Krones, a manufacturer of packaging and filling technology, is adjusting its earnings target for 2019 as a whole on the basis of the figures currently available.
The difficult macroeconomic conditions and uncertainties, such as the unresolved trade conflict between China and the USA, as well as the debate about the sustainability of PET packaging, are also unsettling Krones' customers and weighing on their willingness to invest.
Nevertheless, Krones' revenue growth in the first half of 2019 was still satisfactory. However, earnings before taxes (EBT) for this period will be significantly below the Executive Board's expectations.
High costs and unfavourable product mix weigh on profitability
The company's profitability is characterised by the high Costs, especially for materials. These remain at a high level. However, Krones had expected that the weaker economy in other important industries would lead to a slight easing in the increase in material costs in 2019. Furthermore, the additional measures taken by Krones to reduce material costs will only take effect after a delay. Furthermore, the Product mix unfavourably on the result for January to June 2019.
In the second quarter of 2019 in particular, sales of products with high added value, such as machines and systems for plastics technology, were up on the previous year, lower than expected. In the field of plastics technology, Krones offers extensive products and services for filling and packaging beverages in plastic containers, such as PET bottles. However, the current discussion about the PET packaging solution also offers Krones New opportunities for innovative solutions.
Another key reason for Krones' current earnings performance is that revenue growth in the high-margin after-sales business (LCS) was below plan in the first half of 2019. The reason for this is that customer demand was temporarily weaker in some areas of the LCS product and service offering due to the macroeconomic uncertainties. LCS business is expected to pick up again overall in the second half of the year.
Outlook
Overall, the company continues to expect growth of 3 % for 2019. The EBT margin is expected to be around 3 % (previous forecast: around 6 %). Krones continues to expect 26 % for the third target figure, working capital in relation to revenue.
The Executive Board has taken measures to counteract the negative impact on earnings. These include, for example, a recruitment freeze and measures to reduce material costs. The expansion of the global footprint is progressing well. For example, the new plant in Hungary is fully on schedule and on budget. Krones will ramp up production there in the course of this year and realise positive earnings effects from the Hungarian plant from 2020 as planned.
By continuously expanding its global footprint, Krones aims to utilise not only cost advantages but also regional growth opportunities. The closer Krones is to its customers, the better the company understands their needs and local specialities.
The projects initiated to date strategic measures, such as the price increases and the expansion of the Global Footprint to date, are currently not sufficient, to achieve the earnings targets in the long term. The Executive Board is therefore currently working on further structural changes to sustainably strengthen profitability. The focus here is on reducing complexity, reacting quickly to market requirements and a corporate organisation that places an even greater emphasis on the customer.
Krones remains committed to its medium-term targets. Depending on the overall economic situation and developments in the company's markets, the Executive Board anticipates average annual sales growth of 3 to 5 % excluding acquisition effects, an EBT margin of 6 to 8 % and working capital in relation to sales of 22 to 24 %.
Source: Krones
