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Edited Transcript of KRN.DE earnings conference call or presentation 30-Oct-19 1:00pm GMT

Q3 2019 Krones AG Earnings Call

Neutraubling Nov 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Krones AG earnings conference call or presentation Wednesday, October 30, 2019 at 1:00:00pm 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

* Olaf Scholz

Krones AG - Head of IR

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Conference Call Participants

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* Daniel Gleim

MainFirst Bank AG, Research Division - Director

* 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 customers' request, this conference will be recorded. May I 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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Yes. Good afternoon, ladies and gentlemen. A warm welcome to the Q3 conference call of Krones. Pleasure to be here today. Before I start with the presentation, one short remark about our new CFO, Norbert Broger, who is joining Krones on the 1st of January 2020. And very briefly, I want to give you a little bit background about Norbert Broger just that you can justify who is coming on Board, if you have not read already.

First of all Norbert Broger worked the last 7 years with the Schuler AG. Schuler AG was still SDAX listed when he joined. Later Schuler was bought by the Andritz Group and Norbert Broger operated there in a very challenging environment for the automotive industry.

Before this engagement Norbert Broger was with Krones and was Head of Controlling. And this is something which allows him without any warm-up to start immediately in his new job and helping us to get profitability in the right direction.

So far to Norbert Broger and I am coming to our presentation. Presentation will have roughly 14 slides, so it should not be too much. We would like to start first with the key takeaways so that you have an overview. First of all, we are confirming our full year guidance for 2019 with a sales growth of around 3% and an EBT margin of around 3%. Our business is on track after 9 months, sales is up by 7%, and the order intake is slightly above last year.

Profit improvement measures are in place. First, measures are implemented, and we are in the execution of the first structural measures. These are the key takeaways. And of course, we go now in the details that you have an overview.

On this slide, you see on the 2 left-hand columns, the order intake, which is roughly EUR 2.9 billion, which is up by 0.6%. And on the right-hand side, you see in the boxes and the columns, you see the sales, which is up by 7%, as already indicated, up to 2-point, roughly EUR 9 billion.

With this strong Q3, which we had, we are confirming our top line growth of 3% for the full year.

If you look of the 9 months sales and revenue we have, it's up by 7%, I would say. Important here to remark is that the organic growth is about 3%. The rest comes out of M&A. The order intake is slightly up compared to last year, only slightly, but important to note here that we see our markets still relatively stable and all despite the economic and political uncertainties we have.

What we see in addition is that the PET discussion, which hit us quite significantly in Q2, comes more to, let me say, a more sustainable discussion and a more rational discussion. So we see customers less hesitating on PET. So the order intake in Q3 was in terms of the product mix better than Q2.

However, I have to say, of course, the PET discussion is not going away completely. So this will still remain. And again, it's more rational.

If we look to the geographical split of the order intake and the sales, I would say there are no significant surprises. We have some ups and downs, but I would believe that until the end of the year, we see here some quite balanced markets, and we will see it on the same levels you are used to.

For order intake, we expect for the rest of the year a comparable level as of 2018. So a very small growth, most probably. And if you look to the pipeline we have, we are very, let me say, careful in justifying that pipeline on the orders, there's volume out, but since we are reflecting both volume and pricing, we have to balance that and we need to see how things are working out.

We predict here, again, Q4 in order intake on a comparable level to 2018, with some upside potential, but this, we want to be more clear if we are going for the rest of the year.

If you see for sales, we are looking for a strong Q4 with around EUR 1.1 billion in sales that we can achieve the 3% top line growth. Again, the major takeaway here is that we are confirming the growth of 3% and have a quite strong Q4 in terms of sales and revenue. So far to order intake and sales.

Now to the profitability. First, the good news, we confirm to reach the EBT margin for the full year of 3%. And as already -- basis for that is a strong Q4 in revenue, I can say capacities at the moment are almost fully booked. We still need some orders, but I would say this is in a magnitude that we really can predict that this will go okay. And we see, of course, that some of our first measures are already playing into profitability, just slightly, not big, but we see the measures becoming materialized in the P&L.

However, and I have to say that very straightforward and clear, the EBT margin of 3% can't be satisfying at all. That's absolutely clear, and we need to work on that.

If we see what was -- just to repeat that, and we said that in Q2 -- after Q2 and in several other discussions what were the reasons for the significant drop from a predicted 6% EBT margin down to a 3% EBT margin, number one, it was the PET to date in Q1 with low order intake in terms of, we couldn't convert the orders we had into production, and we set a low utilization of our production capabilities.

Second, material savings have been not on the level of the previous years. And of course, the price development in the market was positive, but not on the level expected. I would say if I would repeat that these are the major factors where we are in terms of our profitability.

If you look to the absolute figures, we have after 9 months an EBT margin of 2.1%, with EUR 61.4 million. EBITDA is, of course, higher. We have a margin of 5.7% EBITDA margin and EUR 164 million EBITDA in absolute figures.

We then come to the next page. You see here, again, repeated on the left-hand side, in the dark blue column boxes, where we had our problems. This was number one, the public debate on PET, then the second one, the price pressure and, of course, then the cost structure.

We repeated below the dark blue boxes the reasons for it. And I want to run you just briefly through it that you have an idea of what was going on and how we see things. First of all, investments and decisions have been postponed due to the PET debate, I said it, and we call it, it's the emotionalized discussion in the markets. We have this discussion in any market, I have to say. I would say the most significant one in Europe that still remains. But in all the other markets, I would say it's more a debate on how can PET be used in more environmental friendly manner and what can we do in the mid and long term that it can be used and the consumer will accept it.

We have compensated for that issue because we have around 60% of our volume being driven by PET, which is, at the moment, down to around 50%. While we had in the Q2, is down to 40% PET driven, but we compensated that with a stronger focus in glass and can and for those of you who are not following us for long-term already, we are coming from glass and can and we had a 15 years question, whether we can do PET? Now the question turned around, we are asked whether we can do can and glass and we can answer, yes, we can do that. And we are more focusing on that portfolio, of course.

This postponement in decisions with PET, of course, then led to the lower utilization of our blowmoulding and labeling areas which was a problem for us.

In addition to that, which we have not mentioned and which we will touch later on with our aftermarket business, we were even down in one category of the aftermarket business, and we are still down. This is most probably more long-term or midterm issue, I reflect to that later on. Here, we have written that we are supplying for those categories of our aftermarket business more out of the -- of China for APAC and China to be more cost attractive, but it's more a question of innovations, which we have to do there. So I'm reflecting to that later on a bit more.

The second topic was the price pressure. I mean, for us, pricing developed, and I come to that more in more detail later on. Pricing developed okay, but below expectations, and even that was one of the parts which we're missing 4% to 6% EBT margin. I mean, for us, we have -- pricing is the everyday discussion we have, it has a very strong focus, and we have a pricing transformation program established with own organization, just having a look on how can pricing be applied to the market, how can pricing be done for our products? And how can that be organized in a much better way in the organizations to keep the focus on it.

And then, of course, we had the biggest issue, the cost structure was the #3 issue, material cost savings, not on the levels of the previous years, I can say here, and this is something which is quite important for 2020. We have -- in the meantime, we negotiated with all major suppliers, the contracts and the pricing for it. So those conditions are already fixed in, and this is not, let me say, speculation what we have already, let me say, as conditions fixed for next year. This is something which is coming with the quantities we are ordering for the P&L for next year.

Then one of the other points where that planned production we had to Hungary to the new plant is later than expected. So this was delayed. I'm referring to that in more detail later on. I can say production started already in Hungary on a low level. I give you detailed figures later on. And is the other important point, which is important for material cost, is that we are doubling the sourcing in best-cost country by the end of 2019 already.

And this will go on for 2020 as well. But I would say that was quite an achievement that we could shift so much of the procurement volume to best cost countries. If we look to that, this helps us, of course, to confirm our EBT margin of 3% for the rest of the year and for the full year of 2019. And of course, the points indicated here will have as well positive effects in 2020.

