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Welcome to the conference call of Krones. We're off to a good start to the financial year 2022 and a strong first quarter. We want to present to you today's figures for the first half year. But first some technical information. For all who participate via video, if you do not see fully both presenter, then you have to change system settings in Teams. Please make a right-click with your mouse key at the picture and select 'Fit to Frame'. Then you'll see the entire picture with both presenters. So once again, please make a right-click at the picture and select, 'Fit to Frame'. After the presentation held by Christoph Klenk and Norbert Broger, you have the possibility to ask questions. [Operator Instructions] If you do not have the possibility to send a short information mail, I will ask at the end to all of you, if you have further questions. So I think let's start with the presentation. I think we are all interested in the details about the first half year. So I will hand over first to Mr. Klenk. Christoph, the floor is yours.
Olaf, thank you very much. Good afternoon, ladies and gentlemen. Pleasure to have you here today. We can inform you about the first half year of the Krones' numbers and, of course, where we are with the company. We are very happy to have achieved the financial results on one side and on the other side, of course, that we have achieved with our customers what we have promised because we think that's equally important that our customers, even if there was difficult times are, let me say, to a certain extent, happy with what is Krones doing. Not fully because of the delivery times. And if you see the results today, there might be, to some extent, in contrast to, let me say, all the challenges we have. And I would like to give you just in the beginning before we jump into the presentation, a greater view how we see things and why we believe where we are today and why we are there today. So the whole thing, the story started 2019 and those of you following us for a longer period are aware of that we are having been in not good shape financially in 2019. However, that created some readiness once COVID started in 2020 that we have been fast in recognizing what does that mean and taking measures to counterattack the COVID-19 issues. And in particular, I mean you all know, and we are not happy about that, but it was necessary. We reduced at that time significantly head count. And with that, we created a kind of fundament to continue in the future. Some more measures have been taken at that time, but I think that was one of the important things. And under COVID-19, we actually improved the market position of Krones. Why is that? Because almost every project we executed in 2020 under COVID-19, we kept the time line agreed with our customers. I mean that was a huge milestone for us since every customer was afraid of that this project will fall apart and we could not keep the time lines. The basis for it was our huge service force around the world and the remote access capabilities we have. So we kept the promises we have made at that point. And that created a better market position and more trust into Krones. Then the supply chain crisis came, the next big thing. We all know the result of it. And we took even there fast action. There have been 2 things we have done. Number one, we looked at about our capacities and the utilization of it. It was clear that we cannot utilize 100% of the capacity because of the shortage of the supply chain. So we have been roughly adjusted it to 90% utilization with the effect that delivery times have been increasing, of course, at that time, a bid appeal for our customers and for Krones.
But again, this created in a second stage of it a very good environment for us because we have been communicating very honest where we are with the supply chain. And up to today, again, no major project has been fallen apart because of the time line we have promised. So we still keep the promises. And number three, this we regard as the fundament for the pricing we can do at the moment, because we believe pricing at the moment is key that we are to almost full extent able to compensate for the cost increases. Of course, there's a proportion on cost reduction as well.
But the bigger proportion is certainly on pricing power and the fundament we have created with those 2 actions being on one side drop solid during COVID-19 and the project execution; and second, have not overpromised in the material supply shortage. And I think that's the fundament that we got with those things a lot. Fortunately -- let me say, unfortunately, Ukraine-Russian crisis has not a too big impact to us, and this is only 1.5% of the revenue we have. And now, of course, we have to deal with the upcoming, let me say, energy crisis, which is coming, where we come later to it. And last but not least, I should say even returning out of this, let me first say, the financial issues we had in '19, the headcount reduction in '20, COVID-19 in '20 and the supply chain shortages, we do not lose, let me say, the Krones' team. Again, a very important point since we created at that time, a new target picture and a new strategy for Krones, which we communicated and which actually created a future for all our team members to 16,000 people plus in the organization. Of course, we share that more on the Capital Markets Day. But I think I had to explain a bit in the longer view how things have been happening and why we are today as we are today. So that's for the beginning and sorry for having a bit longer introduction of everything. Now here on, let me say, on the highlights, we come to everything, so I'm jumping over that because we go in any detail for that. First of all, if you look to the numbers, they are, I would say, in line with what we have promised. We have not overpromised, and I would say we go for every number in more detail. So I think we jumped one further step forward, and I start with the order intake. I mean the order intake is overwhelming when you see that we are about EUR 3 billion after 6 months, I mean, record high. And of course, they had to do that. Delivery times have been extended and customers are ordering over a longer period. However, number one, I would say, even after deep analysis, our markets have been going down already '18, '19. And then, of course, COVID-19 came, 2020. So there are catch-up effects. And I would say there is another thing coming into place. This is sustainability, because of a lot of our customers, they need to reduce their energy costs, their CO2 footprint and invest in, let me say, new lines. And this is, let me say, something which is a fundamental for it. So again, delivery times have been increased. We are at the moment roughly at 60 months or let me say, 15 -- sorry, 60 weeks and 15 months. So that's where we are at the moment. And even with that, we have a very good order intake and have a robust pipeline as far as we can see. Important is, and I've said that already, that we improve our pricing power of ongoing story with Krones that pricing was an issue. And those of you who know me longer, I was all the time saying pricing needs to go into the DNA of Krones. And I'm really happy that this has been arrived now since the processes around that are rock-solid, and we have good visibility, we have a good possibility to drive pricing as we need to do that. And we actually brought it in a very good and large sense into the market. So I would say pricing has arrived in the DNA of Krones, of course. Now let's prove that in the future that we are really continuing that. The second thing I wanted to remark on the order intake, it's extremely high. And it's despite, one, let me say, we call them all the time white elephant, big project, which is around EUR 100 million. Those are all orders which are, let me call it, standard sized orders. This is important in terms of the risk we have to manage because we all know is bigger the project, is more risky they are. So this is a, let me say, a rock solid order intake in terms of how it is structured. Nevertheless, I have to say, of course, the order backlog is huge, and this gives a good fundament for 2023. So in case we will see some interruptions in where economy might have a good basis already that we can cover 2023. And let me say a few words about the markets. USA has been strong. The good thing is, as we might expect that this could go down because of the economic situation. South America is arising. So the pipeline we have in South America looks extremely good, and we believe that this will give impact on the next couple of months. Europe and China are doing very good in accordance to, let me say, the average, and the average is quite high at the moment. So they are doing very good. Asia is lagging a bit behind. I mean, they have been -- had most probably the strongest impact on COVID-19 still and are in a recovery phase. And last but not least for us, Eastern Europe and Central Asia, where Russia is included, is doing even very well. So we have compensated in the other countries the order intake, which is missing from the Russian customers and the Belarus customers. So that's in a nutshell where we are with order intake. And with that, I hand over to Norbert that you see all the other numbers.
