Krones AG
XETRA:KRN

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XETRA:KRN
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Earnings Call Transcript

Earnings Call Transcript
2024-Q1

from 0
O
Olaf Scholz
executive

So good afternoon, and welcome to the conference call of Krones.Krones continues profitable growth path. This was the headline of our press release in the morning. Now we would like to present you the figures and give further details about the first quarter 2024.After the presentation by Christoph Klenk and Uta Anders, you will have the opportunity to ask questions. I think you also know how the question-and-answer session works. Please send me a short e-mail, or use the function or raise your hands in teams. And then I will hand over to you.So let's start with the presentation. So I hand over to Christoph Klenk. Christoph, the floor is yours.

C
Christoph Klenk
executive

Yeah. Hola, thanks. Warm welcome, everybody, ladies and gentlemen to the Krones conference call for Q1.Uta would like to give you an overview of where we are and why we are convinced to reach our guidance for 2024. I will skip the first slide, at least I try to. Good. Here's the summary. But since we are going in anything in detail, I don't think we need to talk about this one here. And I would say here are the highlights. I don't jump into that either. Why? Because we are jumping immediately to the real numbers and talk about that.If you look for order intake, I mean, we are down, that sounds in the beginning a bit strange by 2% compared to Q1 last year. But nevertheless, we believe it's a very strong number, EUR 1.5 billion roughly, so it's EUR 1.48 billion, but EUR 1.5 billion was actually the result we were targeting for, and we believe it's a very strong signal that our markets are working. I'm happy with that. I would say if you look to a bit more in detail, I would say, bottling and packaging was strong on new machine side as well as on the life cycle side. Processing was a bit slow and was compensating by bottling and packaging, as I said, and even Intralogistics is on a good path in terms of order intake. So all-in-all, I would say it's very nice. And if you compare to the last quarter 2023 to Q1 this year, even a very nice increase, I don't have to repeat the numbers. So we are happy where we are for the time being. I will come to order intake in a minute a bit more. Just before that, I want to reflect to order backlog. So even the order backlog has further risen, of course, with the good order intake we had. This gives us a pretty good visibility for 2024 and 2025 either. So we are, I would say, in terms of production utilization already beyond the mid of the year in 2025 and have a good view on the second half of 2025. So a very good one in terms of having security on what we say and that we believe that we can manage actually the revenue growth we are anticipating.There's one other important message into that, that we decreased the delivery times, which we had, I would say, in average over the last couple of months at 70 weeks, we decreased to 60 weeks in the first quarter, which is a big step forward from our point of view, and that has mainly to do with material supply, which is now working quite well. And of course, with that, the productivity increase we have managed. If we look to the longer-term view on order intake, I mean, that shows, first of all, how robust our markets are with, I would say, the well-known dumps we had historically. And I want to reflect a bit on 2024 because having a first quarter at EUR 1.5 billion and what we said is that we do anticipate even for 2024, a book-to-bill ratio bigger than 1 compared to 2023. And this is even without the acquisition of Netstal. So if we add Netstal and we are consolidating Netstal from the April 1 onwards, so 9 months will be counter to that. So this comes even on top. And if we look to that, we estimate an order intake of EUR 5.5 billion to EUR 5.6 billion for 2024. And if you calculate that, in the first quarter, we had EUR 1.5 billion roughly, so that would lead for the remaining quarters at least as an average to EUR 1.35 billion per quarter order intake. Now this will be not exactly on the level. You all know that we have stronger and weaker quarters. But nevertheless, we still believe with what we see in the pipeline that this can be achieved. So that's the major message we want to say and state for that we believe our markets are still quite stable and that the investment scheme for our customers is working.One word about Netstal. First of all, we don't go in details even with the number today, but we are going to present on the Capital Markets Day on July 3. We are giving you more insights, in particular, even financial planning short and mid-term that you are aware of where we are heading to. The message we want to send across here is that since we are now four weeks into or let me say, after closing, we had very strong and intensive discussions, aligning the programs we had. We put that more or less in 3 categories, markets and product opportunities, what we call value capturing and the financials, and let me just talk on the left-hand side. I mean we have a couple of chances together with Krones and Netstal, where we can address markets where we can push with our sales force or in that term, Krones sales force. This we have aligned already. And second, we are going to hire more salespeople on the Netstal side because they have been pretty short on sales force. So that's one big thing we want to bring into the market. And we have defined the product categories which we are pushing. But nevertheless, that's anyway, the portfolio Netstal has.Then the most important one in the middle row is the value capturing and there the cost reduction focused on supply chain and procurement in combination with the Krones terms and conditions we have from our suppliers, plus, let me say, the procurement power Krones has is the biggest issue we are driving forward. Nevertheless, in addition to that, we have even aligned ourselves on how do we add digitalization to the Netstal products that we can bring them, let me say, on the level we have them at the Krones products.And last but not least, financials, of course, everything is translated into the P&L, the programs and what I said earlier, we are going to present that translation then, of course, on the Capital Market Day, so that you have by July 3, a good overview where we are with that acquisition. I can say on the people side, so we have aligned nicely and we're aware of that from day 1, once we had a discussion that the cultures of the 2 companies are fitting nicely together. I think that's an important point. So there is a good alignment even on the culture level and on the mentality level. So and we are quite happy that we believe that we have set up a good program.Then, one word about sustainability. From next time onwards, we give you even a set of figures where you can follow-up what we have achieved in comparison to our targets. We thought for today, it would be too deep to go into it because it has to be justified and to some extent, explained why we are in the certain categories at that particular point, but we are doing that as well on the Capital Market Day that you get deep into that. And from that point onwards, we are going to report actually the progress we do in comparison to the year target and of course, to the 2030 target we have set ourselves. I should not forget to mention what you see in the green area. We have committed to Net 0 until 2040. I think an important step for us with a big challenge and this had a significant impact on upstream and downstream CO2 emissions in Scope 3 because we had before targets there a 25% reduction from the basic year 2019 until 2030, and we increased that now to 30%. Otherwise, the Net 0 in 2040 would be not possible. But more for that, as I said, on the Capital Market Day.Last but not least, a short view into the markets. We have, I would say, no fundamental changes here. I mean, you see ups and down. And I would say being in the first quarter, I would say it's not so relevant. All-in-all, we can discuss ups and downs. But nevertheless, a lot of things will be balanced. We do assume that North America, Central America will be a bit higher by mid end of the year, so it will be quite balanced to the year 2023. And we are talking to you about any way about sales and the share which we are going to deliver and install into North America with the strong order intake we had actually is then increasing the share in North America anyway. South America, quite stable, don't see changes here. Europe, a bit weaker. And this is, in fact, the reality we see that the investments in EMEA and Europe was the lowest, and this is pretty much driven out of Germany. Then Africa, Middle East, a bit of a recovery. We see that continuing in the order intake. So that's quite good in with the crisis we have in the regions, but nevertheless, the order intake is good, and we assume that the business goes okay. Asia-Pacific, quite stable. Even there, we will see a bit more of share in the future because the order intake was good. China, on a quite stable level between 7% and 8%, no changes there. And there is a bit of a peak in Eastern Europe, Central Asia, but even there, I would say this will be balanced out by the mid of the year or end of the year. Nevertheless, the markets are strong there, and it's all the states coming from Eastern Europe through Central Asia, which is Uzbekistan, Kazakhstan et cetera, which is in that region as well. So quite good on that way.Maybe I should mention one investment we are doing. We are extending our facilities in India. We have just made a decision for it because the Indian market is working quite well. There is a strong demand from our customers that we have local presence there and have local value added. So that's the reason why I invested there. And it has, of course, as well a geopolitical perspective why we believe India would be a good spot to invest. So far for me, for the beginning and just overview where we are with order intake, the acquisition, where we are in terms of sustainability and how we see the split at the moment across the world.And with that, I hand over to Uta.