I'm coming to the -- most probably, most important slide in the presentation because this is the summary of our midterm measures. We have established, and we are going to establish. And I would like to run you through how you can read that. If you look to the 3 other dark blue boxes, there you see structure, portfolio and growth. These are the three categories, and we are going through all those categories in the following slides. These are the three categories, what we have put our measures into.

I will come back to that in the next couple of sentences. Below that, you see that we have indicated the financial stability and efficiency is the basis for it, and this is mainly the free cash flow. I mean, in order to get that in the right direction we need to have a significantly improved free cash flow. And I refer to that as well. Then you see on the next 3 boxes, the impact, you see that on the left-hand side and the gray box, you see the impact for the EBT for 2020 and 2021, out of the measures we have applied in the individual areas. So you can read it this way.

Structure will apply in 2020 with the measured global footprint and headcount for EUR 20 million. And in 2021 for EUR 45 million. The portfolio measures, which is below into the segments, the products and procurement will deliver in 2020, EUR 30 million; in 2021, EUR 20 million. And then on the right-hand side, you see the growth. And we have here underneath pricing. So we do expect for pricing in 2,000 -- for both of the categories, pricing and aftermarket growth, which is quite profitable. We expect in 2020, EUR 20 million; and in 2021, EUR 15 million.

If you add all of that up, this will give a positive momentum on EBT improvement of EUR 140 million. Now the -- next is income, you see on the left-hand side, you see restructuring expenses, we estimate at the moment that we will have restructuring expenses of EUR 60 million to EUR 80 million. Now you can ask, why is that so high? Then I would say, this can -- you can put that in 2 proportions. Number one, you see that in the next slides, is the reduction of 500 full-time employees, where we have an equivalent amount in and the second one is the optimization of our portfolio. I come to that later on, including possible divestments on certain technologies if needed.

And we see that we need restructuring costs of EUR 60 million to EUR 80 million. And if you accumulate that then that you delete the restructuring costs from the positive EBT improvements, then we will have a positive effect of EUR 60 million to EUR 80 million on EBT improvement over 2 years, and it shows that even with the restructuring expenses we have, we have a payback of less than 2 years to compensate for it.

I have to say that the restructuring costs are not included in our 3% guidance. Now you can argue what is the timing of the restructuring costs, we can say, of course, they will come, and we need to figure out and justify once we have achieved further milestones in a more precise definition of the measures, once we can actually put provisions for the restructuring expenses on our P&L. So this is not yet determined, and we can't justify when that exactly will be since we have still to go for those milestones for justification once we have them achieved. So this is how you can read the slide and translate it later on in a calculation.

First of all, free cash flow looks as well, not good. I have to admit. And I give you just a brief feedback why -- where the problems are. First of all, working capital, with working capital there is one downside, which we have actually done, in the material costs compensated. What we did, and this is the biggest proportion of it. When you look to the change in working capital, which is around EUR 180 million this is mainly on the liability side, on trade payables, and interest rate payables, of course, to suppliers, and we have worsened that by EUR 130 million. So they were going down to trade payables by EUR 130 million. And this is just because we need to pay during the year our suppliers in a better manner to get the pricing, okay? And with the pricing, of course, that, of course, that translates then directly in the P&L.

The other gap is then around EUR 30 million from trade receivables, where we were up and EUR 40 million by inventories, which are up. This comes -- traditionally, as always, to the end of the year in a much better ratio, so we will have improvements on working capital, but these are the critical areas here. And our point is for working capital, for us, the most important thing is managing receivables. And this is based on, of course, a contractual government -- governance that we have like sunset clauses, et cetera, in our contracts, but this has as well a very operational focus that we are closing out our installations faster than we are doing today.

The second point is investments. I mean, we had quite strong investments over the last couple of years. And in particular, the last 2 years, and we see with the free cash flow and the cash, which we have a necessity to reduce that. Now this is not only driven by, let me say, having a financial optimization of the free cash flow? No, because we still need investments. And I would say, investments will be for the next 2 years on a level of EUR 60 million roughly without R&D because that comes on top of it because we are not reducing R&D at all. That would be significantly lower than what you have seen last year and this year. And we believe with that we still maintain a very good condition of our operation and of our R&D that we have state of the art focus. And on the other side, we invested significantly in the plant in Hungary. In China, we are building a new factory for system logistics, intralogistics company we have, and this is running all out by the end of the year. Work is finished. And therefore, we believe we have a really, really good set up for the next 2 years where investments can be lower without, let me say, jeopardizing the performance of Krones.

Then one short word about M&A. We have, at the moment, no further bigger M&A transaction plan. Why is that? Because first of all, we have accomplished I would say the setups, which we tried to bring together, number one is, of course, for processing technology that we have a more global setup. And this is for the time being on a level where we say, okay, now we need to harvest on what we have invested over the last 3 to 4 years and get that optimized, with even the view that we are reducing our activities for processing, to some extent, in high-cost countries and utilizing more low-cost countries. And the same is true for intralogistics since we have system logistics acquired, and that we have acquired a company in the U.S., where we are well positioned. We are well positioned with intralogistics in Asia. So we believe basically that -- where we are is quite good for these 2 business units. And number three, one focus was that we get our agents. And with that, the aftermarket business we had with the agents integrated into Krones even that has been done. So I would say this is consolidated around the world, all important agencies we have bought and the setup we have today will enable us to run our sales and service business, I would say, with a really close and dense network around the world. So that's the reason why we say, okay, we are not investing in M&A significantly the next couple of years, but I do not say that we do not do M&A. That's not a statement I'm doing. So if there's something interesting coming, we most probably talk about that.

Now I would like to reflect now actually to the first box on the left-hand side of the previous slide. Well, we first want to talk about where do we put our global footprint and how do we do that? And if you look to that, you see that we are moving around 600,000 production hours to best cost countries. And this is quite a significant amount. As you see, this is 15% of our production hours in Germany. So that's a big move. I mean, we spoke several times about that, that we have invested in Hungary and I'll come to that in more detail. And in China, and this is going to materialize already and will be, of course, the majority of it will be materialized in 2020.

Then we are moving 200,000 engineering hours. So we have already, in the Czech Republic we have a company with right around 180 people doing mainly engineering and IT. We will move 30 engineering to the plant in Hungary that we can do the order processing there. And we have the same in China. And India is our backup for our internal IT. At the moment, we are running there 40 people for IT, which is the global IT of Krones. And in total, this is adding up to 200,000 engineering hours.

The plant in Hungary will be in full operation as far as we can see today as it's postponed by around 3 to 4 months, but will be in full operation by end of Q2 2020. And if you look to the savings we have estimated there it will be savings of around EUR 20 million per year if it's in steady run and steady rate.

The operation in China will save around EUR 2 million per year. Of course, it's much smaller than Hungary, but as well, a significant amount of savings. If you summarize that all up, the workforce in emerging markets has then increased by 60% since 2017, which is quite a big number. And once we are completing what we have on plan, we will have around 35% of our workforce then in emerging markets. I should, by the end, even name here, the new processing technology setups, which we have acquired in the U.S., in China, and in India. Despite an acquisition, which was not profitable in the U.S. We knew from the beginning, but all the rest is working profitable and give us access to the local market with smaller setups with actually okay profitability. I wouldn't say good because that can be really improved. But this gives you an overall view how we are changing our footprint, and this is going to materialize with its majority in 2020.

Now a short look on the plant in Hungary. And we believe that the production hours, it gives you a good overview of where we are. This plant has around 36,000 hours of production, which is manufacturing and assembly per month. And at the moment, we are on a utilization of around 8,000 hours per month. So we are not yet fully there. And this is going step by step. And since we are there not only bringing products from Germany to Hungary, we are implementing there as well for the first time a full-scale template of SAP S/4HANA because Krones is still running on SAP R/3. And in Hungary, we have the full template for a production plan then introduced, which is to be honest, the biggest hurdle we have at the moment.

