development in China, that we have to have here a very careful look on how China is developing, and this might create as well a little bit of headache. And this is actually, in the market, one of the concerns we have.

Now then to the key figures you see here. So first of all, we are growing in new orders by 1.2%. We said it already. The organic growth without acquisitions is about 0.4%. With the figure here, EUR 2.039 billion, it's matching our seasonable plan. And even as the Q2 is a little bit decreasing compared to Q2 last year, I would say, overall, we are in good shape in regard to how our market is developing.

On the lower end of that new order chart, you see the backlog we have in hand at the moment is slightly lower than last year. However, still good for, let me say, the second half of the year. Sales, as such, increased by 6%, however, and this might surprise you, of course, that might be one of the questions you have later on, even with a growing top line, how can we manage then bottom line? And one of the answers is, of course, the product mix we have into here. Of course, we are on plan with the 6% plus, however, the product mix is not as where it should be.

If we can see, let me say, the market maintaining the current economic level, I would say, we are in line with the close predictions we have made on the top line with what we have achieved after 6 months.

Now to the EBT, and I come to that in a later slide in more detail. I mean, this is, of course, a very short comment. It's a very bad result in Q2. And of course, a significant drop, more than significant, a very bad drop after Q1, seeing that we are, after 6 months, at 2.5% EBT -- EBIT (sic) [EBT] margin.

So I would say, I comment later on that, as you have an understanding what has happened and how we see things. The last comment I would like to do on that slide here is the EBITDA. It becomes more important for us because with the investments we have made over the last years, depreciation will be a higher point. And I would say, the operational performance, you can see better in that slide here in the future. Now to the 2 main cost drivers. Personnel costs on one side, you see that, of course, a significant increase. And the ratio is, to an extent, concerning, you see that we are at 33.6% of personnel costs, which is a quite high level. Historically, we are all the time higher in the first half year than in the second, of course. And what are the driver? Of course, it's the strong labor cost increase we had last year, which you see with full impact now this year on one side with a further increase already by this year. And of course, it has been in general increase because, now, we have Hungary. We have, in the meantime, hired 300-plus people more by this year, which are in that figure. You have in that figure our agents.

It's now an agency of Krones in Dubai, that's 180 people which we have in. We have owned historically already 40% of that agency. And now, the 2 owners, because of age reasons, are going to retire, and they wanted to sell off. So we have bought the remaining 60%. And if you buy a subsidiary with 180 people, they are sales and service. Since they have actually no material costs, they are not adding in a favorable way to the percentage of personnel costs. So that's one of the reasons. By the way, the same is true in case you increase the numbers of sales agents out in the regions. So that's the significant drivers in that. And of course, you see the bad Q2 in that as well because we have been not fully booked, I'll come to that later on, because of the under-booked capacities in PET. And of course, with the consequence in other areas being under-booked. So that's the point to the personnel cost.

Now let's come to the material cost. You see an increase, quite significantly compared to last year. And this is one of our weak points where we have been not coming forward. And I'm going to get a little bit more in detail as well that we have anticipated a better reduction of material costs, which we have been not able to manage. To that, we come later on as well in a little bit more detail.

Now a view on have we been growing? Or how have our employee base developed in the first half here? So you see in the, let me say, in the middle class, you see the 17,128 people. You might be surprised how big that number is, and that the increase is from 1st of January to today, 580 people. And I would say, if you look to the green bar, you see that explained because 700 are roughly coming out of the M&A activities. I told you already that, the company called IPS, agency in the Middle East, and of course, about the strong increase of headcount for our new plant in Hungary. So these are the 2 major drivers, in the M&A and the increase in Hungary.

When you look to the numbers in Germany, 2018, by the end of the year to the first half, you see that in Germany, 10,880 people. You see now 10,760 people. You see that we have been taking measures already to get at least slightly in the right direction. This is something we, of course, are working more on it. So this is something you see now first things coming up out of the other measures we have taken.

Just one word about the split of employees in the emerging markets. There is actually one wrong figure in. I told you, we have acquired this subsidiary in the Middle East, which is counting to Africa in our way how we count. So the 440 you see here by June, in the lower bar, the 441 are actually roughly 620 since the acquisition is going fully into that range. And of course, the other high number you see is the strong increase in Eastern Europe. That's predominantly Hungary, where we have increased people significantly. And you see that we have been growing as well slightly in China. That's due to the point that we are increasing the headcount for local conveyor manufacturing, which we have started last year and which is increased step-by-step locally.

Now a short view on the segments. So first of all, a view on sales in our core segment, product filling and decoration. You see there is an increase in -- of about 3%. However, in Q2, we have, overall, a decrease of around 1% in the top line. So that's at least a slight impact you can see there.

Then to the EBT margin, you see, of course, a significant drop. And the drop is definitely here in the core. You see 3.6% after 6 months compared to 7.6%, quite a lot. And in particular, the second quarter was extremely bad, where we had a loss of EUR 6 million, and this is roughly 1% minus EBT margin. Then to the processing technology, if you look there to the top line, has developed nicely. And you might see then the -- on the right-hand side, the EBT margin, where you see minus 3%. And here, the important message is that's mainly driven from Q1, the negative effect. Q2 was a positive result of EUR 2.4 million. And this is something we see stable for the second half of the year. So we, today, anticipate that we are going out of the segment for a very long time with a positive EBT margin. We are not yet there, where we should be, because we stay with the target of long term 4% EBT margin in that segment. But however, we anticipate an EBT margin for that segment of 1% and a growth of 5% all over the year. And just coming back to the core segment here, we do, over the year, anticipate a growth of 3%, and you saw before that the order backlog looks not bad for that, and EBT margin of around 3%.