Thank you, Christoph. And yes, we did not expect more than 50% order intake increase. And when you read the newspapers, [ CDMA ] total machine building business, Germany, plus 2% in the first half year. So that is remarkable. We expected increase, but not to this huge extent. On the revenue side, of course, it's not quite so dynamic compared to the order intake. We increased our delivery times, we had to, and we are still limited by the supply chain issues. So the increase of 15.4% compared to a not so strong first half year the year before is good, but we could have done more with more materials available.
And the second quarter is plus 18% versus 12.8% in the first quarter in all segments. You will see later in the segment report, all segments have a significant revenue increase. And we are already above pre-COVID level, 5% above 2019 first half year and this is not price-driven. So the price increases, what Christoph just mentioned, maybe some of you remember the first one we announced in August last year, the second one in April this year. Now with the long lead times, there is very limited -- very, very little price increase in those numbers. To be fair, on the other side, also from the material cost increases there is not all in here because we also had longer contracts with our suppliers. So that goes hand-in-hand, more or less. So what you see here is primarily volume-driven compared to last year and also to 2019. Now you also know that in our guidance, we said sales increased 5% to 8%, and we were debating whether we keep it at this point of time or not. Now the point is the second half last year was significant higher. You can see that. And if we continue with the same sales volume in the second half, like in the first half, mathematically, we end up at 9% above last year. And the question mark is still the supply chain, not only on our side but also on the customer side because if the customer has problems with his suppliers or with his building, construction work, then we have seen that last year, they push out projects. And then the revenue realization will be postponed as well. So we are a little bit careful here. We have a chance to make more, but we will wait how the third quarter goes. From a regional perspective, Christoph mentioned order intake. And there we had North and Central America, very, very strong. Here, you also see North and Central America on the revenue side quite strong increasing in the last 2 years, now to 21.6%. And with a huge order backlog, it's easy to forecast that this share will increase, also very positive. Europe 33% stronger than the last 3 years, good recovery. China 8.5% despite the COVID lockdowns we have seen in the Shanghai area and other areas. And also Asia Pacific on the revenue side, still very strong. Middle East, Africa, a little bit weaker than the previous 2 years. And also South America from the revenue side, weaker, but with a huge order intake this year in South America. And not surprisingly, Eastern Europe, Russia, Central Asia, lower compared to previous years due to the crisis we have in Russia and Ukraine. Profit development, EUR 175 million, 8.8% after 2 quarters, both quarter similar profitability, 8.8%. This is also something that is not quite normal standard for Krones because usually, Krones has in the past very strong first and last quarter due to the seasonality of the service business around the world. This year, we could manage that both quarters were equally strong in terms of profitability as well as also sales. And it shows that the profit improvement programs over the last 2 years, 2.5 years show positive impact. And also that, let's say, we were able to manage supply chain issues. As Christoph mentioned, we did not disappoint our customers. We were able to fulfill the projects as planned. And that certainly gave us a lot of credit, which also is shown in the order intake this year. And for the total year, our outlook, 8% to 9% is, of course, still valid. On the EBT level, it looks a little bit better, EUR 113 million, increase of almost 50%. And you can see just graphically that the right column 2022 with 2 quarters is almost same level as 3 quarters last year. Last year EUR 118 million, this year EUR 113 million. And the second quarter was a little bit stronger, 5.9% versus 5.5% in the first quarter. Our major cost drivers, personnel expenses and material expenses. I think not surprisingly, the material ratio, that the personnel ratio went down because this year we see the impact of the restructuring we did in the last 2 years, 30.6%. And on the material cost side, same percentage as last year despite material price increases. I said there is still a lot to come because not all of the material prices has materialized through the P&L yet. But more importantly, the new machine business grew stronger than the service business this year because it also fell much shorter in the crisis 2020-'21. Now it's recovering stronger. And the new machine business has by itself, higher material quote than the service business, which has more personality costs in the ratio. And from that perspective, it's a good development from our perspective. Headcount development pretty stable. You can see June this year, exactly the same in almost the same in Germany as 6 months ago. But we are increasing outside Germany. That's primarily service technicians. We continue to even strengthen further our global service network, because, as Christoph mentioned at the beginning, this was a big winner in the pandemic and people cannot travel across different countries and here we continue to grow. Also, we are hiring more specialists, also especially outside Germany in the area for software development and automization because in Germany, they are -- let's put it this way, in some countries, they are easier to find and to hire than in Germany. It's difficult everywhere. But in our areas, it's extremely difficult, as we all know. Working capital development, first half this year versus the June last year and the year before, 