U
Uta Anders
executive

Thank you, Christoph. Good afternoon also from my side. As usual, I will continue with earnings development as well as balanced equity position, liquidity.Before I start on revenue, I want to add on what Christoph said in terms of Netstal. Just to clarify that one more time, there is no P&L effect of Netstal in the first quarter. It will be starting second quarter and then also full second quarter. But there are balance sheet effects, of course, because we have consolidated Netstal. And if you look at our total assets and liabilities, which I will come to later as well, it's a mid 2-digit number which Netstal added.But now let's have a look at revenue. Krones recognized EUR 1.247 billion revenue, that's a 4% increase in comparison to last year. And also at that point, we already want to mention last year first quarter was very strong. As you can also see, it was the second strongest in 2023. And the reason that we have, if you want to call it, only a 4% increase is in addition to that, that we had a lower number of working days compared to 2023, plus the fact that Easter was end of March, beginning of April, whereas last year, it was a week later. On the more neutral side, we still have inefficiencies in the supply chain, which will be eased throughout the fiscal year. On the positive side, on the supply chain, we are getting all the material we need. But as I said, there are still some inefficiencies, which also have some effect on revenue as an absolute number. Also at this point, very important, we are confirming our guidance of 9% to 13%. And also for the second quarter, we already expect slightly higher than we have in the first quarter.Continuing on with EBITDA, Krones recognized an EBITDA of EUR 125.4 million, which is a margin of 10.1%. And as you can see, quarter-over-quarter, EUR 10.5 million in addition, plus 0.5 percentage points and 9.1%. And that's despite of the fact of higher new machine volume, which comes with a lower margin and also despite of effect from quarter-over-quarter comparison, increased payroll, which is also an evidence of our good backlog quality and also the pricing discipline, which we continued throughout the quarters. As we have mentioned several times, overall cost increases are covered by price increases. And also at that point of time, I already want to confirm our guidance for the fiscal year 9.8% to 10.3%, including Netstal. EBIT EUR 89 million, 7.1% quarter-over-quarter, EUR 6 million in addition, 0.2 percentage points. The increase is slightly lower than we had for EBITDA. Reason being that our financial income in 2024 quarter 1 was slightly lower than in quarter 1, 2023, but without any major significance and also no extraordinary effects included in here. It's just timing also of dividend income from non-consolidated entities And I also want to mention at this point of time that we have also had no major extra or no extraordinary effects coming from depreciation. So all in line with our expectations here as well.Personnel and material expense; starting with personnel costs, EUR 384 million, EUR 30 million in addition. We are above the 30%, 30.5%. But from our point of view, is still in the range, which is reasonable and necessary for us to achieve our targets. And the reasons for an increased payroll is of course, merit increases as well as FTE increases, which we will see later. On the material side, EUR 620 million, EUR 31 million increased 49.3%. As we have said several times, 50% is the threshold we are always looking at, which is important for us to achieve our targets. And also at this point of time, I want to confirm one more time that cost increases are covered by the price increases we have done. And I also want to add at this point of time coming back to material cost, of course, the 1 effect we also had because we have a higher new machine ratio than we had in previous quarters.Coming to Krones employees. And here, Netstal is already included in the 19,349 employees Krones employing as of end of March. That's an 836 in addition to December 2023 and approximately 550 coming from Netstal. So without Netstal, it's about 270, 280 increase. And that's across the board, actually. One major portion out of that is additional field service engineers or service technicians. We have 50 more compared to end of 2023. And we also have an increase in our digital workforce and everything else, as mentioned along the companies and along the functions, so far for the group.Coming now to our largest segment, Filling & Packaging Technology. Revenue of EUR 1.043 billion, a 3.8% increase. So the reasons I have mentioned for the group are very much the same as we have it also for filling and packaging technology. So a very high baseline for 2023 as well as a lower number of working days and still some inefficiencies in the supply chain. But overall, we are getting the material as mentioned. Looking at the margin, 10.2%, EUR 107 million overall EBITDA, so slightly lower than last year, but within our expectations also. And also here, important, we have a higher share of new machine business, which comes with a lower margin. But also here, very important, we are confirming our targets here in terms of growth, 9% to 13% as well as in terms of margin, 10.3% to 10.8%. Process Technology, EUR 128 million revenue, so EUR 18 million in addition. First quarter of 2023 did not include Ampco yet. We only consolidated Ampco in the second quarter, and there was just 1 month. And so some portion out of the increase is coming from Ampco. Looking overall at the EBITDA, EUR 14.8 million, 11.6%, a very strong start into the fiscal year. There is some effect quarter-over-quarter coming from Ampco, of course. But we also want to highlight at this point of time also without Ampco, we had a very strong start into the fiscal year. Reason being here also that we had a good share of component business besides of Ampco, which comes with a good margin. And overall, I also want to confirm at this point of time, the guidance, 15% to 20% for the fiscal year. As mentioned before, Ampco only was not included in the first quarter. And also for the EBITDA, 8% to 9% we are confirming at this point of time.Intralogistics, EUR 77 million revenue for the first quarter. So lower than the first quarter for 2023, which actually was also strong in 2023 for Intralogistics. And we have already mentioned in the annual call for 2023 that we have more smaller business in terms also of size that we had some delays in revenue recognition. But as also Christoph indicated, quarter 1 order intake was good for Intralogistics. That's why also at this point of time, we are confirming our guidance in terms of revenue growth of 5% to 10%. And looking at EBITDA, EUR 4 million, 5.2%. So also an under-proportional start into the fiscal year. But also here, we are confirming our guidance of 6% to 7% for the who fiscal year. So far for the earnings.Now let's have a look at the liquidity situation as well as equity. And as mentioned before, here, Netstal is included. Let's first have a look at the liquidity situation of Krones, a very strong first quarter in terms of free cash flow before M&A. You can see that we have a cash position of EUR 442 million, and that is despite of the fact that we have paid out EUR 180 million in total for M&A activities, the largest portion, of course, being Krones. Including 3 credit lines and used ones, we come to liquidity reserves of EUR 1.3 billion. So a very strong fundament for the execution for the backlog for pursuing our growth strategy, just to name 2 reasons. On the equity side, EUR 1.776 billion equity, you see that we have added EUR 61 million. On the equity ratio side, we have a decrease of 0.6 percentage points. Major reason being that we have added assets and liabilities from Netstal in the mid-2 digit range, which decreased the equity ratio. And apart from that, it would have been neutral. Working capital, as of end of March or as an average of the last 4 quarters, 17.7%, so lower than 23%. And so we had a very good situation in terms of working capital stabilization or keeping it more or less on the level of 2023. Overall, as an absolute number, we were holding a working capital of EUR 742 million, whereas as of end of December, we had EUR 766 million, and that's including Netstal. And if we look on the right side into the composition of the working capital, you can see that it's again that it came again from received repayments, which were strong because of the high order intake in the fourth quarter as well as in the second quarter.Looking at inventory, 15% as an average over the 4 quarters, so very similar as we had it the last reporting period. The same is true for payables and receivables PoC remained to be high below 40%, but also on the level as we had it the last reporting period. Working capital trends leads automatically into free cash flow. And I mean looking at the free cash flow before M&A, EUR 184 million, so very strong compared to minus EUR 21 million in the first quarter of 2023 and it's all coming from cash flow from operating activities because, first of all, from the earnings, I mean, other non-cash changes were more or less similar to last year, but change in working capital was favorable whereas in the first quarter of '23, it had been unfavorable.CapEx on the same level. And here, the situation is that every year, we are starting a little bit slower, but keeping up then towards the fiscal year. And I already mentioned or talked about our M&A activities, the payout for Netstal on the one hand, but also for deferred purchase price for Ampco and all-in-all, taking together a slight positive free cash flow and including payments for leases, we had a change in cash of EUR 6 million, which we already saw before.Looking at the overall fiscal year for free cash flow, I mean, we have said that we are expecting a positive EUR 3 million digit EUR 150 million to EUR 200 million more for the fiscal year. So the message is in the next quarters we are not at free cash flow as an absolute number. Actually, for quarter 2, in particular, we expect a negative free cash flow because quarter 2 is always the quarter where we are having more payout than in the other quarters. And overall, we are confirming what we have said for the overall fiscal year also in the annual call.ROCE is our last KPI. 19% ROCE compared to 17.8% a year ago. And that comes from -- the increase comes because we have an increased EBIT by 21%, whereas the average capital employed only increased by 13%. And of course, with that, this was the effect. And overall, say, for 2024, 17% to 19%. This is our target, and that's what we are also confirming.That is so far from my side.