Now to working capital and return on capital employed. I mean, capital employed is a very simple explanation why it dropped so much, because of the very bad debt EBT we had. I mean, there is not much to explain. And on working capital, we are at 26%, which is okay for the time being, even not too much to comment.

And now we come to the free cash flow. This is significantly lower than last year. I would say you might have later on a couple of questions. And I would say, we have quite a good overview of what happened. I mean, the biggest change in working capital is definitely in trade payables, which you see in change in working capital because we have paid our suppliers, let me say, significantly better than by the end of last year. We saw that as a need to build up trust and, of course, to set a path of possible negotiations on pricing. Let's see how that works out because, I mean, this is the, as I mentioned earlier, the biggest point: We need to work on our material costs. So this is where you see our suppliers actually in. Of course, then if you look to -- of course, I forgot the top line here with the missing profitability. Of course, we have earnings before tax, of course, down compared to last year, which is the second big impact, which is a cash flow from operating activities at minus EUR 137 million compared to plus EUR 6 million last year.

And then if you look to CapEx, of course, this is high, mainly because of the strong investment we have made in Hungary. That's the biggest proportion of increase compared to last year. And the M&A activities you see in here are predominantly the acquisition of IPS, the agency in the Middle East. And this leads us to a quite critical free cash flow of EUR 259 million. However, I would like to state again that this is something that this is the worst time of the year for Krones all the time because our projects we are executing in the field are at the peak, and with that, the payments made, the accounts receivable, are on the highest level at this point. And this is as well an impact. This will become significantly better, of course, towards the end of the year. Those of you who are long term with us are aware of that. However, with the given conditions on free cash flow, free cash flow grew by the end of the year, definitely been lower than last year.

Yes, outlook for 2019, and this gives you a little bit an explanation why we come from 6% EBT margin now to the revised guidance for 2019 of 3%. If we add all of that up, what I have told you previously. So the first point was that, of course, we have -- we are growing slightly in our life cycle business. However, we are below plan. And this below plan would cause, over the year, quite impact, of course, on profitability because no secret, we have better profitability in aftersales rather than in the new machine business. And if we do not achieve the top line here, we have definitely a quite significant problem in bottom line. One measure we have taken, we have identified our sales force there by 30 people around the world. That's quite significant. We have moved them from new machine business into life cycle because we want to push that strongly forward. At least, order intake, we can catch up in the second half of the year. Whether this will give that impact on top line and on bottom line, this needs to be seen.

Now the second point is the pricing, we are getting -- I mean, this is a long-term issue for Krones, we are getting forward with that. However, we are not where we anticipated to be, as well, a little bit of downside. It's better than last year. It's not where it should be on plan. And it's, by far, not on a level that we can compensate for, let me say, the cost increases we have seen. Maybe one word about competition. We get less and less view on how competition is behaving on that. Of course, we are losing quite a bit, and we have lost some, let me say, some important orders, not that you see a too big effect on order intake. But I would say, we have been quite firm on the pricing we have put at the customer, have been staying there, and with the consequence that we left some of the important -- lost some of the important orders. So I would say, this is what we can see on the reaction of competition, that they might go from time to time below our price. But I have not too much information at all because, I would say, all the, let me say, the regulations we have in the market and the, let me say, the professionality of our customers. We do not hear too much anymore, where our competition is. And I do not believe that Krones has been coming in the wrong direction because of our, let's say, technology would be not okay or some of the performance would be not okay. We are still regarded, highly regarded from the customer in the point what we deliver to the customer, what services we can deliver. So this is certainly not the point.

One word about our customers, how do they react to our, let me say, price policy, being strict on that. I would say, even me personally have more calls from customers, why we act this way. And despite, let me say, final negotiations, we get calls from our key accounts, from top management, how we do see our pricing policy. And maybe one of the very few good things about the profit warning is we got from all the big key account calls, what is the reason for? And we told them that, of course, pricing is not okay. That's one of the issues. And even if they would like to hear this message or not, this is something we are conveying consistently to say pricing needs to be improved in the market because not only we have an issue with that, that's the whole industry, and that can't be the case with what we are doing for our customers. So we are repeating this message.

Now the next point is the PET problem. And I would say, point #3 and point #5, which is the utilization in Q2, are strongly related to each other. And this is one of the factors which had the biggest hit for us. I just would like to explain that. You see that the order intake of Krones is quite okay. And even the order intake, let me say, in Q1, at least to a certain extent, it was not perfect for PET and it was below -- already significantly below expectation. But in addition to that, at the beginning of Q2, even as we had already scheduled some of those orders in PET for production, the customers stopped that. That we have never seen before. Once an order was in production, that we actually continued. Maybe that happened once or twice a year for some of the orders, but not in a bigger magnitude. But because of the uncertainties, even we had orders in hand, ready for production, and we have been not able to execute. And the very bad thing about that was we had no chance to shift any order to that free capacity. So the reaction time for that was very, very slow, and that was one of the hits we had to take. So we were up to 50% underutilized in Q2 in our blow molding, which we call PET area.