21.6%. Also here, we are going into the right direction, improving to make our, let's say, achieve our targets. It's significantly lower than the previous years. And you can see, of course, we have, let's put it this way, a little bit of windfall profit, a tailwind from the higher order intake because the higher order intake also creates higher prepayments from the customers. So on the right side, the left columns at the bottom, that's the increase prepayments in percentage of average sales in the last 12 months. Inventory, we have an increase of around 2 percentage points, but that's intentionally. Wherever we can, we try to improve and increase safety stock for our parts. To, let's say, be more resilient in the supply chain. And our plan is to keep that level of around 15% also in the years to come. Payables and receivables improvement compared to 2 years ago, but no improvement compared to last year at this point of time or even slight deterioration. And here is the focus for us for the time to come for the next years. And here, we have not only targets but also plans how to improve it over the next 3 years. ROCE development, that's, let's say, the number 3 big key KPI that we report since end of last year, beginning of this year, 11.8%. And we said this year we should be in the range of 10% to 12%, which we will achieve. Segments. Segment development here, our major segment, filling and packaging technology. It's the same segment, what we called until last year, filling and decoration, but filling and packaging is made to be clearer. Strong increase in sales, 16%, close to the overall group increase, and EBITDA margin of 9.6% after 6 months. Here, the fact that the new machine business increased much more than the service business had an impact negative on the margin. 2020, we had a positive impact because the new machine business went down dramatically, whereas the service business also went down, but by far not as much as the new machine business. So this goes also into the right direction. And the pricing impacts are -- with POC and all the delivery times, we have many projects. It's a fluent development. But the smallest part of the price increases we announced are included in here. So the major parts will come in the next 12 months to 18 months. But to be fair, also the major part of the material cost increases is -- will still come. But we are sure that we will definitely compensate or overcompensate the material price increases with our product price increases. And we have another topic in here. Due to the supply chain issues, we have quite a bit of inefficiencies in our manufacturing assembly processes. Because what we do is we start with new equipment to assemble it, then the people realize there's something missing, then they put it aside, start with a new machine and assemble as much as they can until something is missing again and they put it aside. Once the parts come, then they take the old machine, continue with the old machine. In addition, we had to rent additional space and warehouses to store all those, let's say, semi-finished machines. So this is definitely not a very efficient process at this point of time, which costs capacity and also efficiency. Process technology, let's say, the positive development continues. We have seen last year a turnaround on the profitability side with similar volume. This year, in the first 6 months, also 15% sales increase and 5.3%, sorry, EBITDA margin after 6 months versus 0.9% same period last year. Some of you might remember, end of last year, we have achieved 6% or 6.3%. So we are also very confident that this margin will further increase, and we will certainly meet our target of 5% to 7% for the process technology. And last but not least, intralogistic. Here, you see a huge revenue increase from 2021 to 2020, which was primarily because 2020 Northern Italy was in a shutdown and intralogistic was not named system relevant like all our beverage production or beverage equipment production. So 2021 was catch up to an unusual low 2020 with more than 60% increase. And this year, so far, 8.7% sales increase. And you also see that the turnaround in profitability, the positive development continues. We are at 3.9% for the half year. And we are -- so this is not yet in the announced range of 4% to 6%, but we are very confident that at year-end, we will be certainly in this range. That means also profit improvement in the second half of this year as well as volume improvement. We know the projects, we have the projects and we just have to execute in the remaining months of this year. Financially, no real change. We are very solid, 40% equity. We hardly use any credit lines. We have EUR 390 million cash despite the fact that we paid EUR 44 million dividends in the second quarter. Some might ask, well, why do you keep so much cash and don't do something or more useful with it? Well, there are 2 reasons for it. One reason is, of course, we need cash to work off all the orders that we got in the future. And second, on purpose, we keep, let's say, a war chest in cash so that we are able to do smaller or medium-sized acquisitions quickly, easily, when, let's say, the chances come up. Free cash flow, first half year, okay, of course, we start with a higher EBT that helps here. On the other hand, the other noncash changes are lower than last year. That is primarily depreciation. We have less depreciation than last year. Change in working capital is negative because working capital is increasing with the business also compared to last year, absolutely. But in ratio to sales, as we have seen with 21-point-something percent, we are improving. And CapEx, EUR 10 million higher than last year, but in line with what we have planned. So free cash flow, EUR 68 million this year versus EUR 35 million the year before. And here, you see, and I want to comment this, the development of free cash flow and cash conversion rates this year versus last year and the year before. So this goes all into the right direction. And now I give back to Christoph.