We have, at the moment, 450 employees hired. We still need a couple of people in 2020 because we have slowed down a bit. So we do expect between 50 and 100 until mid of next year, in addition, that this plant is fully staffed. Out of the 450 employees. We have around 120, 130 at the moment in manufacturing. And we have another 100 here as replacement of temps in Germany in our operation to train them that they have the on-hand training with the products they are doing then later on in Hungary. Again, savings per year will be around EUR 20 million. And we do expect for 2020, a positive impact of the Hungary plant between EUR 8 million and EUR 10 million.

Now let's come to the structural changes we are doing. And if I run through that, you might have not recognized to let me say, the publications we have made where we are really in terms of reducing our headcount here in Germany. If you look to that slide, you see on the left-hand side, own Germany. This means own Krones employees. And you see below temps Germany. We have quite a lot of them. And then you see own rest of the world, which is our Krones employees. And what we have done, we have already reduced own employees in Germany in 2019, which we have not published. Why is that? Because, of course, once we saw that we were not going to achieve our financial targets we started a quite significant program doing that. And this was, in Germany, it's called (foreign language), which is in English, socially acceptable headcount reduction method. So this is actually with severance payments, and we offer that to people. So at the moment, we -- if you look to the numbers, you won't see it exactly because we, at the same moment, we have taken more apprentices on board. But by the end of the year, we expect between minus 180 to 200, the 180 I would look at as being safe, that the headcount of the Krones AG headcount will be down by 180 without the apprentices, which we have on board, which are from a cost level, not so important in terms of the apprentices. So we are going to reduce workforce in Krones AG already between 180 and 200. And the temps we have mentioned because that have been long-term temps in administration, and even those be reduced. So in total, we have a cost effect for next year, which is based on those 250 because they are really then have left board.

In addition, I have to say, we have compensated for the apprentices we have taken on board because that's an obligation we have out of the tariff contracts we have that the apprentices are on board. So actually, the number which we have moved is even bigger than what you see here because that's a net position that we are by the end of the year in AG, 200 people less.

Then you see on the right-hand side, for 2020, the program, we have actually publicly announced, we are going to reduce in Germany further 300 people, headcount, we are reducing another 100 temps in administration functions as well long term. And in the rest of the world, which are then all the other Krones subsidiary around the world, we are going to reduce further 200. So we are ending up on around 600 headcounts being reduced, again, 100 are temps, 500 are our own employees out of the organization. And our point is that we are going to run what we call efficiency of organization that we eliminate redundancies and streamline processes and going to optimize our setup, in particular, between our international setup and the set up in Germany. So all of that will end in a cost savings of EUR 45 million with the reduction of the 600 people. The 200 we are reducing in 2019 will be then, of course, in the P&L for 2020, those 600 of 2020 will be in the P&L 2021.

Then let's come to the next point, the portfolio and I have to say, in this situation, we are, I would say, our point was, we need to review everything in our portfolio in all directions. And I mean, it's no secret that we are earning and processing technology, not too much money, and we can't be satisfied with where we are with the profitability in that segment. And this becomes even worse in case, we look to our brewery activities. So I mean this is a clear indication that we are looking to that. And with all the consequences and with having clearly in mind once we're not getting that in an appropriate time manner in the right direction that we need to bring action in place.

And if I reflect to processing technology offers, initiative is unbundling the processing business fully from AG because we have still some integrated parts that it become a stand-alone business that we have all options for the future. Here, we have to say as well, we do not look for further acquisitions at the moment because we believe that the leverage of the current footprint, in particular, with China, India, and U.S., can be utilized much better, and this is one of the focuses we have. However, clear statement is you get an update on the Capital Markets Day in March 2020, where we are with that, how do we see the time lines, what will be our next measures, and we have a much clearer view on it than we have today.

For our core segment, bottling and packaging technology, we call it optimization of portfolio. One thing I mentioned already that innovate the glass and can product portfolio. We are good there, but we have a couple of things, which we are introducing at the moment into the market, which are helping us to make our position for glass and can bottling lines, but there are further things to come, in particular, in the secondary packaging, where we see a lot of potential and where we see innovations, which should come.

Then, of course, we don't want to step away from PET, which we call Push sustainable plastic packaging. And our point is close the loop from recycling to blowmoulding. We have quite significant activities going on to push our recycling business. Krones has around 15 recycling plants in operation. And our point is to help countries, customers to close the recycling loop that we can recycle PET bottle to bottle, where we have the abilities, and even more important that we have a know-how out of the recycling for the blowmoulding and the preform manufacturing because if you have what we call recycled PET that has a different behavior in a machine rather than a virgin material so to enhance our know-how here.

And then the last point, divest on low potential technologies. We have a very serious look on those technologies we have developed over the years and where we need to look on, do they deliver the right return of investment? If not, we have to put a question mark behind that and would even go to the level that we are going to divest here.

For the rest, intralogistics, life cycle services, no further significant news. The only thing I want to mention here is the lowest one on the lower box is digitalization. I mean, in the meantime, digitalization, we spent quite a lot of money for it. And when I see the return on it, we had to change a couple of things. And what we are doing and looking at here is that we are splitting that actually in 2 parts, to be more clear. One is, of course, implemented digital solutions in our core business, what we call the digital fundamental that we can run machines and life side business in the future on a next level with maybe new business models. And then on the other side, develop and commercialize the stand-alone products, which we have in a much more straightforward way that we make more revenue and, of course, more profitability out of that. So that's the area of the product portfolio optimization. And again, we are reviewing everything in all directions to make sure that the portfolio of Krones is structured in a way that we can reach profitability mid- and long-term on the level we plan.

Now one short message on procurement and material costs, we tried to summarize here, the program we have established. This is already for a year going on. I mean, we recognized already at the end of '18 that material costs are becoming more difficult to manage. And actually that's why we categorized it different, but nothing new for you. One is what we call the basic lever on the left-hand side where it's more or less renegotiations and pricing. And then we have the 2 important things, the category management and best cost country sourcing in the middle column where you see that. And we have on the lower boxes, then you see all the time, the accumulated gross cost savings, which we do expect in the individual categories. And of course, we are working on what we call the far-reaching levers where we need to have a lot of engineering that we get, I would say, ability to use even components manufactured in Asia, for example, that we have -- that we can put, let me say, component suppliers from 10, maybe down to 3 or 4, but this needs a lot of effort in our machines and in our products that we can do that. But this is something where we need to do the fundamental work today that we can harvest on that in the next 2 or 3 years. So that's just a summary. But again, this is something on material costs where we are for 2020, extremely confident. And by coincidence, we went this morning to 2021, what savings on material cost we have there. And I would say this looks with the current economic status around the world, quite good that we get the achievements, which we would need on the profit improvements on material cost.

Now almost at the end, this is where we are with pricing. And when you look to the graphics, we are showing on the left-hand side, this light blue corridor should actually indicate where pricing was going. So actually, pricing was, of course, going in the wrong direction, what we said. And now we believe, we call it a turnaround, I mean, maybe a little bit too ambitious to call it turnaround, but at least a turn in the right direction, because we see that we have positive impact in Q3. Of course, we have a challenging Q4 ahead of us. Again, it's a steep roof between keeping the price and having the volume on board. But we have a very strong focus on managing pricing in the market. And our key priority is that we get at least one further price point out of, let me say, 30% of the total portfolio, which we see at around EUR 10 million to EUR 15 million. I know this is not a big figure if you look to pricing, but in the market, which has seen for years only one direction we believe this is quite an achievement. So again, pricing has key priority, and we are going to name it in every call, we name it in every meeting we have that we need to go with pricing in the right direction. So this is where we are with pricing, I have to admit we are still below target. This is not where we wanted to be by the end of the year. The last 2 months, we are looking quite good. However, then, of course, you see immediately impact on the volume. But again, we try to balance that and with the forecast we make for the end of the year and the EUR 1 billion order intake out of the last quarter, we have factored in that we keep pricing stable.