And of course, this has some impact on other product categories, in particular on labeling, because actually, with each flow we are delivering, we have at least one labeler. And this is actually PET area is the area where we are selling a lot of freestanding labeling machines as well. So we had a hit as well in labeling because of this PET issue. And of course, with the underutilized production capacities, we have a cost in -- let me say, a problem in covering the cost of the overhead cost all over the company is that hit. So these are the 2 main factors which we had into that. And then #4, and we spoke about that quite often, is material cost, where we have been not on the level where we should be.

Maybe just a word, and we have not talked about that earlier, when we look to the impact on that, we will have still an impact of PET in the second quarter. However, it's getting much better. We have those orders which we couldn't get into production by Q2, we have them now in production. And I would say the order intake was not on the, let me say, planned level for the last 3 months.

However, we have done well, if we can say that on PET, much better at least than the beginning of the year, that we have got order as well for PET. So that -- let me say, production booking is increasing from July onwards. It's still on a low level in July and, of course, in August. But towards the end of the year, we have a much better utilization. And of course, this gives then a good view on Q4, that we believe that will be, again, and you know that historically, the strongest one that we are getting in that direction.

And that brings me to the governance for 2019, overall. We do expect a growth of roughly 3% if, of course, the market is stable as of today, and we do expect an EBT margin of 3%, again, of course, based on that the market stay on the economic performance they have today. And definitely, we are predicting around 3%, and this is without structural measures we might take in the second half of the year.

Yes, finally, long-term view, and there has been nothing changed. The only point I would like to make here in the long-term view, where we talk about 3% to 5% growth in average, where we talk about 6% to 8% EBT margin and where we are talking about the capital -- working capital of around 22% to 24%. We need further measures that we are getting in the direction of 6% to 8% for profitability. We are in the preparation of those and making detailed plans because we believe it doesn't make sense to come up with, let me say, general statements. We want to have plans in place, which are specific, which are clear, which are executable. And you are aware of this needs to be then even talked through to the internal -- has to go through the internal procedures that we get possibility to execute them.

This will happen within the next -- I mean, it's in full preparation, and we are coming back in fall and give you details on that. So again, we stick with our long-term targets. And with that, we are through the presentation. Thank you. And now, we are expecting your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question we got is from -- coming from Joerg-Andre Finke from HSBC.

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [2]

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Maybe take them one after one. The first one would be regarding your new margin guidance. And referring to Slide 14, the bridge in terms of former to current guidance. If I look through your statements, you mentioned that the LCS business should recover sequentially in the second half. We -- you just argued that the PET utilization should move up in H2. I think material costs are at least unlikely to go up further in the second half. So what should we read into the fact that H2 margins are probably roughly guided at the same level than H1? Is there anything to add on that bridge with regard to the second half?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [3]

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Well, I would say, when you look to the overall guidance for 3%, I mean, we are still taking the hit in July and August in terms of capacity utilization. It's getting better, but it's not where it should be, so I would expect a pretty low Q3. And of course, the biggest point would be then a good Q4. That's what we see. And in terms of LCS, we are recovering slightly in terms of order intake. I don't think we can really catch up, this will be certainly not possible. And of course, then the question is, in case we're picking up in order intake, can we really transfer that into revenue? So that's the biggest question. But the overall assumption you had is okay.

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [4]

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Okay. My second question is more on the pricing side. I mean, first of all, you had a pricing chart in your Q1 presentation with regard to the quarterly pricing, where there was a sequential uptick in Q4 and Q1. You haven't provided an updated one in this presentation, so maybe you can talk about sequential development of pricing. And that -- a related question. Generally, do you think you had some pricing issues in larger projects in terms of mispricing?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [5]

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Okay. First of all, and that's a little bit of problem because I have been not in the Q1 call. I would like to explain quite briefly how we do on pricing. I mean, pricing is not something we touch, let me say, every 3 months. This is something that, in the meantime, we have a pricing director. And this pricing director is evaluating, let me say, the possibilities in a period we have. So this is something very important. And you won't see that, let me say, we are increasing prices by 4% or something like that. We are looking more category-specific. Can we do something in a category? Would the market allows for that? So I would say we are getting step-by-step forward on that. The steps are not big, but it's going in the direction. Hopefully, that answers your question. And I have to look through all our charts a little bit better. I reflected that well. So we are working really every day on that, that we are doing the right things and trying to utilize margins where possible.

To the point of the, let me say, mega projects and pricing of those. I mean, one of the points which were important for us, that major projects are getting not a specific or better pricing than in the past because customer expectation is once you are getting all -- or you get a very big one, the appetite is very high, and you might then be undisciplined because of the size and magnitude of the order to take it. This is completely gone. One of the points we have today is that we are staying firm on the big projects. And when I said we have lost quite a significant one, so maybe I can say we have lost one of the biggest orders out in Q2. I don't know whether it was end of Q1, but out in Q2 or beginning of Q2, which was a EUR 100 million-plus order, which went to our French friends because we have been really firm on the pricing there, just to make not the mistake that having then capacities maybe fully booked. In hindsight, you might think sometimes different, but we wanted really to make the statement we stay there, and we have a price, and this is the price, and not overdoing it.