Norbert, thanks a lot. Yes, we have seen now the numbers. What is the first thing which is lying ahead of us, it's of course the impact of potential energy and gas shortage on Krones. And we want to give you a bit of a highlight what we see for Krones and how we classify the world that you see with what impact do we calculate at the moment? First of all, the global network around the world, just to see some numbers what we have. I don't want to explain that, but you see that we are very diverse in terms of how we execute in sales and service and to some extent, in production our business. And you see on the right-hand side that we have 80% of our production hours in Germany, which is, of course, an issue. And we have some of it 2% or 3% in Italy. So those are the 2 countries which are affected most and -- jump to the next slide. We have actually 3 categories where we have looked closer to it. And 2 we want to explain to you. On the right-hand side, you see actually Krones. And I would put it in a nutshell. Yes, we are exposed to gas because around, let me say, 50% of our energy we receive, and I explained that to a certain extent, is gas. If you see the numbers here, and they are split down. Don't forget we run our power plants internally, and they create heat and electricity, but they are mainly gas fueled. So that's the reason why I say 50% of our energy consumption is gas, 50,000 megawatt hours per year what we use. And we have done a detailed plan, one, the gas emergency plan might be executed. We spoke to the -- how is that in English -- those who are operating the gas network, once they are on business and are going to reduce the gas consumption or going to limit that for us, we have a clear plan how we can step by step shut our gas consumption down. And I would say, we have built 3 scenarios because we don't believe it will be a complete shutdown if we exclude. We have a scenario for that, but we don't think that's a reasonable scenario. We have a scenario where we see a bit of better supply and a little bit worse supply. But in those categories, we are pretty sure that we have no interruption of our production. Why is that? Because we have no energy-intensive process running, and gas is mainly used for heating. And with a lot of activities we have right now, we can compensate for a certain extent, and of course, office buildings, and that's easy. We are all used to home offices and mobile working. So I think that should be not an issue. So we are pretty sure that with what we have in place, we can continue our operations. Now the second question, this is on the left-hand side of the slide is what about our customers, because I think that's a more important point. And no doubt, breweries are energy-intensive because any peer needs to be cooked before and later on cooled. So they use a lot of gas. And I would say that the European brewing industry is, to a large extent, depending on gas. Now if you look to the overall, and that's an important assessment, the overall customer base, we have 15% of those are in markets heavily depending on Russia. This is Germany, Italy, Poland and Austria. Those are the 4 countries where we regard very critical in that regard and all the rest, and we talk to those customers, they see it -- how to say -- relatively easy in Europe. And outside of Europe, this is not a debate at all. Nevertheless, everybody wants to reduce energy because that's even a chance for us. So reducing CO2 footprint and energy consumption globally is a big point for us. So I would say this is -- this might impact ourself for the order intake once this 15% of our order intake might be affected, but it will be not totally affected. And the second thing is we see even a big chance in that because we see that inquiries for energy reduction programs. And we have several in place. I mean we mentioned that many times, for example, the program we have over years already. Now this becomes really, really a strong movement. And at the moment, we cannot offer so much quote like the customers are requesting. So we strongly believe that this is a huge pusher for order intake and a good substance for further business. So I would say this is something positive and even great to improve economics, I would say, on the Capital Market Day, we can deeper into that, that you understand what we are doing there is a good thing for us. So if you look to the Krones side and the customer, you see some yellow traffic lights. Now last but not least, I should name that, the critical thing is our suppliers, and this is difficult to judge at the moment. We spoke to all of them, and I would say our procurement has done a perfect job to figure out where we are. Number 1, for this year, we don't see power production in effect because we have ordered what we need, and this is under execution. Then the big question is, if the chemical industry has a problem with gas, we might have a problem on the supplier side. That's clear because if we need plastics or cables or whatever, this is a critical thing. At the moment, interestingly shifted the supply chains more to Europe. Now we are looking to outside of Europe. I think at the moment, there is still some potential that we could even that compensate. So this traffic line would be as well on yellow at the moment once the energy supply is on the level we expect. So in a nutshell, I would say from what we know today, and this is again what we know today, we believe that we can handle this energy gas issue for us with the, let me say, reasonable impact on maybe 2023. We don't see an impact on 2022. Yes. And then finally, to the outlook, 2022, I mean, based on all what we stated here, the strong market position we have, the pricing power we got, I would say, the supply chain management from procurement and all the related departments as well as the ability of our team to handle the supply chain shortage internally flexible. We are very confident that we'll achieve the targets promise, and I would call it on the upper end of the targets we have seen here. So that's where we are. And we strongly believe in a good 2022 in, I would say -- difficult to say but lot issues coming up which we have not envisioned at the moment. And therefore, I would say, it was a good feeling that what we promised here we can really keep. And I would say, in a nutshell, you have the point here, I just wanted to repeat with the high order intake we have. That's an excellent basis for 2023. And if you look to, let me say, the outlook worldwide, I would say that could be even a very good buffer to compensate what is coming up. For 2023, I have to say limitation will be supply chain. This is a statement we want to make here today. Let's see how this develops. And all the rest, I would say, is under the right way for the future. So far from Norbert and myself, and now we are open for questions and answers. Thank you.
Well, thanks to Norbert and Christoph, I have already received some e-mails and also I have here hand from Mr. Sven. He also was the first one who send us an e-mail. So the first question is Sven Weier from UBS.
First question is on the order intake. I think you already mentioned the structure of the order intake in Q2 was quite broad also regionally. So that seems quite a good quality. I was just wondering what you've seen so far in the third quarter, it seems that the pipeline is still solid, seems to be continuing. And also maybe frame your expectations for drinktec. You think there's maybe some hesitance ahead of the trade show and then some more orders coming up after? Or how should we think about drinktec this year? That's the first one.