Now last slide, I know you usually would like to have more detailed figures on that particular point, this aftermarket business. But our point is here, we have done the last 8 weeks a recap on where we are exactly in the capture rate, what we call, how much of the machines do we service around the world, what potential do we have. And our statement was up to now that we are servicing around 65% of our machines, actually, with the calculation we did and the analysis to figure out where we have the potentials, we saw that we are below the 65% figures, and we do estimate that just slightly above 60%, which, of course, offers for the mid- and long term, still a significant growth.

Today, we would say next year is quite a difficult year in terms of growth, this would be, from our point of view, moderate. And I said it earlier, we had this year in one category, what we call the change parts. We are down in one category in the aftermarket business, has nothing to do with spare parts or services, which are going absolutely okay. However, we have quite an impact out of that area. It's mainly PET driven, and we do not expect that we catch that up immediately even next year. So this will take time until we are replacing that maybe with something out of business and having even more innovations in that area that we really catch up.

So we see next year a moderate growth in life cycle, but mid- and long-term, with the installed machine base. I mean 42,000 machines in the market and running. So that's the installed base of 10 years. We have quite a number of machines, which we can service. And I mean, each percent of increase of capture rate leads to EUR 12 million higher revenue and, of course, a highly profitable one. So this is something where we do see that we have a nice contribution in our profitability for next year as well.

So this was in the nutshell, what we are going to do in our program. Again, here, you see the targets for 2019 confirmed around 3% growth, around 3% EBT margin and a working capital of around 26%. And please note that no restructuring costs have been implemented in the 3% EBT margin.

So thanks a lot for listening. We are now at the point of Q&A and happy to receive your questions. And we have prepared even for the questions some backup slides, if necessary, but now I'm listening to your questions. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Mr. 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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A few of them. And I might take them one after the other, if I may. The first one relates to the sales growth outlook, you mentioned -- you reiterated the 3% top line guidance for the year after a 7% plus in 9 months and you mentioned good capacity utilization and that you're fully booked more or less for the fourth quarter. So why should we imply a relatively significant reduction in revenues in the fourth quarter from putting these statements together, the guidance was onto growth, we probably look for 7% decline in revenues in Q4, so what am I missing there? That was my first question.

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

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Okay. First of all, hello, Finke. I would say I don't see a decline for it because we are doing roughly EUR 1.1 billion revenues in the first quarter. So that's quite big. And we have the order intake, which is coming, of course, from the previous quarter. So we have this order intake to fill up capacity, why we are, let me say, cautious on the order intake of EUR 1 billion because if we -- as I mentioned, we want to manage pricing. And at the economic times we have today, I would say, it would be too optimistic to really count on growth at the moment. So what we are doing is the full plan for next year is based on, I would say, no growth in terms of revenue or very slight growth. And this is, in particular, to plan our capacities, resources and the cost structures.

And if we have then an upside, let me say, by the end of the year, let me say, in Q1, in terms of order intake, then we are fine because then we are sure that we have the cost structures adapted to a lower revenue level and with some impact on order intake, I would say, then we would be in good shape. However, I would be more than careful that we are over-planning and over-challenging ourselves in those times. So I'm -- the point is, we are careful. Hopefully, this answers your question.

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

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Yes. So -- but it also means that the 3% is not really set in stone, it's more a rough indication, right, in terms of more or less organic growth and for the full year?

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

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Yes.

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

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And the second question relates to -- maybe to sum up all the measures you outlined in detail in terms of more efficiency, job cuts, procurement, et cetera. If you take all this together, by which year would you expect to get back to your former margin strength or targets that you see?

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

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Yes, I have a standardized answer here, sorry, when I'm being so rude. I mean we can't achieve that in 2 years, if I look to the current economical environment we have around the world because we are not planning on significant growth. We are planning on moderate growth. Saying that, it's not in 2 years, but it's not in 5 years. So somewhere in between, because, I mean, our clear statement, and this is the statement even on -- of our Supervisory Board, we need to get back to the 6% as soon as possible.

On the other side, we don't want to overpromise at the moment because it would be really not good to do that. So we see it as a solid measure with the improvements that you see right now, if we get then tailwind from growth in addition, or some of the measures, which might come better than we see them right now okay fine. But I would say not in 2 years, but not in 5 years, so somewhere in between that's the target.

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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 mainly related to potential offsetting factors. And to -- I think you mentioned in your presentation, just wanted to make sure, the first one, you said there's some unbundling in process technology ongoing or being prepared with regard to potential disposals. Would that imply higher costs in terms of fewer shared services, et cetera?

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

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It's a good question. I have not thought about that. Would that imply about higher costs? Certainly not significant ones. So because some of the integrated parts of the processing technology are, let me say, operated more or less independently, this is, in particular the Steinecker operations which we have. So they have a quite independent setup. However, they are not legally independent. And I wouldn't see that this will have a significant impact on administration fees if we are going to do that.

Even the other way around because we would look then into, can we bundle some of the activities in -- where we have maybe 2 or 3 entities that we get it in one. Costs would be applied for the process of the carve-out, of course. Their costs would be applied, but this would be not an operational one, this would be one-off.

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [10]

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Very clear. And the second one would be to S/4HANA, as you mentioned, that will be the rollout in Hungary or basically the start of the new platform. Will there be a rollout for the other production site as well?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [11]

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Yes. Hungary will be done in 2020 because this plant is fully relying on S/4HANA. So there is no alternative. The second one we are going to do is then China. Why is that? Because they have sales and services in addition. So then we have a full template, S/4HANA applied. This will be either end of 2020, beginning of 2021. And then we start preparation for AG as such that we have a global rollout and in particular the main entity, Krones AG, by the end of 2021, beginning of 2022.

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [12]

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Okay. And the very last question really is on the recycling. I think you mentioned 15 recycling plants up and running at the moment, I think at the full stage you mentioned 10 sort of, is that the right growth rate to look at? And is there any kind of financial impact from that?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [13]

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Say it again. The 10 was related to what? I didn't catch that 100%.

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [14]

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10 plants running when we -- when you referred to recycling at the full year 2018 call. So I just wondered whether there is a very big increase. And..

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [15]

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Yes. I would say we are counting. We have 2 new recycling plants in the U.S., which we implemented. And we have in Japan 1. So we did increase, most probably have been there at 12 and now we are at 15. So I would call it this way.

So there's no tremendous growth rates and still recycling is coming, let me say, like a Christmas gift, this is not a consistent order intake machine. This is coming 3 months nothing, and then we have 2 plants maybe and then 9 months nothing. But we need to put that on a more constant platform since the inquiries with all the PET discussions have rose up significantly and significantly has [you see here] by 300% to 400%. We do expect that this will generate some order intake in 2020. And once we are going to achieve that, I give you further information. I would say, when we are doing a Capital Market Day, we are certainly going deeper into that, that you have a better understanding how we justify the market there.

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Operator [16]

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The next question comes from Sebastian Growe from Commerzbank.

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

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Same as Andre, I would like to go for them one by one. To start with the service, I think, apparently, the installed base is what it is and has been for quite some many years. I would be interested in what the exact measures are really to improve the overall revenue growth within that installed base, if there's also opportunities for hiking prices, et cetera, as we have been hearing that from GA for instance?

And if you could also comment on the slight improvement in the growth rates within this aftermarket business in quarter 3 compared to H1, as you referred to in the report. That will be the first one. And then have I some more to follow.

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

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Yes. First of all, what helps us will be the acquisitions we have made to get a better access to our market. I mean we bought our agent in the Middle East called IPS, we called our agent in Pakistan. We have last year bought Australia, and we have bought Western Africa. And then you see that if you look to the companies we have founded, we have done Bangladesh, we have done Philippines, we have done Ethiopia.