So this, I can give you as a feedback. We are extremely disciplined on that. And I would say mispricing, you don't hear in the future as an argument that we have failed in terms of profitability.

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [6]

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Okay. Very clear. The third question is on Hungary, and apologies again, referring to a chart from the first quarter, where there was a sort of a monthly cost and profit contribution chart, which indicated, I think, that there should be a positive contribution from H2 onwards, while I think you said in your releases that this will be a margin contributor from 2020. So just wondering whether everything's on track or whether that implies that this one (inaudible) expectations?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [7]

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Yes, I got that -- I do get this question many times, where is Hungary? I would say, and a very honest answer, we are in the peak of the troubles to get that plant up. And I would say even in case we would have opened up that plant or started that plant on the other side of the street, we would be in the same trouble because we are introducing for the first time in a larger magnitude, SAP HANA S4. This will be some of the blueprints then for the later-on change in the overall company. We have 300 new people on board, and we are shifting right now.

So I would say, we are, in terms of timing, on track. Is it going flawlessly? No, not at all. I would say, we are on the peak on the troubles, but I would say this is something which we expected. I don't know or I can't say how much delay it will be. At the moment, I would assume 4 weeks, 6 weeks to the current time schedule. I would say, maybe we see first impacts by the end of the year. And I would say, without being aware of -- sorry, but I'm being so straightforward of the discussions we had. I would anticipate that, really, in Q1 next year, really first positive impacts will come. Why? Because we still have quite a number of Germans from here in Hungary, and I believe we need them to start up the plant, in particular, the SAP pace. It's less on the product pace, but on getting SAP up and running. So when I see that from today, it will be Q1.

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [8]

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Okay. And my last question is basically, did you have any specific discussions or feedback with the family already also with regard to structural measures? Or is that at very, very early stage still?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [9]

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Sure, we have that, but we had that, let me say, all over the year. So I would say that there's, of course, a more intense discussion about that. But I wouldn't say this is something where I believe that things would go faster or slower. I mean the family, like all the other shareholders of Krones, is expecting clear measures to get things corrected, and there is no deviation from any other investor or shareholder I have seen.

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Operator [10]

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Mr. Sebastian Growe from Commerzbank.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [11]

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I would also like to have it as Joerg-Andre had it, one by one. So let's start with the CFO, if I may. Is it really, the separation of the 2 sides, mostly a function really of missing the guidance? Or can you also eventually shed some light if there has been different views on strategy, different views on the pace of eventually structural measures, et cetera? If you could just elaborate on this point.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [12]

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Mr. Growe, I'm not going into details there because we have been quite clear, together with the Supervisory Board, that we do not talk about why Michael Andersen has left the company. I mean in a situation like we are, it's a difficult situation. That's, of course, clear. And I would say that has brought everybody in our, let me say, leadership community to deep thoughts. That's usual in those times, but we do not certainly comment on specific items in regard to Michael Andersen. Sorry for that. That was the agreement we have made yesterday.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [13]

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Okay. Fair enough. Can we talk then about the succession plan? It's rather lagging internal, external solutions. If you could also be so kind to give us some sort of ideas around what the, say, profile should be. Is it mandatory that it's a food and beverage manager? Has it -- or is there a need to have it a sort of public company rather than a private company? If you could just give us some -- a bit of a sketch on really what the perfect candidate would bring to the table, that would be much appreciated.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [14]

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Yes. I mean, let me say then that actually I would repeat a profile of a good CFO. You are aware of -- I mean, we are all looking for good CFOs. So I would say we are not yet in a stage that we are able to talk about the profile somebody should have. What -- where we are in is, what are the next steps and how can we get in a timely adequate manner, let me say, a successor in place and, of course, having experience, let me say, in managing the performance of the company of a magnitude of Krones, number one.

And second, of course, having experience with capital markets because we believe this is of the essence that there is somebody with some experience into that. These are the 2 major points for us. And of course, maybe number three that he has international background in the sense of -- or he/she, I have to really emphasize that, he/she should have been working in an environment of having multinational entities around the world and getting performance out of them. I would say that's roughly the profile without being too specific. But in particular, managing performance is, I would say, on the top. And second, it's understanding of, let me say, the needs of the capital markets and, of course, of what you need to know that you can charge where Krones is going.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [15]

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Okay. That's appreciated. And if I can, let me come back to more the operational part of the whole discussion here, to the PET to start with. You said that, obviously, there were some pushouts from customers, and now you're expecting better utilization in the second half of the year. I would have expected eventually any compensation payment or so from your customers. So is this not foreseen in the contract? Can you just elaborate?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [16]

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Yes, it's really not foreseen in the contract, actually. We are talking about that to the customers at the moment because the contracts have usually a cancellation fee. In case you are stepping really completely out of the contract, then you have really to pay money. What we didn't have before is that, usually, customers are fighting for getting the production slots. But what we never had before, that the customer was really jumping out of a production slot saying that, "Hey, wait a minute, this is something I don't want to start right now. But I might start it in 3 months," is what they have done right now. But we have not that contractually settled because we never had the case. But now we are talking, of course, for some compensation. But I would say contracts are usually, on both sides, binding. So I do not expect that this is really going to happen that we have larger compensation on that. I hope that answers your question, Mr. Growe.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [17]