C
Christoph Klenk
executive

Thanks. Yeah. To the outlook. I mean Uta said that we are confirming in any category, the guidance we have given. So revenue growth of 9% to 13%. And again, the 9% would be organic. I would say the 13% is then including Netstal. So I would say it's plus/minus a percentage, but it's in that range. EBITDA is 9.8% to 10.3%, and this includes, again, Netstal 9 months consolidated and the ROCE at 17% to 19%. That's where we are today and we believe we can achieve that together. Here again, the segments Uta said that already, so there is a confirmation of all the numbers which we had before. So in any regard, good growth and good profitability margins. So I don't want to go through that again because it was already highlighted.The key takeaways, yeah, I mean, we had a successful first quarter. Markets are still strong. Very happy on that. We have a good backlog to plan for 2024 and for, I would say, into the second half of 2025 gives a lot of security for our people, but even for us in terms of the financial planning. We have good profitability. I would say we could talk longer about productivity improvements because Uta said that the supply of parts, in particular, electrical and electronic components is good. Nevertheless, we have not fully recovered from, let me say, the go-around procedures we had in several areas into the company and going into efficiency improvement programs that we are moving back to the standard procedures we had over a very long time. And with that, actually improving our delivery situation down from 60 weeks to a range of 50 weeks, hopefully, by the end of the year. Free cash flow, Uta spoke about quite good and on the expected level for the full year. Then we have done the acquisition of Netstal, we might talk a bit about that later on. But for us, very important to add significant know-how for circular economy to do recycling of PET and to do PET solutions more energy efficient. We have a full set of long-term view on it, which we are going to present anyway on the Capital Markets Dat. And the targets are confirmed anyway, as I said earlier.So far from Uta and myself, and now we are looking for the Q&A, which you hopefully have.

O
Olaf Scholz
executive

Yeah. Thanks to Christoph and Uta for the presentation of the figures. So as mentioned before, you can use to send me an e-mail or use a function raise your hands. And the first signal I get via e-mail from Sven Weier from UBS. Sven, you are the first. Please, your questions.