So first of all is you need to have a local footprint. Why is that so important, that you can trade in local currency the services. So -- and since we have invested in that quite significantly over the last 2, 3 years, again, it's about to harvest about that and not going even further. So our guys running the aftermarket business have a very clear focus on that, even with the point that with the acquisition of IPS, which is the agency in the Middle East is 280 people, so quite big. There are even some restructuring going on because they have redundancies to get, let me say, the profit level up. And the same is true for Pakistan. And the good thing is that if we have a service set up in Pakistan, we can utilize the Pakistan technicians, even in other countries, not in India, by the way, but in other countries. So this is the first big point we are introducing here.

And then the second important one, I would call it availability, availability and availability. You need to bring 2 things to the customer. Number one is a service technician, which is qualified. And this is where we are working all year on that we have in each region qualified people, which really can help you in a short period of time, not that they have to jump on a plane that are coming immediately. And availability of parts that we are actually enlarging our setup where we can source parts because not necessarily everything needs to be on a stock. By the way, the 3D printing plays there an important role for the future. And that we have suppliers in the regions, which can help us out immediately and that we can source to local costs. One of the biggest initiatives to be price attractive even in the aftermarket and, of course, maintain profitabilities that we are going to source more and more locally.

And I would say this is the, like the everyday teeth brushing exercise. And then in addition to that, we need to further digitalize our business because we need to get hold more of the data we have from our customers that we had to manage then, what we call the utilization rate of the alliance, where you can make with a, I would say, with a new business model, money off it. This is not yet in a stage that we can really talk about and talk about millions, but I would say this is something which we will come tomorrow. That's very important why we need this digital fundamental in our machines that we want to be in a position that we can have a few on the lines around the world, how do they perform and that we help our customers to improve efficiency or change over times.

If I could rather adopt this in this way. So I would say this is the way we're going to do it. That needs still a lot of efforts. And -- but on the other side, it offers still the potential for the next years.

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

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That makes sense. So it currently sounds more like an underutilization because they've been, I think, then also in prior quarters pretty much on the fact that the budgeted growth has not been met. And it's more, I think, a question of underutilization, is that the right way of looking at it? And if so, can you just give us at least direction an idea to what extent eventually the overall profitability level margin-wise has plunged and dropped within service in particular?

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

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No. This is -- I know this is the most asked question, but I would say we don't talk about that. That's one of our big secrets we have, what profitability we are running in those areas. And it's not because we don't want to tell you, it's just because of our customers. I mean it was just recently with Coke, and I was -- they were desperately looking for what profitability do we have on our service business that I can figure out how much they can squeeze us in a direction. And that was a quite unpleasant meeting with them because we didn't give them the figures. So please understand that we are really careful with giving those figures.

What I can say, and this is really true, I mean, it's a seasonal business. And of course, you see in Q1 and Q4 a significant bigger impact on profitability with Krones due to that factor, but it has more to do with volume rather than with profitability.

And one further thing I can say, profitability has been in this area quite stable over the years. So it has not been deteriorated. What hit us in 2019 is that, as I mentioned, we were down in one category with significant good contribution margins. And this was really dead and we can't compensate or we couldn't compensate fast enough for it. I hope that answers your question. And I know it's not the one you want to have, but please understand that we are in this particular regard, I want to keep that secret where we are with that.

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

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That's fully understood. And the next one is on M&A because you also made the point that you have, obviously, done quite a bit over time. I've seen in the 9-month report, it's about 2 -- sorry, EUR 100 million, roughly speaking, from M&A around the revenue line as far as I've seen it. So could you just share with us what you think is the right number to plug in for the full year, i.e., what's the spillover in the fourth quarter, another EUR 40 million, EUR 50 million as in the quarter 3?

And the second question is, and you made the reference to the overall low EBT contribution in the 9-month period. Can you just give us a flavor, at least if the overall M&A activities and the added revenues have been only at about the margin that you were able to generate in the first 9 months or even below that?

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

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I was just thinking about the impact of M&A. And if we look to the growth we have and I would say, we had 7% growth after 9 months. And in this 9 -- if you look to the organic growth, that's roughly 3%. The rest of it is current exchange rate, which is a quite significant proportion. And the other one is M&A. So it's not M&A only. And I would say it's around EUR 90 million to EUR 100 million in the first 9 months. And let me say, then I would expect 22 -- maybe EUR 20 million to EUR 30 million in Q4. So that's how I see it.

And margins have no big influence. Does that answer your question?

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

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It does. The only question that remains then is what the outlook is concerned when it comes to the M&A, is this more a function of integrating these businesses better? Is this more a function of the service penetration that we discussed at the first question? Or what is simply in your sort of ability pool to just bring up the profitability for...

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [24]

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You are right. I mean it's really a point of integrating them further and really bringing the setups to a level which is performing better. I would say one of the upsides we see for next year absolutely clear is that those acquisitions we have made in whatever area they are, they can contribute significantly to better profitability.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [25]

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Okay. And then last one and then I shall go and come back later. It's on the CapEx that you were aiming at cutting for the next 1 or 2 years, as you phrased it. Can you just give us an idea of what sort is a shorter-term CapEx level might be, that's obviously quite a significant number?

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

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Since we have done the planning for the CapEx at least for 2020 already, so we see a CapEx, let me say, despite from the R&D activities we have, between EUR 60 million and EUR 70 million for next year, that's the level. Then we are, of course, below depreciation. That's no doubt. But again, with the level of investments we have done in the previous years, we are absolutely fine and we can keep, I would say what is important, the IT systems, and this is the -- by far the biggest investments we are going to do over the next 2 years that we can keep those activities fully up because for the integration of all the acquisitions and getting better performance out of our main [TAG] IT systems in India in particular, S/4HANA, will be the majority of it. And with that, we have that 100% secure in the box.

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Operator [27]

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Mr. Sven Weier from UPS.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [28]

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A couple of questions, please. The first one is on the point of adding headcount and you already elaborated on the point that a lot of that was due to taking over apprentices. But a more general question, I mean, in the past, the company was kind of set up for growing at least 5% organically, and that's why you have added a lot of employees also in the emerging markets. Now that you've entered the kind of a -- quite a bit of a lower organic trajectory, don't you feel that the whole size of the organization in terms of head count, but also production footprint, is a bit oversized and could support a much, much higher revenue level that you are unlikely to achieve in the next 3, 4 years? So in other words, do you really think that the adjustments that you are making now is really the potential that you would normally have?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [29]

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Well, that's an extremely good question. And I would say, the first indications, and that's the reason why we are going to reduce head count is, of course, that with the setup we have today, we can handle, I would say, the revenues we have today even with the reduced head count. And of course, we need to see whether -- once we have done the measures we have now in place, where we are really in terms of the infrastructure, and then I would call it infrastructure, plus the people we have, whether there is not further potential, number one, or maybe there's growth in addition. But I would fully be with you that we are here not talking about an exercise we are doing once and then things are settled. We need to look more mid and long term into that and figure out what is the right infrastructure for us.

And I have to emphasize, I mean, there are 2 things we are looking at. I would say, with the international business, we have generated with being active in so many countries, number one, I would say there is an overhead, which we have to look at very carefully, how can we allocate in the right manner organizations that we are really lean, which -- and I wouldn't say we are really lean today. I mean, that's one statement.

Second, we need to look into, is the operational setup the right one for the future in terms of, let me say, the production capacities we have, is that needed long term in all the specific areas, yes or no. This we need to answer. So I would say, if I'm saying that, I would say, yes, your question is correct. And this needs to have deeper thoughts. And I would say we are not today yet there that we can say, what is that mid and long term and what is the -- there are some ideas on the fundamental set up but not yet finished. And this is something where I would say we are much deeper into once we are in the Capital Market Day beginning of the year. But the question is absolutely right one.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [30]

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Because it is a little bit interlinked to the point on CapEx you made, right? You have invested for years a lot of money, and now you can afford to run well below [D&A]. So I guess it's a little bit the same on the head count situation, where I think you have quite a good setting for the future.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [31]

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Yes.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [32]

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And the other point is also linked to that because you've outlined in the presentation the savings potential that you have in the coming 2 years. But what kind of cost inflation should we expect, right, because that's a growth figure, right? But on the one -- other hand, I guess, you also have personnel cost inflation.