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Yes, it does. Yes. And then so I think it goes without saying that you will strive for implementing that for future contracts, I hope.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [18]

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Absolutely.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [19]

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Then one additional question on PET, and then I would have a one-off question on the order side of things. Can you just give us some idea, at least, what the gross margin data roughly is, if we talk about the new equipment business, PET versus the rest, if I may put it so simplistically?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [20]

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Gross margins are usually 2% to 3% better than, let me say, with, let me say, the other equipment, just out of my mind. And one of the reasons is that the installation and commissioning of a PET line is usually easier than on a glass line. That's the reason why we can manage that better. And of course, let me say, the blow-molding machine is most probably our best modularized machine which we have. And it's -- I shouldn't say that, but the easiest machine we have in terms of managing the material flow and get the machine assembled.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [21]

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Okay. Very clear. And then last one on the orders. And you made the point that obviously you let some important big orders, like the EUR 100 million-plus order in quarter 1 or quarter 2, go. For how long can you turn off any such potential orders? I guess there must be a tipping point. Is there some certain point of time where the volume hit is more painful than giving in on price? I know it's obviously a delicate question. But given where you are, I think I have to ask the question, sorry.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [22]

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Yes, sure. I mean that's a very good question. And of course, it's all the time a question of balance. But again, even there -- even in this quite difficult time at the end of Q1 through Q2, we have been pretty close to the governance which we have given ourselves to say, okay, we need even to step back from some of the orders in case things are getting too bad. And I mean we told that -- even Mike Andersen, Mike had told you that in all the conference calls. We are prepared to take smaller hits, and I have to definitely say smaller ones, in the order intake just to manage increase of pricing. Now this was a quite big one, and it did help us a lot in Q2 in case we would have had this order.

Looking now to the magnitude of what had happened, I mean that had -- could have helped a lot, no question about it. But you can't see that all the time before. And of course, in hindsight, I would say I don't know when I -- how we would have reacted, knowing all of that today, how we would have reacted at that point. On the other side, in case we are not strict on pricing, we won't get in the right direction, that is the clear message. And I repeat that every single day, pricing is the best thing to get forward on profitability. Hopefully, that answers your question, Mr. Growe.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [23]

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It does. It does.

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Operator [24]

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Mr. Sven Weier from UBS.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [25]

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First of all, still on what happened in Q2, I'm still a bit puzzled about all the simultaneous things that happened with the sudden loss of momentum on the services side, then the PET projects getting on hold. So I was just wondering if you could give us some more color on that. What exactly triggered that? And also on the PET side, if there's been one single customer that's having several manufacturing lines, because this plastic dancing that has been going on for a while, so that's not entirely new. So that will be the first one.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [26]

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Yes. First of all, I mean we have indeed a couple of things overlapping. And I would like to start maybe with another point. Of course, we had very ambitious planning. And I mean when we came up last year with the planning, it was really a challenging one. And as I've said many times, material costs were playing an important role into that, which -- where we didn't get to the point where we should be. And then it was overlaying by the 2 facts that we have, let me say, a drop-down in -- or let me say, not achieved the plan in our life cycle business, so that's one significant part. And then, of course, we had that underutilization in PET. And this is certainly -- maybe I wrong interpreted. When I said there were orders going out of production which we had already in hand, that's a proportion of it. But the overall PET uncertainty in the market was by far the biggest driver. So we even didn't receive the orders which we needed, so that was the other point.

We compensated that with other orders. That's the reason why you don't see that in order intake. However, with the downside, different product mix. We have more OEM equipment into that with no gross -- or it's lower gross margin than we have own machines. So it's indeed an overlap of a lot of things. However, I have really to admit even structural things, if you look to the personnel cost we have overall and, of course, the overall material cost observation, this has not developed in the right direction. And this is something we need to work extremely hard on it because the PET discussion we don't have under control. I mean, we have to reflect that in MRO, we can maintain, repair and operate. Our customers have cut, in general, budgets because they are, to some extent, in the same situation than we are, that they're saving money wherever. And in particular, the big key accounts, they are driving that to a very, very far end.

So I would say that's 2 long-term things we have to think of: MRO, how this gets develops; and how the PET discussion will continue. And PET, I said it earlier, this is not a short-term point. This will be a long -- a longer-term point how we see that. We are doing good in the second half of the year on that, but this discussion is, by far, not over. Hopefully, that gives you an answer to the questions you had.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [27]

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Yes. It's -- but I'm still a bit puzzled, why the sudden line change of customers. What was different in Q2 from Q1, right? Because, as I said, this plastic discussion has been going on for a while, been talking about that. And now you see all of a sudden a kind of a big bang also on the services side, which you would see normally more resilient. Also, in the material prices. You see other companies now talking about softening, but for you guys, it's still high. So those -- I understand that the cause of the profit shortfall, what has been driving it, but what has been the underlying reason for the sudden change? That is not entirely clear to me itself.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [28]

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Maybe first point, what I would like, to turn it the other way around, that we are now, let me say, on a better side on PET in the second half. Let me say, it's not something where, I would say, the PET issue is over. I mean I would call it lucky that we are good on that. But I would say the PET discussion has taken momentum over the last couple of months, which is -- I mean you see that in all the press releases around the world. This is the general plastic discussion, of course. And I would say this is still an issue long-term for us where we have to think through. And I would say in some countries, we had really strong initiatives, even from the government, that customers have been approached in the sense of what are you doing for recycling and recollecting the whole stuff. The magnitude, which was for our customers as well, is surprising. I mean our biggest PET customer, for example, he had to show up with the administration in the U.S., in several states, to make clear what they're going to do with collection of PET, which they have not [there] in their hands by far. But this is the way it goes. And I would say we are doing better in the second half of the year, but this is not an issue which we can take aside and say, "Okay, that was a short-term impact." That's something we have to talk about in the long term.