S
Sven Weier
analyst

The first one is Mr. Klenk on the order guidance that you've given. I was just wondering how much have you incorporated a contribution from Netstal? Is that roughly like EUR 50 million per quarter. And I was also wondering if you expect a positive book-to-bill also for Netstal stand-alone this year. That's the first one.

C
Christoph Klenk
executive

Yeah. The first answer is yes, it's EUR 50 million per quarter. What we have assumed in order intake for Netstal. And if you assume EUR 50 million order intake per quarter, it's less than 1 book-to-bill ratio. So we are careful on that because we see that the markets for, let me say, injection molding, in particular, those outside of the beverage industry are not working so well at the moment, and that's the reason why we are a bit, let me say, reluctant on that and having some careful approach to it.

S
Sven Weier
analyst

That's understood. And I guess it's probably also this year too early to see the benefits of the combined group on the order side, I guess, that's more next year, I would guess.

C
Christoph Klenk
executive

Yeah. Let's see. I mean, we can give a better view on, I would say, maybe in the Q3 because we believe there will be some impact because with the strong sales force we have and the combination not only of sales force, even the combination of our service force might help in one or the other case, but how big this is really, I would say, we need to see once we are deeper into, let me say, the cooperation we have. I would say the real effect you see next year.

S
Sven Weier
analyst

Good. The other question I had was just on the free cash flow and the process tech margins. I mean I understand it's maybe too early in Q1 to talk about a higher target. But should we think that the targets you have as a kind of a minimum for free cash flow and for PET?

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Christoph Klenk
executive

Uta, free cash flow.

U
Uta Anders
executive

Yeah, I think we can say that this is the minimum, yes, for free cash flow. I mean we had a very strong first quarter. We were pushing also for free cash flow again in the first quarter also because we wanted to pay Netstal with our own financial funds. So there was an additional strong effort, but it's too early to tell if we can increase it, but I agree with your estimate.

C
Christoph Klenk
executive

Yeah. And to processing, we don't want to raise the bar at the moment just because of -- it's not an uncertainty, but we will have later in the year, bigger projects to be executed. I mean it has to do a lot all the time with, let me say, the product mix we have, and we need to see how good Ampco is performing in the second and third quarter, which is a contribution to it. And let me say, our own component business out of the [base] is quite strong in the first quarter as well. So we need to see how this continues since that it's a very short time business and has not a longer-term view like 6 or 9 months into the future. We are careful on that.

O
Olaf Scholz
executive

And the next one I got from my list is Sebastian Growe from BNP Exane. Sebastian, your question please.

S
Sebastian Growe
analyst

It is also around Ampco Pumps. The question that I have there is if you can give us also some data to what extent did contribute to the quarter 1 sales and maybe also indicate how really the profitability compares to the rest of the group. So I heard your qualitative comments, but if you could also eventually be set up with a bit of numeric data that would be very, very helpful.And the other question I have around Ampco is with regard to the earn-outs. Obviously, you had the EUR 13 million in the first quarter. And the question is if there is eventually some further earn-out related cash outflows we expected for the rest of the year.

C
Christoph Klenk
executive

So I'll do the first 2 ones and you the second one. The per quarter sales is around EUR 12 million to EUR 13 million. So that's pretty easy. And you could actually -- since it was not consolidated in the first quarter last year, it's easy to figure out with the numbers we have given for the first quarter this year. It's around EUR 12 million to EUR 13 million, what we anticipate per quarter. The second half of the year might be a bit stronger. But this has a bit of a seasonality within the Ampco business. And profitability, the profitability in processing would have risen as well without Ampco. I mean, we are on a pretty good path there, had to do that the product mix was in favor. Since it was smaller projects, and we are paying in the meantime, very much attention on that we get the product mix in the sense of how big are the orders and how is the risk profile much better managed than in the past. So that's one big thing. And second, what we call their life cycle, which is different from the life cycle business we have in bottling and packaging. So we had many upgrades. And let me say, what we call life cycle business, smaller orders, which are in the range of EUR 500,000 to 750,000, which have been added into that. And that's the reason why we're so profitable. We had less bigger projects, which come more into revenue by the second half of the year. So that's the reason why we're still a bit careful on the profitability on processing. It's not that anybody gets now concerned. We are in the guidance, and we are, at the moment believe that we are in the other level of the guidance even in terms of profitability. So nothing, I believe goes wrong there. But this is how we are seeing it at the moment. I hope that answers your question.

S
Sebastian Growe
analyst

It does now. Good.

U
Uta Anders
executive

Yeah. Then I will answer on the earn-out. If we are expecting any additional earn-out throughout 2024, that's not the case. We had the earn-out, which we were expecting paid out in the first quarter.

S
Sebastian Growe
analyst

Okay. And there's also nothing really scheduled so for 2025 or what would be the --

U
Uta Anders
executive

It depends actually on the profitability then of Ampco on the one hand, and we also have some delayed purchase price because we only acquired 90%, but that's then to be seen also how the profitability is in '25, and yeah.

S
Sebastian Growe
analyst

And for Netstal, you had one slide where you had said that you would have agreed on the term targets. I guess you want to talk about that in more detail on the 4th of July or 3rd of July. But whatever you can and are willing to share, I take it.

C
Christoph Klenk
executive

I mean what we can share, I mean -- and this we said already last time, is that Netstal is not on the profitability level of Krones, and we want to get them as fast as possible on a 10% EBITDA level. And what we see at the moment is that could be in the range of 2 years. And the reason why we don't give more detailed figures because that meeting took place Monday, Tuesday, we're well together. And we do have spent 2 days with the management and it's not finally translated in detail into the P&L, not in the sense of the height, it's more in the sense of the timing. One, it's really appearing in the P&L because we all know in case we talk about procurement and there are still some parts in the stock, which you need to use. So when it's coming, it's really into play and that's the reason why we don't give too detailed figures today. Nevertheless, we believe it can be managed in 2 years. So by end or let me say, mid of 2026, we should be at 10% EBITDA. So that's -- and I apologize that we are going not more in detail because all the rest would be speculation, and we want to be quite firm on it once we are going to do it on the CMD.

S
Sebastian Growe
analyst

Yeah, that's absolutely reasonable. And the last question I have, sorry for labeling the point around free cash flow again. I would like to start the discussion in the way that if you look now at the quarter 1, would it have been in line with expectations or has it been clearly better than you would have expected when starting the year? Maybe we'll start there and then I have another question.