Pipeline for Q3 looks good, rock solid. But it's really then on the level we have seen in the previous quarters about a bit because we have summer vacations. So even actually, this has cooled down a bit. But again, the pipeline looks extremely good, rock solid projects. I would say rock solid mix, what we see coming up. So I would say we are optimistic that this will be a good Q3. And I could even say even Q4 looks from, let me say, the perspective we have, the pipeline looks good. So I mean, the heaven has to fall down that those things are really going wrong. We see it in good shape at the moment. So to drinktec, to be honest, we believe it has no impact on order intake at all in the meantime. Because number 1, since we have so long delivery times, customers think in longer terms. So they think about, let me say, even season '24, not '23, once they order. That's one of the things. And since everybody was not certain if drinktec will really happen because of COVID-19, nobody has faced anything related to the show in terms of order placement. What the -- and I do not expect that everybody has one order back because of that because they are looking all the time for timing. And I do not expect that we have surprisingly upcoming orders because our sales is -- network is so dense. I don't think that there's anything in the market which comes that up as a surprise. So it might sound strange, the exhibition will not have impact on order intake. And I would say the exhibition has changed to a certain extent that we talk more about the problems of the future and the solutions we supply after tomorrow because our customers have so big issues that the top management on C level wants to talk about the 3 big things. They have to deal with sustainability on one side, how they can save resources and of course, for those running PET, what they do with PET. So there are 3 big things to be discussed, and we believe it's more communication rather than ordering.
The second question was just on the order backlog. Out of the EUR 3 billion, how much of that is actually still due for this year? And then how does that number compare against what you had at the same time last year?
Good question. I don't have the -- let's say, the answer in the right figures. I mean we have enough order backlog and also the material to complete those orders that we can achieve similar sales in the second half of this year, maybe slightly more than in the first half. The rest goes all into next year. And I mean, the good thing for us is we are not used to order backlog of EUR 3.1 billion. I checked 2020 we had in May or February, we had EUR 1.1 billion. So it's almost tripled the order backlog, which is a new situation for everyone in the industry for our customers and for us. For us, it helps in certain ways. We have better plan capability or security. We are ordering -- we have ordered material 12 months out. Normally, we do this 3 months out. And we have more possibilities, let's say, to use the flexible assembly and production with this order backlog with this big one and the low products available. And if we run into a recession, which is not unlikely for maybe Western Europe and North America, of course, this order backlog helps us to get past recession at least for 1 year, and then we see how 2024 develops.
And let me put it this way for the core segment. I would say it's an average run rate per month what we are going to utilize out of the order backlog, because the limitation is simply the supply chain. And we anticipated even that we might increase a little bit revenue in the second half, which will not come true. So that was beginning of the year. So we run it relatively compared to the first half year. And we will have some catch-up effects in Intralogistics and processing, which is stronger in the second half of the year. And you saw that even in the slides we presented because we will even generate there, higher EBITDA levels than shown after half year. So the run rate will be the same, and we are carrying over most probably a huge order backlog in 2023, which will be, to some extent, even then hopefully, by the end of the year, even running into 2024.
Understood because that's also the third question I had was just on the -- when you -- I think you're kind of sold out for next year already?
Yes.
What kind of production increase does this actually imply? I mean you said you -- the organization is already at a bit of a limit. So how much can you actually increase the production next year?
I mean what we have done, let me say, when you look 3 years back, number 1, we have even outsourced more than we had in the past. We were working strongly about that last 3 years, so that helps in terms of capacity. Second, we had said that earlier for the new machine business, we have only 90% of our capacity is utilized. And I would say a big thing would lie into, we don't have the supply chain inefficiencies anymore. This would generate for us, let me say, a lot of possible more capacity.
So I would say this would be in a range of 10% to 15%, which are doing significantly anything on the headcount. But again, even in 2023, at least for the first 6 months, we are limited by supply chain that has not improved in a level anybody thought, and we are quite happy that we are dealing with that. And just if you get a feeling how we deal with that, we have every 6 weeks a planning meeting, dealing with capacity up to 2025 because our question is how much capacity can we increase without overdoing it?
Not that we ruin, let me say, the very good level we have achieved now in terms of capacity versus headcount. So we don't want to spoil that. And on the other side, we need to catch up to a certain extent our delivery times because we can't live long term with 18 months. So we need to go down -- ahead. That's a consideration. It will be not 5 months anymore, but somewhere in between would be a good level where we could be. So this is something every 6 weeks to be shown at and looked at, and it's today only driven by supply chain issues, nothing else.
And the 10% to 15% would be the entire supply chain plus your capacity? Or is that just the supply chain effect you would have?
Supply chain effect.
Just supply chain, okay.
The next question is Jorge Gonzalez from Hauck Aufhauser.
Three questions, if I may. And the first one also regarding the guidance. So if I understood well, you were commenting that for the second part of the year, you're expecting similar sales than in the first part of the year, despite the price increases, tailwinds that you are going to experience in the second part of the year. So I was curious if you can give us some color or elaborate a little bit on the planned utilization for the second part of the year? And also regarding the guidance, your case is because of these potential headwinds regarding to this -- to the energy supply or it is more the general situation in the supply chain, what is making you to not increase your guidance at this point? And also regarding this, in the presentation you are showing that you have your own electricity generation. I was also curious if in case you cannot use gas to generate your own electricity. If you are going to be able to sell the gas, so you compensate for, obviously, the need to buy electricity through other sources?