And I know this is something which is bothering the entire investors, how this continues, but we need to find answers. The community of the beverage industry in general and, of course, what Krones is doing in that regard. But this is the first point I want to say. And of course, I would say then the issue that the -- let me say, and I come back to that all the time, material cost cuttings, which have delivered over the years a significant impact to maintain profitability. Material cost cuttings are not working the same way.

What we are doing at the moment is, and most probably we have said that in many calls, that we are looking for more dual sourcing, which is extremely difficult in the sense of we are using components in our machines which would increase complexity a bit because then we have 2 different components. And, of course, the best-cost countries [all think this as well] is a significant one which we need to do in order to get in the right direction there. So these are the 2 fundamental things which are certainly not where they should be. But again, it's more on the cost side of Krones rather than on the market side, that I would say.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [29]

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Okay. And then the second and last question I had was just in terms -- I understand you can't speak about the measures you are taking specifically. Understood. So you give that in fall. But when I look into the margin trajectory then to what's your medium-term goal, should we already see a very meaningful improvement in 2020? Are you planning for the measures to be so aligned with that? Or should we have a more back-end loaded improvement?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [30]

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Very simple answer, back-end loaded improvement. Why? Because this needs to go step by step. And for us, it's a very important step that the plant in Hungary works because we can't put more on that stream before we know it really works and has proven that this is the way to go. So this is one of the things. But on the other side, the biggest point we are working again is material cost. And this has step-by-step impact. There would be not one very big hit on it. That's going step by step. And of course, once we have changed some, let me say, design and machine issues, that will allow us for dual sourcing and for better -- best-cost country utilization. This is going step by step. And of course, we have to do something. We have to work on personnel costs, which is as well a very important factor for us. And don't forget, we need to understand quite well the -- our life cycle business, that this delivers good margins, and how we can get more share out of the market even as the big key accounts might reduce their MRO packages.

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Operator [31]

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Daniel Gleim from MainFirst.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [32]

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The first one would be on the restructuring plans. Do you plan to release those with the Q3 numbers?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [33]

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So I'll say it again, if we'll release those with the Q3 numbers. Let me say, we have said already in our Capital Markets Day that we are going to do that with the Q3 announcement. At the moment, I would say -- I say to fall. It's not by the end of the year, that's the plan. It's earlier. But since we are here not fully alone in terms of what can we then talk to the public, I would say it's in fall. And I don't -- through the statement, it will be with the Q3 announcement. So it will be fall, but we give you definitely the details. That's what we have promised, and we are going to do that. Maybe that will be then a separate session.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [34]

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Okay. I mean we're seeing a slowdown on your service side, which you explained just the economic uncertainty and customers keeping their hands on their cash. You haven't commented so much on the new equipment side. If we leave the PET stretch blow molders aside for a moment, what are your observations on the rest of the new equipment markets? I mean is there some kind of slowdown or hesitation [feel-able] from the customer side given that the economic momentum is a little bit harder to guess for the next 2 years?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [35]

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Yes. I would differentiate from the market. I would say in Europe, we see that, yes, definitely. So -- and if you look to the order intake by region, I would say Europe is the region where we actually feel the uncertainty of our customers on the highest level. On the other side, we have then received orders for returnable-glass lines in Europe because of this trend towards returnable-glass bottles. But Europe is something where, I would say, we had a slight concern on order intake. And the second one, I said it earlier, was China. We don't see that at the moment. So the order activities have been okay, and we haven't seen that. But since other industries have already, let me say, a strong indication that the order intake in China is not working as, let me say, the last 2 years, this is some of the headaches we have.

All the other places, let me say, North America, South America and Asia and Africa and Middle East are, let me say, in the magnitude of what we have out in orders and where we can anticipate order intake as quite active. In particular, Asia has done very well over the last 3 months, for example.

Now -- and I would say the hardest projection, of course, but the next 3 months, I would say the order intake level, what we could get, and I definitely emphasize could get, looks not bad.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [36]

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And the observation in Europe, is this already starting from Q1? Or is this more easing in...

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [37]

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No, no. This is starting already from Q1. So that's the whole year already.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [38]

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So -- but we don't see those in revenues yet, yes? So this is something that's maybe to happen in the third or fourth quarter then?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [39]

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In the revenues, you don't see that. Why? Because we had a strong order intake last year. And this is what we are -- at the moment, we are on the peak of installation and commissioning from those lines we have sold last year, even here in Europe, and you might see that later on in a drop in revenue from Europe.

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Operator [40]

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(Operator Instructions) Mr. Joerg-Andre Finke from HSBC.