U
Uta Anders
executive

Actually, it was slightly better than we had expected.

S
Sebastian Growe
analyst

And you said before that there is some sort of scheduled cash outflows. I understood some of which is related to working capital. At the same time, I think you also made some positive comments around the order intake that you still expect in the coming quarters. So quite frankly, I'm having trouble to see any cash burn really as of the second quarter. So obviously, profitability should further rise as per your guidance. You have, as I said, the working capital should be sort of in balance, I think, if orders are playing out as expected. So what am I missing?

U
Uta Anders
executive

So there are various factors. I mean, first of all, looking at payroll for instance, there are quite some outflows in the second quarter, which are higher than in the first quarter, for instance, but not only bonus. And just to mention one, we will have some tariff merit increases in the second quarter, which are not yet in the first quarter. So that's an effect than the overall payout of the backlog or the received prepayments will also continue. So those are the major reasons why for the second quarter, we expect a much lower free cash flow. And for the overall fiscal year, as we have said earlier, it's too early to really increase it. But as I said, quarter 1 was better than we had expected. And we also have to have in mind, we also had a very good Q4. So if you take Q4 and Q1 combined, we had a free cash flow before M&A of EUR 350 million. And of course, that needs to be translated now into working capital increase and with that utilization of prepayments. That's how we look at it.

S
Sebastian Growe
analyst

Yeah. Which makes sense probably at this point. And maybe just for housekeeping, the CapEx guidance is what for the ordinary CapEx for this year.

U
Uta Anders
executive

3%. I mean, we had always said 2.5% to 3%, but we are now keeping it at 3% also because we will invest also in some modernization and other things.

O
Olaf Scholz
executive

The next, I got on my list is Christoph Dolleschal from HSBC. Christoph?

C
Christoph Dolleschal
analyst

3 questions from my end. First one on the regional sales in Q1. I mean, they do look a bit strange. Did you do some reclassifications, because I see Central Europe plus 90%, Central Asia plus 270%. Is it organic or is it reclassifications in there?

C
Christoph Klenk
executive

No. I would say, first of all, what we have in the presentation is not order intake. It's anyway sales what we have. And this has to do because we don't show order intake per region for the time being. And if you look to it, I would say all the regions have worked quite well. So when I look every day on the order intake, that's the reason why I'm very deep into it. There is no market which is, let me say, out of the frame and not into, let me say, the 18-month history we have in terms of order intake. So North America is still quite strong. There's a slight recovery in Africa, Middle East, which we see, South America is on the same level, Europe is lower than, I would say in previous times a bit because we are below 30%. Historically, we have been around 30%, 31%, 32%. And I would say Asia, which is separate than China and Central Asia are doing quite well. So we are in any regions, I would say, plus/minus 5% to the target. So there is nothing extraordinary. If you would ask me where do we see a bit of a change is North America that the intent of the investment scheme goes a bit down there, which is compensated for the time being what we see in terms of possible order intake in Q2 and Q3 in Africa, Middle East and in Asia. And because of that shift and the compensation of, let me say, a bit of, I would say, a less intense investment scheme in North America, we definitely believe that this can be offset and compensated by Asia and Africa.

C
Christoph Dolleschal
analyst

Okay. I mean I looked at your quarterly report, and that's why I came up with these strange numbers, but I'll follow up with Olaf. The second one is on backlogs because you said in the past that, obviously, lead times are very long, 1.5 years, probably even 2 years. And also recall that you said at some stage, clients might turn to competition because the lead times are just too long. Now the good and the bad thing is you're shipping in orders like crazy. So the backlogs are not coming down. The lead times are not coming down. So are we in a situation where first clients are turning away to competition because this is what you have been highlighting.

C
Christoph Klenk
executive

Yeah, sure. I mean, as I said last time already, yes, that's the case that we see from time to time that one or the other order goes away because of better delivery times of competition. That's still the case. And the 60 weeks we have for the time being is by far not sufficient. I mean, we say that all the time, we need to go down to, let me say, in the range of, I would say, roughly 40 weeks would be the target we are aiming to by the end of 2025. I can say, fortunately, even competition has good order intake because the markets work well. So the difference is not too big. Otherwise, we wouldn't have had the almost EUR 1.5 billion order intake in Q1. But yes, we have lost some orders because of that. And this is, of course a pity, but nevertheless, we keep pricing up with that and stable, which is as important as having good delivery times.

C
Christoph Dolleschal
analyst

So that means pricing discipline is stable, right?

C
Christoph Klenk
executive

Yes.

C
Christoph Dolleschal
analyst

Okay. And then last but not least would be on Intralogistics because we haven't been talking about that one at all. And obviously, we know that the market is very slow. Also, when you look at the bigger players, I think, only slowly recovering. And one thing is like what are you expecting for the rest of the year? And also probably more of a strategic one, how do you see yourself positioned in that segment, let's say, in 5 years? Because I mean, there's a lot of big competition. There's a lot of say, modular guys coming in there and taking away share. So is it something that you're keeping on doing or is it probably something where you probably would also consider other options at some stage saying, hey, we need to buy something or we may need to sell it or -- so where do you see yourself in 5 years here?

C
Christoph Klenk
executive

Yeah. First to the short term, how we see it. I mean we have been low in revenues in Q1, and this is clearly to be seen in the segment report. We are catching up the following 9 months. So that's the reason why we still talk about growth in Intralogistics. For us, it was important to take orders on board, where we can maintain profitability that we do not drop even it's not on the level we want to have it. But nevertheless, we managed to keep it stable. And the order intake in Q1 was good. And we believe that we can generate significant growth in terms of order intake for Intralogistics in 2024. So that's our Q4 this year. And if we look to the long run, I mean, of course, we have the questions you have. Once you are not as profitable as you are with the core, you ask yourself certainly the question is that in the long run, the right thing to do. And that's the reason why we are, from time to time, rechecking that. Second, I can say why we are I would say, in that difficult times have done so good. There are 2 reasons for it. One is that a lot of the projects going into the beverage industry, where there is a strong connection to the know-how and the main know-how of Krones in combination. So this is one subject. And second is that, let me say, once we are talking about distribution centers of supermarkets, we have set a couple of innovations which helped us to go through that time. We need to see how they performed now since that has been a kind of a broader type solutions for the time being. And we need to see for the next 12, 18 months, how they are going to materialize. If you look to that, so we have a nice, let me say, approach to a couple of questions in the beverage, let me say, and in the supermarket distribution industry. So we are concentrating on those 2 industries. And if you look to that, then I would say there's an interesting perspective. Nevertheless, that needs to be proven. And number 3, maybe to mention, we are quite strong with a couple of big customers in the food industry, where we can even use some, let me say, cross-selling from other divisions we have, which helped a lot even to maintain their position. So if you look to the combination and the connection to our core with Intralogistics, I would say there is still a large justification of having this segment on board. But again, we are never, so let me say -- so strict to say, no, we don't ask the critical questions as well. If things are not going in the right direction, we might react to it and rethink the position of it.