Thank you, Mr. Gonzalez, for your questions. I take the first part regarding guidance and headwinds and utilization. We have everything in our order book to make the second half at least as good from a revenue perspective as the first part. Probably with lower revenues in the third quarter, a little higher in the fourth quarter, but for the whole 6 months combined, definitely minimum the same as the first 6 months. However, headwind is supply chain and energy supply -- energy and gas is a topic, but that will not affect, if at all, 2022. That might have an impact depending on what Mr. Putin is doing beginning of January next year.
And the supply chain, let's put it this way, we don't expect further deterioration on our side. But we -- I mean, we have many, many customers who also have supply chain issues. And we have learned from last year that, let's say, our internal revenue forecast we missed a little bit because several customers could not progress in the projects with us as much as they have planned and we have planned. And then we have project delays on the customer side, which means also revenue will be pushed into next year.
So that is, let's say, our question mark, and we said we want to see how Q3 develops on the revenue side and the project, and then we have a clear picture for year-end. So for the time being, we keep all 3 KPIs and say we will achieve all 3 at the upper limit. But for us, it's due to the supply chain topic, especially on the customer side, too early to say that the sales will be higher than what our guidance is.
Okay. And regarding the electricity generation?
Yes, yes. I would say the scenario looks a bit different for us. Whatever we can get on gas, we are running our own internal power plants. That's important for us. So we would not go to, let me say, selling gas. That wouldn't make sense for us because, again, I said it in the beginning, that once the authorities with this emergency plan for gas food limited our, let me say, access to gas, this will not completely go down. That's our assessment. And then we will still keep running those power plants. We have a bit of an advantage because those power plants are supplying even heat to the local city here, and this gives us a bit of better position in terms of energy safety. And that's the reason why there is no consideration of selling gas to compensate for the electricity. And second, we have, even in case we shut down the power plants completely, as of today, we can say we get the access to the electricity we need because we spoke to the suppliers and figuring out the scenarios. So I would say, again, what I said earlier, that we maintain our operations, and this would harm us, of course, but not to the extent that revenue or profitability would not come.
Completely understood. Maybe a final question. What was the role of key accounts in the second quarter? I understand this big EUR 100 million was from big account. And what do you expect for the third quarter in terms of key accounts also rolled?
Yes, to correct that, the EUR 100 million, what we call white elephant has nothing to do with the key account. These are projects, bigger magnitude, this for example, is a complete brewing -- brew house, including bottling and packaging. The customer, you can say is from Ethiopia and has, again, nothing to do with key account. The key account proportion we have at the moment in the order intake, which is an average around 30%, the top 10 to 12 customers is 30% to 30% of our order intake or revenue. There's no difference, I would say, is in the same mix like we had in previously. I would say there's nothing seen that this has done in the other direction. While in the past, we had a bit more non-key accounts because there have been more courage on placing orders in the critical times, while now it's being back on the normal levels we have.
And Mr. Gonzalez, maybe I understood you wrong, but this big order in Ethiopia was in the first quarter, not in the second -- no major single project in the second quarter. Normal -- regular, let's say, run rate business of Krones in the second quarter.
Well, the next question is Richard Schramm from HSBC. I hand over to next one, Sebastian Growe, from BNP Paribas.
Yes, let's start on the PET segment, fulfilling and packaging. And Mr. Broger, you pointed to some inefficiencies due to supply chain constraints, making components, et cetera. Could you quantify the impact, please? And also eventually give us a number with regard to the mentioned buildup of semifinished goods in the quarter?
No, we cannot quantify it. And probably if we could really quantify it, it would be difficult to tell you because then you would already calculate what the profit has to be in as soon as the situation improves. But to be honest, this is very difficult. It's inefficiencies in many, many processes, not only on the shop floor, but also it creates inefficiencies in purchasing even in sales to discuss with the customers why we have delays and we're working with the customers to somehow make it work so that the customer is satisfied and us. So it's way beyond just manufacturing and assembly.
And it continues then on-site with on-site assembly, whether the time tables change where people were waiting for equipment, last second deliveries which might come or not, which creates, let's say, through this whole flexibility, additional costs. But we have given up to try to measure this. Our hope is that the situation, hopefully, beginning middle of next year will improve, and then it will not be like a shift that goes from left to right. It will, let's say, over a period of, I don't know, 6 months or 8 months improve like it deteriorated from, let's say, June last year to November last year. But sorry, we don't have -- I mean, we have a gut feeling, but that is not satisfying for you and also not for me.
Yes, probably not too bad to have some of that work. Let's then switch gears and go to demand and talk about the order pipeline a bit. So if I may start as a follow-up question to Klenk, what the outlook is concerned for the Q3? You mentioned good order intake. Obviously, we did get used I think to a number that was somewhere between EUR 1 billion, EUR 1.1 billion since Q4 '22 -- sorry 2020. And then obviously, things have accelerated enormously in the first half. So would it be fair to say somewhere between the 2, so 1.3-ish probably the right yardstick to look at when it comes to Q3? Or how should we think about the kinds of decline and just get a better sense around that one?
First of all, I mean, we had historically some seasonality in the order intake. So Q4 was a bit lower than Q4. We do not expect that for this year. So we would see that's quite stable and continuous pace for the next couple of months. And I would say even more the last 5 months, how they would develop. But to give our exact figure, it's really difficult. We believe it will be not as high as it has been in the first 2 quarters. It will be not as low as, let me say, the EUR 1 billion, which is more or less the standard for us in the quarter. It depends if it's -- how much projects are moved and not.