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [41]

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I just have 2 smaller follow-up questions. First one is basically on what you commented on in terms of the order intake situation. If you look at your order backlog as it stands today and compare gross margins in your order backlog with its gross margins 1 year ago, what would you say is the rough delta?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [42]

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That's a good question. I would say it's quite balanced. Of course, margins have slightly improved. Now it's depending on when today -- those orders going into production, when they give us momentum because maybe that's a little bit a critical thing that some of the good margins are in a later stage in terms of delivery. But all in all, I would say it's quite balanced and slightly improved compared to a year before because we have seen price increases and this improves gross margins to a certain extent. Again, not to the magnitude we really would need to be on the right track, but I would say it's better.

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [43]

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Okay. And the second question is just a follow-up on PET. If you look at PET together with the related labeling revenues, what is approximately the revenue magnitude we're talking about?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [44]

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You mean what we are carrying with the PET, if we get a blow molder, how much would it be?

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [45]

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I mean, generally in terms of -- is it a low triple-digit euro million amount that is PET plus related labeling machines? Or how can we look at it?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [46]

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Got it. That's a good question. What I can say, I mean -- let me put it the other way around. We have been low in labeling by around 25% in capacity utilization, 25% to 30%, because of that. I mean even if you have a glass bottling line, you have a label with that. If you have a canning line, and we had quite big orders from canning lines who don't have a labeling machine. So that's the magnitude. I would say PET, if you put it on 100, and you put labeling on top, it's maybe 150, something like that. Maybe it's 140. But to be honest, I have not really calculated into that. I mean the best view is if you got a glass line instead of a PET line, it carries a labeler which is, let me say, a little bit more expensive than maybe a PET labeler. And if you have a canning line, of course, you don't have a labeler, which is then a problem. Does that answer your question?

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [47]

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Yes. I think that's helpful.

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Operator [48]

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And Mr. Gordon Schönell from Bankhaus Lampe KG.

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Gordon Schönell, Bankhaus Lampe KG, Research Division - Analyst [49]

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It's a question on your material cost. So you have, obviously, not the power to pass higher material costs through. And you have, obviously, also not price escalation clauses in your contracts. So what happens if prices fall off? Let's say, steel and electronic components would decline significantly in the next quarter, would you really benefit? Or would you have then to pass these lower component prices through to your customers that, at the end, you wouldn't get anything?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [50]

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A very good question, Mr. Schönell. I would answer that this way. Usually, we order the equipment for a bottling line once we have received the order. So we have a pretty good match between the timing of once we receive an order compared to once we are going to execute and buy the equipment. Of course, on steel, we have long-term contracts. If this goes into, let me say, significantly in the other direction, I would say we have clauses in those contracts where we can react to that and have then the better pricing.

Where the problem starts, once we have a bottling line received by this year and we would deliver it by next year. This would be, indeed, if prices would rise, significantly a problem. But I would say this is the significant lower amounts of orders we have on hand. And I would say the impact on, let me say, better or worse cost on material wouldn't be impacting, let me say, in the connection of executing an order versus having bought the raw materials or the materials for an equipment. So I would see that not on an upside, more on a downside point. So this would have little impact. Again, since we are ordering, we are executing only once we have the orders.

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Gordon Schönell, Bankhaus Lampe KG, Research Division - Analyst [51]

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Okay. So if I would observe that prices for electronics, steel are coming down, I shouldn't [flag it as negative effect], this is positive for you.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [52]

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Yes, that would really help. Yes, definitely.

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Operator [53]

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So Mr. Peter Rothenaicher from Baader Bank AG.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [54]

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I'm still struggling with the aspect that in the third quarter, suddenly EUR 50 million, EUR 60 million results are missing, not least, obviously, as the performance of KHS was not so bad. They're talking about a total positive business development in the first half of the year. So it's the first remark. Secondly, in the third quarter, do you see here some chance to go away from the underutilization of capacities? Or typically, I thought you have the opportunity, as production is more concentrated near Regensburg, that you can shift employees to other areas which are better utilized and to get that -- a better personnel-cost ratio then here in the third quarter?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [55]

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Yes. First of all, we are getting more production hours in, in Q3. That's clear. And if you -- I look only to the machine, new machine business, I would say we are quite better in Q3 than in Q2. The bad thing is that the life cycle business is, let me say, all over the years in Q3 on the lowest level. So this is the point why we definitely do not see a significant improvement in Q2 because new machine business will be better because we have done exactly what you said. We have utilized capacities much better in Q3 than in Q2. And that starts from July. We are not yet on plan on the 100% capacity utilization yet in July, so we are still low but higher than in June, significantly higher. We are back on track with overutilization most probably in the first time in September. So August is medium. But again, the bad thing is that life cycle business is, in Q3, on the lowest level. And this, as a match, gives us very little momentum in Q3. Q4, both things are going in the right direction. That's the reason why we predict most of the profitability coming from Q4. And both things, life cycle and new machine business, is going in the right direction in Q4.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [56]

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And how would you say that your competitors, obviously, has had not these problems?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [57]

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Yes. Well, I can understand. First of all, Sidel, I would say it didn't have this -- I spoke about this big order before, this would have been much better. And for KHS, I can say very little because I have only access to, let me say, the published figures. There is no -- very limited conversation on that level. So I would assume if they have structured that better, and this was even the feedback that we had, that they have a quite constant capacity utilization compared to us.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [58]