O
Olaf Scholz
executive

So I get a question via mail from Andrea Gabellone from KBC in Brussels. Andrea, you want to ask your question or should I ask it for you.

A
Andrea Gabellone
analyst

Sure, I can go ahead. I have also a question actually on the Intralogistics segment. More specifically, do you see any hesitancy from customers to sign new projects? Is there any change recently that you see? And also did you experience any project cancellations. We heard this from some of the peers in the segment. So happy to have your comments on that.

C
Christoph Klenk
executive

Yes, we saw some, let me say hesitation to signed contracts, in particular, for the bigger projects. And then we have a couple of them for a quite long period in a row. They are not gone, but they are not realized. So that was certainly one of the problems we had in Q4, absolutely. Now Q1, even on the bigger ones was significantly better. And even still there, timing is an issue. So expectation was a bit higher than it is, I mean it's good, but expectation was even higher. So that's coming in Q2. And usually, it takes a bit longer than usual. Cancellation, we have not seen, and that might have to do that we are extremely careful with what we take on board. We are talking several times with the customers, even if after signing the contract how secure the order is and how security is to execute it. So fortunately, we have not seen that, that an order was canceled and I have really to say, this is all the experience we have from processing as well that you have to be careful with very large big on orders, and you need to have a certain attitude to deal with them. But all-in-all, so far, in Intralogistics has not happened.

O
Olaf Scholz
executive

So I got the next question from Benjamin Thielmann from Berenberg. Sorry, yes, Benjamin, your are the next.

B
Benjamin Thielmann
analyst

Maybe a couple of questions from my side. First of all, a question on your footprint optimization in India or footprint expansion. Can you maybe give us some color what was the rationale behind that? I can imagine, I mean India is a big market for liquid food. So should we expect especially synergies to be a process technology business, an example, how much [indiscernible] machines or maybe a little bit of color on that, and maybe we can do the questions one by one.

C
Christoph Klenk
executive

Yeaj. I would say there are 2 reasons for the expansions we are doing in India. #1, we have acquired, I think, 6 years ago, a company in India for processing. And since we have doubled the revenues there from a single-digit number now to roughly a bit above EUR 20 million. Their footprint is still too small, and we are extending the plant there. So if it would have been not India, I don't think we would have mentioned it. But nevertheless, the business is doing good, and we believe that we can double the revenue for this processing company pretty -- not pretty easy, but we can double that in the next couple of years. And that includes all kind of products. We have a couple of products shifted from Germany [indiscernible] India and building them now in India. This does for the time being, not include homogenizes, so they are still built in Germany, but that's only on the menu that we are going to do that some years ahead once this new plant is built because it will take until end of 2025 before we have this new facility available, and we can use the space. But nevertheless, we are going to have more products manufactured locally that we can serve the Indian market better. The company served as well the East African market quite well out of India. The second investment we do is for bottling and packaging. This will be an investment in the range of around EUR 10 million to EUR 15 million. So with the experience we have in China and in Hungary, with a smaller footprint, but the land we bought is big enough to extend because our experiences bring first their engineering capabilities and then start with one machine that all the processes are aligned that the people are trained and then the upscale like we did in China for building new machines there is much easier rather than you start greenfield with something very large, where you are in a lot of trouble. This facility is to be planned up by end of 2025, where we start operation early 2026. So that's the 2 investments.If we look to the single market, India, we have around EUR 250 million order intake there. So quite strong and good. Last year, a proportional of it is the dairy industry, but that's a smaller proportion of it. The bigger one is going still in the soft drink area for us and in the water business, where we are quite good in India. So that's where we are. And processing, as I said, is around EUR 15 million to EUR 20 million in India, served out of India.

B
Benjamin Thielmann
analyst

Okay. Interesting. And maybe another question on the order intake. Is there any significant difference in terms of drink exposure, like if is liquid dairy doing significant or order intake from liquid dairy manufacturers is that significantly better than carbonated soft drinks. How is beer doing? I know you don't disclose it by the drink type or by the packaging type, but maybe you can give us a little bit of color over here given that we see some mid markets doing a lit bit weak in the last couple of quarters.

C
Christoph Klenk
executive

Yeah. I wouldn't say there is -- let me say, if you look to the last 18 months, there is not a big change in terms of the, let me say, drink habit being mirrored into the order intake. So we had already last year a pretty low brewery year, and that has to do certainly with, let me say, the not growing beer market overall for the time being and a lot of change in consumer habits from one category of beer to the other category, but not a real growth behind it. So that's what we see in channel. Everything which is carbonated soft drink and water did work quite well around the world. I would say there is an investment scheme driven by sustainability into it already that many of our customers invest not only because of capacity reasons, but invest as well in terms of cost, which is labor, but it's sustainability, water reduction, for example, is a big scheme of reducing footprint because the lines are with higher speed, but on smaller footprint. So that's the investment scheme we see in water and CST. Dairy has never played a big role for us, but there are a couple of dairy mixed products in North America and in Asia, which are quite interesting and booming. But if you look to the, let me say, overall order intake, it might be 3% to 5%, reflecting that category, not bigger. Even in China, we see kind of a boom like that, where we participate only, let me say, in a certain way, not fully on it. So I wouldn't say that dairy is really driving the whole thing. And even India, the order intake is only limited driven by dairy consumption and orders.