And I would say maybe what helps you more is I would quantify that for a quarter between EUR 150 million to EUR 200 million, which could be in or out, not lost. I mean this is not the point because we have -- I mean, relatively clear for those we are going -- we might win and have a good expectation for it. But what we cannot see is how much of it will be by end of September, moved into Q4. So I would say that's the reason why we are saying it might be a ratio between EUR 150 million and EUR 200 million, which is on the debate. And then we are in the ballpark you just mentioned before.
From my perspective, I would say I would be very disappointed if it would be below EUR 1.1 billion, but I would be quite happy with -- very happy with EUR 1.3 billion, but don't expect EUR 1.5 billion again.
Yes, makes sense. Okay. And then I would be interested in the mix, a, from a regional perspective because this, I think, probably you were to say that the pipeline for Latin America is pretty strong and looking into Q3. And I think it was you saying that you can provide as many quotes as are needed if you look at simply the incoming issued. So that suggest to me that you could have already cherry-picked until now, despite this flood of orders in the first half. So how should we think simply about really the cherry-picking element, the pricing quality that you currently enjoying?
I think I have to be careful with saying cherry picking. I mean it's a very difficult assessment and judgment where do we not quote, because it's not a question where we quote. It's more the question where do we not quote? Because historically, we quoted everywhere. So I mean, we have to be a bit careful on that, but the cherry-picking comes definitely or let me say, the selection, I would call it cherry-picking, once the pricing comes into the place and once the order is finally negotiated and whether it's placed with us or not. And how has that shown up? In many cases, we got our prices through. But I have to say, even there have been some cases where we lost orders where we have been pretty sure we'd get that, and we stayed stable on the pricing and was gone. So that's a bit of a new situation for us. And if I look to Q3, I mean, the behavior in the industry is certainly the way that, okay, the customers are aware of that the prices have increased significantly. But at the moment, it's beginning a discussion that material costs are decreasing. So this is a really challenging discussion at the moment. We do believe that for the next, let me say, 5 months in this year, the pipeline is long enough that we got somewhere the range Norbert has just said. We see that some of the projects are a bit longer in terms of their decision. Why?
Because if we ship at the moment, end of 2023, with some of the projects they will not reach the season anymore in 2024. That's really the key. And I would say it has a bit depending on seasonality of our customers, what season they can reach. And that's the reason why we believe it's reducing a bit. But again, the pipeline is extremely full. I would say there is not a big difference between Q1 and Q2, but we believe that decision-making in our customers will slow a bit down because of all the things we have around the world and what I have just said that delivery times are long. And with that, I would say, I would predict a good second half of the year, not as good as the first half of the year.
Yes. Great. Makes sense. And then very last one around pricing. If you have to break down the pricing for equipment compared to services, can you give us a rough idea how price increases have trended and between the 2 I mean? And then the other question that I would have is, of the more than 50% increase in the value for order intake in the first half, how much overall is roughly price-driven?
I mean on the order intake, I mean the high…
The high in good. Let me first come to your first question to say, how is the pricing differentiated between life cycle business and new machine business. And I have to bring up the third category because pricing and processing and Intralogistics is project-based and it's even on a different level or different, let me say, metrology, than the pricing we have on new machines, lines, life cycle services and then take the big projects and the project pricing we have in processing and Intralogistics. And for the pricing in the new machine, we had 2 price increases Norbert mentioned earlier. One last year in August, 6%; and one this year, 4%. And this is not based on the prices. This is what we do on average on the projects and not all of it we can get from the customers. That's important. So that's something politically we put out, but the pricing of each individual project is done individually and we have price limits where we do not go below, and that's actually giving us then the possibility to drive pricing as we want to have that driven. On spare parts, change parts and the life cycle business, it's different. There, we have list prices. And I would say once there are long-term contracts with key accounts, then they have the same increases on their key account rates than they had in the past. But there is one thing in that could be every month different, right? Because the long-term contracts are running in different lengths, and that's not a specific point where we can increase it just when the contract is ending.
And for life cycle, we are more precise. It's not only, I would say, it's 2x or 3x a year where we recalculate and check for the individual categories, what should be done. But this is not necessarily a price increase overall. But again, we look very carefully in life cycle and any, let me say, category we have and the pricing of individual parts of what we need to do. And that's the reason why we can compensate there very well for the material cost increase. And again, for processing Intralogistics, it's different, it's just project pricing, everything is calculated before. It's discussed with the suppliers we need that we are sure on the pricing there.
But I would still say, on the main segment, filling and packaging from what you see with almost 16% order -- sorry, 50% -- 52% [indiscernible] between 5% and 7% is price-related.
Okay. It brings you to my next question, final really. So we talked a lot about volumes and then the trajectory into 2023 in terms of really what the top line might be concerned. But margin-wise, it seems that you are also more and more gearing up to just deliver on the -- under this range of the 10% to 13%? Or do you see any sort of issues with cost inflation, et cetera, that the margin has kind of kept at the current level and we don't see operating leverage or gross margin improvements coming through? So any final comment on that would be much appreciated.
Yes, right conclusions. The only thing I have to add is we need everything. We need the pricing. We need the supply chain improvements. We need the cost-cutting programs we have in place that things are working out, and we need innovation that we do with that, but the conclusion is right. We have a lot on track for return targets.