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And in terms of cost of materials, you mentioned it as a reason for this slumping in earnings, that your expectations and intentions regarding a better situation in material costs had a delay. So are the first positive signs in the third quarter, in the fourth quarter, that you get some more success? Because we had the Analyst Meeting in April, and what has changed?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [59]

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Let me put it on 2 lakes here. Lake number one is those things where we can negotiate and where we can act quickly in terms of talking to a supplier, get things done and maybe get better pricing, which has a short-term impact. But those measures are -- let me say, have been utilized over the years significantly. So I would call the impact out of that lower. Then the second point, and this we said even in April, we need to change design in order to get the ability in to qualify maybe a second sourced supplier, which is a bigger proportion. And of course, we need to qualify suppliers which are, let me say, in best-cost countries. And both of those things are taking time.

And I would say I'm not sure whether the impact of those measures are really giving significant hits to Q4. They are delivering results. But at the moment, they are, let me say, compensating the -- more the personnel costs on the other side, that's the point. And I wouldn't say we see significant impact in Q4 out of that. We are working on it because it is a fundamental change we are doing at the moment. And I would say for 2020, we see results of that, but I wouldn't say for Q4. Let me say, not on a big -- you see -- we will see them, but not in a bigger magnitude.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [60]

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Okay.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [61]

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It's an honest answer. And I know it's not what you expect. But this is where we are. And this is one of our problems, absolutely clear.

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Operator [62]

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Mr. [Jas Kotelwitz] from Bankhaus Metzler.

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Unidentified Analyst, [63]

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Yes, 2 quick ones left. The first one is on structural measures. Could you give an indication what -- just talking about the other way around, are those structural measures mainly pertaining to the PET business? Or is it more a general improvement of your cost?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [64]

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No, no. This is not -- I wouldn't say not at all related to PET, but the measures we are taking is measures, let me say, through all the areas of the company, all product divisions. This is not related to, let me say, one specific point because, I would say, we have now moved -- we are going to move our conveying technology to Hungary. This was a big step. Now I would say it needs to be targeted for individual areas that we are getting more performance out of the company. And this is not an overall measure to, let me say -- that we are coming up and saying, overall, we are going to release people. It's really going into processes, into performance, making a clear plan for those areas, and say, okay, this is the way we go. It might have a point in PET because we need to see how capacities are, that we get more flexibility into that, that we get not a hit next time in the same magnitude as we have this time. But this is the way we are going to structure it. It will be precise. It will be not general. And this is the reason why it takes time that we really can present that.

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Unidentified Analyst, [65]

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Okay. Second question is regarding PET from a structural perspective, or the trends you expect. The first of which, is it a problem on your side, I mean, technological? Technology needs to change or something you need to adapt to comply with the new demand for plastics? Or is it more a problem of your customer who needs to be capable of complying with all those demands and that might result in a longer hesitation? And finally, if there is a transformation, what do you think -- to what extent do you think it could be transferable?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [66]

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First of all, about our technology, I would say, in general, we are -- our blow-molding machines are 100% competitive and I would say on the leading edge. We have one very slight disadvantage, I have to admit, we don't have coating. This is an internal coating for a PET bottle to improve barrier conditions that CO2 is not going out. And this is taken or used in [emerging] markets where you have very small bottles, let me say, around 200 milliliter.

We have had this technology for a long time onboard with very, very bad profitability, and then we decided maybe 8 -- 7, 8 years to take it out. Now it took momentum for, in particular for KHS and, to some extent, for Sidel. So I would say, [Jas], that this might be a slight point. Maybe -- and I don't know really, maybe KHS has had some good function that, in Asia, that could really be a point. So I have to admit that. However, we are working on a solution, which we -- I would say, we can talk about next year. So we are catching up here. So I wouldn't say -- and I wouldn't, let me say, excuse on the technology point. It has nothing to do that we were running short on the technology, I would say, even if KHS has the slight advantage. This was certainly not the case. I would say the longer point of view, has PET a structural problem? I would say, yes, in case the industry is not doing anything. But I would say -- I mean we are doing recycling plants, and this is a good indication how things are going.

Our recycling technology plants have been a very low profile over the years, not because the technology is not good, it was just because of recollection issues. You didn't get the material flow from the market back, and we see a so strong push in that market for recycling technology. And this is bottle-to-bottle recycling. It's not down-trading PET bottle to, let me say, [a shred]. It's really that you get recycled PET material at the end of the day. We see a very strong push on that. However, we will be not the biggest participant into that because we are small on that. But I would say, once the recollection problem is improved significantly, I would say the PET issue becomes smaller. But I would say long term, the discussion on PET will remain because mankind is afraid of having plastic in the ocean with all the consequences. And I would not believe that this discussion is going away. This is something we have to think about how this continues, yes, definitely.

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Unidentified Analyst, [67]

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Okay. But currently, is it more the hesitance of your customers due to the fact that they need to solve the recollection problem?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [68]

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Absolutely, yes.

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Operator [69]

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There seems to be no further questions at this time.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [70]

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Okay. Thank you very much, ladies and gentlemen, for joining, taking the time and giving us the possibility to explain where we are. Thanks a lot. Bye.

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Operator [71]

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We want to thank all the participants of this conference. Have a nice day. Goodbye.