O
Olaf Scholz
executive

And now Lars Vom-Cleff from Deutsche Bank. Your question, please.

L
Lars Vom Cleff
analyst

2 quick questions regarding the order situation. I mean, we already talked about your order backlog, the risk of losing more clients. And admittedly, it's good to see your lead times come down. I'm pretty sure you told us in the past, but maybe you could remind me why are your major competitors able to deliver faster? Is it because your order backlog shot up that much in the past or are they producing or manufacturing more efficient? That would be my first question.

C
Christoph Klenk
executive

Yeah. The first question is, you answered yourself, it had to do with the extraordinary order intake we had during corona and after corona because we manage best #1 corona second supply chain issues. We didn't fail on any delivery time or any installation and commissioning promise we have made. So we did all of that, which led into 2022 into a huge order intake beyond any expectation and we are still living with that backlog we built up there, and that's the reason for the long delivery times. In terms of efficiency and in terms of, let me say, throughput, we have been the fastest historically in the industry, and we are aiming back to that time that we are going down significantly with our delivery times. So it's all about productivity, which will come back as soon as I would say everything is digested after this supply chain crisis.

L
Lars Vom Cleff
analyst

Perfect. And then maybe adding to that, I mean, order intake continuously is extremely high. I know when we started with an order intake about EUR 1 billion, it was extraordinary. Now each of us got used to it. Why is the quarterly order intake still so high? Is it an under event investment in the recent past of major customers? Do your customers enlarge filling capacity or is it rather the necessity to get state-of-the-art technology that is resource-efficient?

C
Christoph Klenk
executive

It's most probably a combination of all of what you said. I mean, first of all, I would say, the growth drivers in the, let me say, Africa, Middle East and Asia are very intact. That's growing population and adding more consumers to it. So that's one of the schemes we have. Then second, it's certainly urbanization as soon as people move into the cities, this is a growth driver for us because don't forget from West Africa to East Asia, the main drink is still tea-brewed. So people drink more than 50% unbottled in that region. Once they move into the cities, they need to have bottled products. So that's one other growth driver. And then it's exactly what you said that a lot of modernization is going on, driven, I would say, driven by cost effects because new lines have significant less people to operate them. Secondly, output and efficiencies are per se higher. So that's one other driver. Then it's more diversification in the product categories in the mature markets like in Europe and in North America. So that's one other driver. And last but not least, it's sustainability. I said the order intake of breweries is low, but one we see right now an order intake from a brewery, we talk in any regard all the time about water consumption reduction. Just keep in mind, in average, we need 3 liters of water to brew one little of beer, and this needs to go down to 2 little water for one liter of beer. And this even goes to the extent that some breweries don't get the permission to brew in a certain area once they don't have this reduction. So it's even sustainability driving the whole thing and going in the right direction. So it's a combination of, and this is why we believe the sustainability scheme is the let me say, beyond the, let me say, population growth, the strongest driver we see. And once we look to the ESG targets, the big multinationals have said the investment scheme arising out of that until 2030 with the promises they have made is giving us the security that there is a lot of replacement of old equipment. We see a lot of lines being older than 20 years to be replaced right now, and that might be another driver for it that a long-term under-investment might have happened, which we haven't seen in that scale like we expected right now.

O
Olaf Scholz
executive

Peter Roth from Baader Bank, your next question, please.

P
Peter Rothenaicher
analyst

3 questions. Firstly, you mentioned you're expecting for the upcoming quarters on average EUR 1.35 billion order intake. Will Q2 be in this range or is it weaker or somewhat stronger.

C
Christoph Klenk
executive

Yeah. We do expect Q2 a bit lower than the EUR 1.35 billion. With what we see right now, April was not so strong, but the pipeline is still there, and we believe that -- and that's all the time, the weakest order -- the weakest quarter in order intake, the Q2 historically, so I would say slightly below, and that there will be a pickup in the third and the fourth quarter.

O
Olaf Scholz
executive

Okay. Second question on your material cost ratio. So in most of the capital goods company we are seeing in recent quarters, some reduction in cost of materials as prices for raw materials are coming down. I understand that you're securing your purchasing if you close an order. But when can we expect some improvement in the material cost ratio?

U
Uta Anders
executive

Yeah. First of all, we are also seeing material cost reduction when we buy material right now. But first of all, we are still holding some stock for the orders which we have secured, and we are expecting then for the second half of the fiscal year a positive effect coming from that. But that's figured in our guidance already. So no additional positive effect coming from that.

P
Peter Rothenaicher
analyst

Okay. And the last question, we see in the balance sheet, Netstal effects in material costs. What is the goodwill you have in for Netstal?

U
Uta Anders
executive

I would say it's a bit too early to tell the final goodwill because we are still in -- I mean, we have done a first estimate on the PPA. But as we have only closed 28, we are still working on that, but it's going to be in the high 2-digit million number. But let us have a look then in the second quarter when we have really finalized the PPA with all its effects.

O
Olaf Scholz
executive

I got Sebastian Growe again. Sebastian, is there a question?

S
Sebastian Growe
analyst

Yes. On purpose, I've raised my hand. Just to touch again on the pipeline. The question that's sitting around in my head is around the under investment thesis compared to the pent-up demand that comes along with it. And the question that I simply have is, to what extent can you sort of realistically plan sort of several years out? So there's eventually a certain tendency or risk, call it that way, that you're kind of running too fast at a given point in time and then you get the sort of rollover at some point. So I know it's a super, super qualitative question. Nonetheless, I would be interested in how you sort of address that one.And the other one more technical question that I have is, do you see any sort of hesitance at the customer side because of eventually rate cuts coming through and obviously, it's always very difficult to plan for this. But nonetheless, based on your discussions with customers, is this really a major thing that this might then unlock more demand if and when rate cuts are ultimately coming through.And then I would have one on services, but if we can take this first, it will be great.