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

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Yes.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [34]

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To a certain degree, right, that we probably decide the restructuring expenses have to keep in mind.

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

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Yes, absolutely correct. I would say, with the figures you have seen, and we indicated at least for the material costs that we are talking here about in the slide cross figures, if you look to the net value, I would say that's somewhere between EUR 15 million and EUR 20 million on material cost. I would say, the inflation on material costs, we have quite good under control for the next 2 years. But for, let me say, personnel costs, I would reflect to between 2% and 3% increase. Having in mind, of course, that we are going to reduce head count, which helps us then for the next 2 years, on the other side. But I mean, we can't deny that personnel costs will go up with, let me say, a certain percentage. And even in those countries where we have higher inflation rate, even on a higher level than we used to here in Germany.

So yes, this is a point you are absolutely correct. And this is our most critical point because we can't avoid most of the stuff we have onboard.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [36]

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And next year, we have a new round of IG Metall negotiations, I guess, which may be a bit lower than last time, I would guess?

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

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Yes. This is the assumption we have. I mean we have already some indications. And I would say, as soon as we know more, which would be most probably the beginning of next year, we can make a clearer statement. But we are planning, let me say, in -- for next year on a more conservative figure that we believe that the IG Metall increase will be definitely then below the planning figure, and we are doing not any mistake on that.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [38]

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Okay. And then on service, obviously, you've mentioned it several times already, but I was just wondering in Q3 stand-alone, was that business back to normal? Or would you rather expect that then for the most seasonal Q4 to be back?

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

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Well, I would say Q3 was not back to normal because we were still suffering in Q3 in July from the lower utilization. So that was not a good month. I would say, then August became better, and September was on level, I would call it this way. And we see significantly, once we are utilized and the resources are, I would say, adequate to the revenue we are generating, then we are back to normal. But this is one of the things we have to settle, the flexibility of Krones is becoming much greater that we can -- that we can cope more with the volatility of order intake and low utilization.

If -- we haven't addressed that to a large extent in the presentation, but one of the most important short-term measures is to balance capacities better because we have some locations, which are 100% utilized during the whole year, like for [dry end] for example, some of the -- what we call the [red] part that has been underutilized. And our biggest point is how can we balance that better. There are measures in place, which gives us then a much more even utilization of our capacities. But again, Q3 was not yet on the level Q4 will be.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [40]

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Okay. And then just finally a follow-up on the CapEx. You said the EUR 60 million. So is that just for tangible CapEx, right? The one where you had EUR 120 million roughly last year.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [41]

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Yes.

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Operator [42]

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The last question comes from Mr. Daniel Gleim from MainFirst.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [43]

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There would actually be 2 areas. One is Slide #6, and the other one is the 2019 outlook. If you could help us a little bit on Slide #6, what really is the starting point for these measures? I understand the 3% that you guide for 2019 is probably not the right starting point to think about, given that there are some additional savings into 2020, which are not on the slide, including that the volume is coming back that was lost in the second and the third quarter.

You never broke apart how much headwinds you actually had from the underutilization, which makes it a little bit difficult for me to do the calculation myself, but if we now assume that the volumes would have been normal, both in the second quarter and the third, and we assume in the fourth quarter they will be normal, as you just alluded to, what will be a realistic starting point EBT margin that we could pencil in for 2019?

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

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First of all, the Q3 -- I mean, you see the results we have at the moment, and we were coming out of a very weak Q2. And we said it several times, I would say the underutilization was around EUR 20 million. So that's one of the impacts we had, the pure underutilization out of that. And on top of that was coming that we didn't cover then with the missing gross margins, let me say, the overhead. So I would say there was a little bit bigger impact of the EUR 20 million from the underutilization in Q2.

We still had -- then we had Hungary which doubled the cost in which we actually assumed, which is -- was around EUR 15 million. So that's the rough figure we can give. And these are the 2 ones, which we might not see for next year. But I have to say might, because I would say seasonality will remain because if you look to the years back, Q2 was all the time low. I mean, in '19, it was significantly low. And of course, we had this problem on the material costs, which was not working out.

So I would say that -- and I'm hesitating a little bit of one-offs to say that the EUR 20 million because of low utilization and the EUR 15 million because of Hungary are one-offs, and they are not repeating in 2020.

Let me put it to the point. We said, for Hungary, we see an upside of EUR 8 million to EUR 10 million for next year. That's what we are going to say compared to this year. And I would say, for the low utilization, I wouldn't promise that we have a completely balanced year 2020. And with the world economy being in the shape as it is right now, I would see that we will have next year, again, impact. However, we have to deal much better with that. And I would say maybe that's a EUR 5 million to EUR 10 million impact since we are coming from a much lower level, because we came from a 6% level with a huge impact, now we're coming from a 3% level. Hopefully, most probably, then we might have a much smaller impact on that.

But to really figure that in that, I can say, okay, next year is going flawless, and we have no problem, I'm not in the position to say that.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [45]

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What was the underutilization in the third quarter

because you gave the number for the second one, it must be smaller, but what is the...

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

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Yes, that will be smaller. Well, that's a good question. We haven't calculated on that, maybe EUR 5 million to EUR 10 million.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [47]

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Maybe around EUR 50 million that we can use as a normalization then for '20?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [48]

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No, that's far too high. Again EUR 20 million we said and maybe another EUR 5 million for the Q3. So we are talking in total EUR 25 million, but again, we will have, let me say, a seasonality next year as well. It will be not a year where we have every month 100%. In Hungary, we have in our calculations already with EUR 8 million to EUR 10 million. That's not a one-off that we are accounting to the measures we have in place. That things are going okay. Don't forget, we have still redundancies between Hungary and Germany. And we have a first quarter, which is still, let me say, borrowed with Hungary in the same manner as the last quarter this year. So if we have a total effect of EUR 8 million to EUR 10 million next year, that's really already something challenging and positive because Hungary is not going away with the start-up on the 1st of January.

So I -- to normalize, I would say the EUR 50 million is far too high. Let me say, EUR 15 million to EUR 20 million maybe would be a reasonable figure, but I haven't calculated that either myself.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [49]

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Well that's on underutilization loans or the costs for Hungary would have to be added on top of that, that I was referring to. But thank you very much for the elaboration. You mentioned that the R&D expenses might go down '20 over '19.

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

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No.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [51]

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Would you give us...

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

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No. I didn't say that. I said it will stay on the same level. R&D expenses will remain because innovation is important for us. I said in the investment because we have that in the investment as well. Investment for, let me say, buildings and machines and SAP is going down and will be between 60 -- around EUR 60 million to EUR 70 million, and R&D is remaining on the level we had previously because, we do not do layoffs in R&D, or some minor, [of course].

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [53]

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When we then look at Slide #6, again, what is the sustainable recurring cost savings in 2022, just to make sure that we all understand what the run rate of the cost savings in 2022 will be, if we add all the measures together?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [54]

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I would say, if you do the calculation, I mean, those are all figures where you have, let me say, a bridge from one year to the other. And since the measures for 2022 are not yet in, I would say, yes, we get the costs down, but as Mr. (inaudible) mentioned, there will be some personnel costs increasing. And I would say we need a set of further measures for 2022 that we are enhancing profitability further.

Otherwise, we would with the measures we have here remain on the profitability we have then in '21. And so '22 needs additional measures to improve profitability further.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [55]

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The question was more, are the numbers that you put on the slide end of year run rates? Or are they going to be released in the specific year that you guided to, that is a typical misunderstanding between management and analysts. So this is why I was double-checking.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [56]

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Well, actually, we calculate it in a way that those figures you see here are occurring in the year we have mentioned. So if you see, for example, EUR 20 million on global footprint in 2020, this is something positive fully in the P&L 2020.

And then if we look to 2021 the EUR 45 million for structure, they are then calculated in the P&L 2021 fully. You might not see them right in the beginning of the year, but at least we see them very early because in case they are applying late, you're going through the full size of the magnitude of the savings. Maybe a good explanation is the head count reduction we are doing in 2019 this year, the 200 people. We have factored in just a rough estimate between EUR 12 million and EUR 15 million savings for next year 2020. They are not factored in this year. They're factored fully in next year. Why? Because they are fully applying in 2020. That's the way we do it, which explains which the picture.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [57]

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Absolutely. Maybe on the '19 guidance really briefly. Could you give us the organic order intake growth after 9 months in the third quarter? You gave the numbers for sales. You didn't give there for order intake.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [58]

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And we didn't calculate and split that up into what was coming out of acquisitions, what is FX and what is really organic. This is a good question. Maybe since I have a couple of people around me, somebody can check and give later on a feedback on that.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [59]

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That will be great.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [60]

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Yes.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [61]

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And you reiterated the group guidance, does this also hold true for the individual segments? Or will you give another guidance for them...

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [62]

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Well, I'm a little bit careful on the processing technology segment. There, we have a guidance of 1%. And I would say it will be more around breakeven. So that's what I see right now. It could go in the right direction, but this is the only one I would say, I would reflect on. But all the rest, I would say, we keep it.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [63]

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That was quite a surprising deterioration of profitability, could you add 1 or 2 more comments on what happened in the third quarter in that very segment?

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

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Yes, sure, we were very low on revenues. I mean, if you look to the third quarter only, that was lower than the previous quarters. And in addition, I would say the biggest peak on revenues is in the fourth quarter, and this is in particular due to the intralogistics business we have at system logistics. They are, historically, unfortunately, not good in the second and third quarter, and all of their profitability comes actually in the fourth quarter. That has to do just how intralogistics projects are installed around the world, and that is that they want to start-up in winter and usually going to utilize then the hybrid warehouses for intralogistics in spring, and that's the reason why we have the highest revenue generation in the fourth quarter.

Let me say, because we calculated that the order intake effect in -- from M&A FX, we see slightly at 0, and M&A is around EUR 20 million. So that's a guess. It's not a perfect calculation what we did, but this is the, I would say, the rule of the sum what we see right now.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [65]

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That is the third quarter impact there?

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

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Yes.

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Operator [67]

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Mr. Sebastian Growe from Commerzbank.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [68]

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Thanks for taking the follow-up here. The first one is around PET and then you stressed, I think, also temporarily weak demand and part of the portfolio in your report. The question simply is, is this is referring to PET? If not, what is the areas in particular? And when it comes to PET, can you just give us a sense of what the rough contribution to the total group revenue is in 2019? How it's comparing to 2018, in particular? And eventually also what your best guess or based on the order backlog would suggest for 2020 to just get a certain sense, at least, what the [square factor is] from a better mix might be?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [69]

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Yes. I mean, historically, we had around 60% exposure to the PET business. And I have to repeat here that when we say that, that this means, including, of course, a filler which is as well in a glass line and in a can line and including a [packer] which is in the glass line in a PET line and in the can line -- but the exposure to PET was at least stable for the last 4 years at around 60% of our new machine business being driven by PET.

Then the second quarter was extremely low, and we did worse than our competition. Obviously, here, they did better. And I said that, that we have lost a huge order in the U.S. We were down at 40%. So only 40% of the portfolio, let me say, between March and July, which we had onboard was driven by PET. Now that has normalized from my point of view to a level of 50-50. So we have 50% PET-driven business and a 50%, let me say, which is glass and can.

And what we see right now, this would be even the guidance we would give for the next month. I would say, it would be not -- let me say, very sound, but I would say this is the governance and the guidance I give for 2020, because I really don't know. The only thing we can say is that the embarrassment about PET at our customers and the uncertainty has decreased to a certain level, but we see, in particular, in Europe, a lower investment on PET, which we believe will continue. And all the other regions have maintained more or less the stability or at the level of the previous years because I said it earlier, they are looking more on how can they handle PET in the market rather than they change their investment.

So this is the reason why we predict in our annual planning around 50% being PET driven and where we need to adapt our capacities in that area.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [70]

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Okay. That's very clear. The next one is around working capital. So from my end, correct me, if you have a different view that it was very much driven improvement by trade receivables, now the second consecutive quarter was an improvement. What is exactly driving that, is this really better internal cash collection? Is it the terms and conditions that you might have changed in your favor? Is this a function of the mix? Anything that you might be willing to share, I appreciate it.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [71]

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Yes. That's a quite complicated matter what we have at the moment. What we see in all bottling lines, and we see that more with glass and can rather than with PET. Due to the point that the customers are differentiating more on the point of sales, and we have a big variety of, let me say, glass, cans and PET bottles at the customer, we have what we call more different bottle types to commission on a line, this is one of the biggest points we have at the moment, okay?

Let me say, previously, you had maybe 5 different bottle types to commission, let's say, a 0.5 liter bottle, 1.5 and a 2 liter and some others. Now you have maybe 10 or 15. And this is difficult to commission, not from a technical standpoint, this is more from a customer standpoint that they can't deliver you in the right sequence those different bottle types that we can commission them.

And our biggest point is that we get sunset clauses into our contracts that we can renegotiate if the customer is not supplying us those different bottle types at the right time, that we can, despite that, close our installation and commissioning phase because this is the weakness in our contracts, we have, let me say, all the arguments on our side, but we don't have the conditions in the contracts.

And this is a point where we saw that receivables are going up this year. We had a very deep analysis on that. And once we are going to address that, this is happening right now. Each contract, which is going out at the moment -- well not each, but 80% has sunset clauses in, which will help us to close our commissioning phases much earlier than this year.

We still have some debates then with customers, but this is one of the important points why we believe we can drive down receivables. So first, put it in the contract and then manage on-site better. And in addition to that, we enhanced the on-site management that we have online a day-to-day tool that we see, really, once things are commissioned and whether we are missing one milestone in the commissioning that we can escalate earlier. Because imagine a service team is in Ghana and in a very remote area, they won't report to you every day. And if they have a problem, they maybe try to figure out themselves over 2 weeks, but you are running then out of dates. And that's the reason why we implemented this remote indication of where we are with the milestones that we can handle and escalate much better in case we are failing on certain days on the installation.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [72]

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Okay. That sounds encouraging, to be honest. Do you have any specific targets or so in terms of the sales of (inaudible) on mind which you might be willing to share? Yes, how much of an effect that might come through over time?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [73]

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Yes. I mean there is a figure. I'm careful in saying that because we are in the planning procedure. But once we are in -- on the Capital Market Day, we definitely will name that. That's no problem because we are relying ourselves on that. And I put a very strong focus on getting, let me say, working capital down with the individual measures. There is a strong focus on it, and that's the reason why we're going to tell that once that's really fixed and locked in and say this will be the target. But there would be definitely an improvement for 2020.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [74]

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Okay. That sounds good. And the last one, sorry for that many questions, is on the portfolio once more, to just really get things right. It sounds like you're preparing for partial divestment, if I get that correctly from what you've been outlining. If that impression is correct, could you just put some numbers around what part of the portfolio is eventually to be the ring-fenced or to be given a second, third, whatever, thought when it comes to the future?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [75]

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Not yet. I would -- if I could, but we have not yet the process put so far forward that we are really giving you reliable answers. And we are coming out as soon as we know clearer what we are going to do. Some could be once we have achieved the milestones for the decision making and for all the conditions, could be in a reasonable time manner, but at least on the Capital Market Days, we give you a much deeper view on where we believe things should go and what time lines we put behind and what detailed thoughts about behind that.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [76]

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Okay. That's helpful. And very last one really. The recycling plants for 15 or so of tools that you're selling annually, or which you have...

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [77]

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No, no, no. 15 in total -- 15 in total in operation over 10 years. So this is a quite low number, not per year 15 plants.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [78]

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Sorry for that, but nonetheless, what is roughly the revenue pool behind it, just to get a certain idea if it's really meaningful or could become meaningful on both?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [79]

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Yes. The recycling plant is -- it could be between a small 1-5. But in average, I would call it between 10 million and 15 million.