C
Christoph Klenk
executive

I mean, I would say a very good question in terms of how long can we plan in terms of order intake and how are we really able to justify the pipeline. And I would say then adjust capacity of the company to the expectation we have and not overdoing that. Most probably, this is the most asked question we have on the Board and the most discussed item. What we see at the moment, and this is -- I mean, you know we have a lot of customer discussion offset from the order and try to figure out how their investments scheme look in the long run. And again, I can say only what I said earlier, the growth factors, everybody sees in the industry and we talk totally independent to them, so there couldn't be a bias between all the customers that they take the wrong assumption. The assumption is that sustainability is driving investments and particularly for replacement of odd lines. And the other scheme is there is still the growth of the world population and the urbanization. Those 2 things together, I would say we could say is for the next 3 to 5 years this scheme, which is intact. I can't tell you if there is an other economic event, which might actually jump into that, that it not become true. But fundamentally, this definitely exists, and we have put a lot of, let me say, research and let me say, analytics into it, in particular understand the installed base and how old it is and what leverage it would give to our customers in case they would replace and understand their business case for the replacement. Again, this shows clearly there is a big tendency for further investments. And then we checked about the interest rate level we see right now around the world is that a factor which might make them more hesitant to the whole thing. It's not because if you look to their cash flows, they generate with the business they have because the conversion from an order intake until it was the consumer is so short that most of the investments are done out of the free cash flow, not for everybody. And then there are some companies still very strong, growing with strong demand, outperforming companies not strong growing and having old equipment. And this drives, again, kind of a scheme that everybody sees those who have investment have a much better return on it rather than those having maybe a depreciated equipment and running it for years and having not the efficiency like the others. So I would say there are many factors we double check for that. Nevertheless, we plan all the time having a quite big contingency that we have a flexibility of 10% down, if necessary, without getting into the structure. That's certainly to do with, let me say, all the third-party workforce we have on board around the world in the meantime. So that's a kind of a security buffer, which we are handling. And we are planning all the time with our infrastructure 2 or 3 years ahead, making sure that what we do is an add-on and it's not taking somewhere the scale away. So that's what I can sum a long answer to a short question, but I just wanted to reflect that we are deep into that and that we are really seriously considering.To your second question, to be honest, I didn't catch the point you said. What is the discussion about the customer.

S
Sebastian Growe
analyst

I was just making the point that I think you addressed it around the interest rates, if some customers are eventually hesitant to place an order now because they are rather eager to wait for, whatever, in 25, 50 bps rate cut in whatever months time from here, if there is sort of a bit of a delay simply in the decision-making exactly because of that point or would you say that most people really indeed appreciate the economics of a given project rather than waiting for the extra data coming from a bit of a lower interest rate cost.

C
Christoph Klenk
executive

In general, I would say most of the customers or 85% I would say are not in that scheme. Then we have 2 categories of customers where the interest rate plays really low, whether they are start-ups and we have a couple of financing questions for some customers, how they can finance their projects. They are not factored in, I have to say, because we are careful with those, but there are some out there. And then there is one particular customer everybody knows, a quite big one running a global brewing setup, which has a certain debt rate where certainly interest rates are harming investments. And this we feel very clearly. But other than that, I would say 80% of our customers are not actually hindered by the interest rates we see right now.

S
Sebastian Growe
analyst

And the last question I had, [indiscernible] to the point I made around sort of how to prepare for an eventual slowdown at some point in time and I heard you around 3 to 5 years looks extremely good from here. The question that I simply have is around the life cycle solutions business. I think you've always been to the extent needed specific and at the same time, rather, I'm clear how big really the business is. But the question I really have is, how do you make sure that structurally you kind of bring up the service contribution life cycle contribution over time? Obviously, we know that there's one other competitor of yours in Germany that has food and beverage rather than just beverage, but obviously, they have materially higher service share. And obviously, this is a great, I think, insurance against whatever can happen in the new equipment business. So yeah, maybe some color on that.

C
Christoph Klenk
executive

Yeah. I mean, I would say, when you look to the general efforts we have, so I would say that life cycle gets at least as much attention as any of our new machine business. And this is, in many regards, #1 in the infrastructure, we run around the world. But even second, all the efforts we have on digitalization are targeting into life cycle services and putting Krones customers closer to Krones. We have an internal slogan, which is called Managed by Krones. I wouldn't go to that extent back because some customers are really unharmed by that, and we have first to prove that we can do it. But first, let me sell pilot lines we have and helping them online to maintain their output and reducing with that, let me say, the use of spare and change parts is well appreciated. It's still in a scale that we can't really talk about a large thing, but it shows that the scheme works. Now you could be concerned selling less spare parts, but the point is once we get more customers in because we said all the time, it's around 65% of the installed base, which we serve. Once we prove that output goes significantly up with the measures we offer and the services, then I would say we can take more in. And second, we can offer more attractive pricing on OpEx issues, which is an important factor for our customers. So saying that, we strongly believe that our life cycle business and the pandemic has proven that once again, it's extremely stable even in case of an economic downturn. It was even sometimes a bit stronger once it came up out of the pandemic because a lot of customers ordered parts just to compensate for the part shortages that it was applicable at the time. So all-in-all, I would say there is a lot of attention on it. It's a lot on the day-to-day business we have there and secure the business in the long run.And now we can come to the final question, whether we have 1 day where we are going to, let me say, give you insight in those numbers that you have more confidence that we have a significant share of our business related to that. I'm not sure how we deal really with that because we haven't spoken about that for the last 2 or 3 years, whether we have to show or not to show that. But at least on the Capital Markets Day, we need to give you some color of it where we are with that.

O
Olaf Scholz
executive

And I guess, I see also that Benjamin Thielmann has additional questions.

B
Benjamin Thielmann
analyst

Just 1 quick follow-up question. You mentioned Mrs. Anders that supply chain bottlenecks has become quite better, but there is still some sourcing issues for some components. Could you maybe give us some color like what components exactly are you still struggling to get. I remember you mentioned electronic and mechanical components --

U
Uta Anders
executive

What I mentioned actually is that we are getting all the components. So no more issues in the supply chain, but we are still having issues in the efficiency of the production just because, I mean, what we did is we disassembled some electronic partnerships, the product without it and just getting this back to normal, that's the inefficiency I was speaking about.

O
Olaf Scholz
executive

So I check my channels. I don't see any further questions from the participants. Good. Thanks a lot to participate today and taking your Friday afternoon. I hope you have an enjoyable weekend in front of you. I wish you all the best. Thanks a lot. See you next time.

U
Uta Anders
executive

See you next time.

C
Christoph Klenk
executive

Thank you.