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Operator [80]

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Mr. Peter Rothenaicher from Baader Bank.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [81]

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My question refers on the restructuring expenses, EUR 60 million to EUR 80 million. Firstly, will this completely come into effect in the fourth quarter this year?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [82]

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That's a good question. I mean, to explain that in detail, I mean, we have roughly 2 proportions. One proportion is, of course, related to the reduction of head count. And I said it earlier, we are doing that in a socially acceptable manner. Once you do that, you do not fulfill necessarily the IFRS standards, you need to do provisions for it. And if you want to do that in, let me say, using the methods of this socially acceptable head count reduction, you need to match certain criteria that you can really do a provision for it. And that's the milestones we are working on because once we have achieved and then that has to do with IFRS standards.

And of course, with the view of -- on the financial auditor we have, because we need to sell that with him or with them, this is something we are working on. And we will let you know as soon as we are clear where this comes up, and we can't really justify the timing at the moment where we are going with that. So we can't say that at the moment. It's not yet clear whether it will be in '19 or in '20. But as soon as we have the figures together, I would say, we'll put them out.

The second point is on, let me say, the portfolio correction. This is actually the same thing. We are evaluating at the moment certain categories of our portfolio, and I named it. We have some technologies where we have to look deeper into whether we continue with them or not. And even here, we need to justify business plans. I have 3 important dates with customers, how do they see the future if they commit to orders or not. And based on that, we will do as soon as possible a decision. But again, here, we need to meet some milestones to make this decision. So unfortunately, we can't really state where this will -- when and where this will happen.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [83]

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Okay. And from the EUR 60 million to EUR 80 million, is this all cash effective? Or does this include perhaps also depreciation on assets.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [84]

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Could be a possibility that includes as well depreciation in addition here.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [85]

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Yes. And here, in terms of your policy, I know it's quite early, but considering that you will have to book significant restructuring expenses in the current year, your dividend proportion of around typically 30%. Would CSPs as a measure, the adjusted net profit, or the reported net profit?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [86]

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I mean, very, very good question, Mr. Rothenaicher, but coming a bit too early because we haven't spoken even to the Supervisory Board on how do we work on the dividend. But let me put it this way. And really, I'm not to want to hide here and it's really not yet considered. But what have we done last year? Even there, we have done a similar measure that we have gone above the 30% of dividend just to provide, let me say, an adequate manner or level of dividend. And as we have not thought about, I would say, Krones is not a company in coming back and saying, we would not consider it the same way this year. I would put it this way.

And more I can't say because I have not really talked to anybody internally nor to the Supervisory Board, how we deal with that matter, and this needs to be clarified first. But again, I would put it straightforward, even on the -- on a Supervisory Board meeting to say this would be the reflection of last year how we have acted, could that be maybe applied for this year as well?

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [87]

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And to clarify, you mentioned you have already reduced your number of employees by around, I think, 180 or so. I think you had to pay here also some amounts. And this is not included then in your restructuring expenses, and you have already booked it in your 9-month results?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [88]

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Partly, yes, and I put it this way. I mean, if you do a reduction of 200 people there is, let me say, the -- I shouldn't say that, but you have low-hanging fruits in the beginning. So the money you need to spend is low. And this is definitely already in the 9 months' result, I would say, towards the end of the year, getting more difficult. And there, we have really to see how we -- can we actually absorb that in the profitability or whether would that be something extraordinary? We haven't clarified that. At the moment, it looks not bad that we can absorb, but we have not fully made up our mind.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [89]

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Okay. And then further making it clear your sales guidance. So did I understand it correctly that the 3% growth is then more organically. This means for the fourth quarter, you had last year, EUR 1.16 billion. So is something you consider as reliable and then we would up -- perhaps end up with around, let's say, 5% sales growth for the year in reported terms?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [90]

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I didn't catch that 100%. Because again, when I look to what we see right now, we said we will be slightly above last year. And last year, just out of the mind, so it was 9-point-something. And we will be slightly higher. I would assume we are in sales, not over EUR 4 billion. That's what I assume right now, with the conservative approach we have. And what I would say, I haven't figured out in the last quarter what is coming then from M&A or not. So we are looking at the moment on the portfolio what is coming from intralogistics, what is coming from processing and what is coming, of course, from the core.

This is the way we look at it. And the upsides are mainly mixed. So they're carrying some processing as well as some bottling because they are turnkeys. So let's see how that turns out. But I don't want to factor them in. It would be not serious at this time of the year with the economic having looked forward, and I know that this is then an outlook that sales might not go beyond this year, next year in the governance. But we are not yet at the point where we can really say where we are.

We have some bigger projects out at the moment. Once we are -- once they are materializing we are in good shape and better than I said. But at the moment, I think we should stay at slightly above last year. That's the statement I would like to do here.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [91]

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No, sorry, my question was on 2019 sales.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [92]

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Yes.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [93]

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So we have been at, after 9 months now, with a plus of 7.3%. I think your indication was you're fully booked for the fourth quarter. Last year, we had sales in the fourth quarter of EUR 1.16 billion.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [94]

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Yes, correct. And this will be slightly below EUR 1.1 billion. So I would say, with the picture we have at the moment, it's slightly below EUR 1.1 billion sales in the last quarter.

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Operator [95]

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The last question comes from Mr. Daniel Gleim from MainFirst.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [96]

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It's on Slide 6 again. And I have a follow-up on the growth buckets, the last column that you're showing. You have EUR 20 million of savings into 2020 and EUR 15 million of savings in 2021. Why is there a decline year-over-year?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [97]

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Hello? Hello?

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Operator [98]

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Hello?

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Olaf Scholz, Krones AG - Head of IR [99]

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We got [missed] the line of Mr. Klenk.

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Operator [100]

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Yes.

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Olaf Scholz, Krones AG - Head of IR [101]

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We'll give him my headset just a second, please.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [102]

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We can't year you.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [103]

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Now you can hear me, right?

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [104]

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Yes, yes.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [105]

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Sorry for that. So we had a technical problem here. Why is there a decline? There's no real reason for it. I mean it's difficult to justify pricing, I would say, 2021, even in case we could have written that EUR 20 million. So the EUR 5 million was a guess. The best guess we had at the moment on that particular point. I would say what we can calculate better is, of course, the growth of aftersales and the profitability contributed out of there. We have been just a little bit more careful. Let's put it this way. But there's no reason why we put EUR 20 million in, that's fine well.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [106]

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And the same holds true then for the portfolio buckets or?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [107]

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No. There is really a difference in because we have -- there we have a couple of things factored in. So there's really a difference between the EUR 30 million and the EUR 20 million.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [108]

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Okay. And just to be very clear how to read this. So in 2021, I have the EUR 30 million from 2020, plus the EUR 20 million that you achieved in 2021.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [109]

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Say it please again.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [110]

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I'm getting a bit confused with accumulated number, which is on the right in the red box. So I'm just wondering whether I need to read it that there's EUR 30 million savings from portfolio in 2020? And then in addition to the EUR 30 million, another EUR 20 million in 2021?

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [111]

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Yes. That's correct.

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Operator [112]

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Mr. Klenk, we have no further questions.

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Christoph Klenk, Krones AG - Chairman of Executive Board, CEO & Interim CFO [113]

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Okay, then if you wait 1 minute. Okay. There's no further questions coming up. So then I would like to thank you very, very much for your questions. It was a pleasure to answer them. And hopefully, we gave you quite a few on that we have here a plan, how we are managing Krones forward. We believe the measures in place are actually generating facts. And with those facts, generating profitability. We have, I would say, sized the measures and put figures in, which are reasonable and achievable because we want to go back to the track that we are reliable in terms of delivering the results we are promising.

I would like to end with that statement. Thank you very much for all of you participating, giving us your questions and putting us in the right directions. Thank you very much.

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Operator [114]

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We want to thank all the participants of this conference. Goodbye.