And the programs we showed you, let's say, in the last 2 years, we will do a brief update in the next Capital Markets Day on the drinktec where we stand and what additional programs we have in the pipeline to secure that the profitability improvement doesn't stop, but continues until 2025 at least, that we achieve our targets for 2025.
I got some questions sent by mail and Mr. Schramm. The first one is about customers who have produced new drinks at the end of the day. And so innovative customers are there in our actual order intake amount. Interesting amounts from these customers with new drinks and are these customers in general, financial rock solid?
If you take new drinks, which is -- which we call on one side, let me say, innovations on the beer side, we see pretty much in North America. I would say that's a conventional technology, nothing different for us. I would say, side base. That's one point. I would say that's -- I would say, double digit number in order intake. And if you talk about alternative proteins like oat milk or almond milk or something like that, I would say that's in the range of, I would say, a lower double-digit number we have on board. And for the customers, when I look to them and their financial structure, I would not see one who would instable in terms of the performance they have. They have all medium or bigger size. So we have not any start-up with us, which is doing that. So it's not a question of financing this new product. It's well-established products with customers known in the market. I would say we have 2 orders, relatively slow in processing, which are might be with smaller participants, low single-digit number.
Well, thanks, Christoph for the answer. The next question from Richard is we talked about the inefficiency in the production. And the question is perhaps a little bit provocative, but should we not stay at the speed we have at the moment in the production to handle this inefficiencies and to stable or increase profitability and not on the other side, increase -- or try to increase the productivity, the production and perhaps have a risk that the inefficiencies will stay at the level or increase?
I mean, we will certainly -- we will want to and have to increase efficiency, and that is connected with, let's say, a supply chain that is predictable that you can plan on, and that will, let's say, count down the whole organization from sales, purchasing, engineering, manufacturing and assembly. Of course, what we do not want to do is once the material is available, hire 1,000 people and reduce the backlog as quick as possible. I think that is the point. So the backlog has to be reduced over time, but let's say, managed and on a continuous way, but not in a very short time. And I mean we will see how this works in the industry with the competitors, but they all have the same restrictions, and we all learned from the past, from the financial crisis and so on, that we are actually, let's say, better off, not with 60 weeks, but let's say, with maybe 40 weeks to 50 weeks instead of 20 weeks what we had to manage the business more efficiently.
And let us put this way in case the capacity will be added in terms of flexibility, I said it earlier, we have outsourced a lot. So we can freeze with suppliers out there. We have done a lot over the last 3 years, and this is a good fundament we have. Don't forget, we have the plant in Hungary, where we have flexibility than in the Gernep operations. And just to give you a number, we are increasing headcount this year in Germany, most probably by 100 to 130. And there is a big proportion of this number -- not into operations, it's engineering and a particular software, because there we have the biggest bottlenecks. So we are not thinking increasing capacities where we have to take care about significantly on our own, that's not the target. Because otherwise we smash what we have achieved over the unfortunate reduction of headcount in 2020.
Thanks a lot. I think this was a question from Richard Schramm, who is on phone, and so that he could not unmute. That's the reason about this technical situation. I got also next question, that's Peter Rothenaicher from Baader Bank.
One question is on the upcoming wage negotiations. So what we currently hear is that the IG Metall demands 8% wage increase. We were already aware at the beginning of the year that this year wages will increase stronger. But I think currently, it looks like that this burden from wage increases will even be stronger than expected. So what do you see here in terms of your profitability outlook for 2023? Can you also deal with, let's say, wage increases, 6%, 7% or something and increase as expected profitability improvement?
Yes, we can deal with that, and we have been right from the beginning was, from our point of view, clear that there will be huge expectations on the IG Metall side in terms of the salary increases they expect. But it's really 5, 6 or 7. I'm not doing a justification. I do not say anything, otherwise our employees will show up tomorrow and say you have said in the capital markets that you agree with. We don't do that. But I would say the ballpark we have in mind, and we thought quite long term about that already. And that's the reason why we have included that in the price structures we have set. So that's not coming by a surprise. And I would say that's not an issue. I wouldn't say it's a big issue for 2023, but not in the question, do we have them to compensate this in addition with cost-cutting programs in 2023? No, that's not the point. Whatever we have in plan is already set for 2023. So it's catching us not by surprise.
And it's not different from the past. Mr. Rothenaicher, I just said the numbers are bigger, but it's always a mixture of pricing and productivity increases to compensate for wage and salary increases.
And then in terms of your agreement with orders, to what extent are your orders now based on price escalation clauses. So what extent of the orders is already protected against unexpected further increases?
I mean really to say we have in some small areas. And this is particularly Intralogistics where we have order in huge quantities of steel. We have pricing indexes used to do the contracts. All the rest, we have not, and this is good because what we see right now is that the competition has done that and it's in very bad shape because the customers are claiming at the moment to get the money back because some of the indices are slowing down, and that's the reason why they are in very bad shape. I have to say if energy prices are exploding by 20x, then maybe this might be a surprise for us, but all the rest as best as we could, those projects being on board are calculated with, let me say, the anticipated increase of material.
And don't forget, once we get an order to date, we are looking at the material right at the place of when we get the order and try as best as we can to secure that material in case we are going to execute the order in 6, 8 or 9 months. So I would say there is a very stable, let me say, outlook in our order backlog for the majority of the business we have. It looks a little bit different for the highway warehouses we do because they have lead times between 24 months and 30 months. That's different. And there you have the indices. But in the core business, we have that very much under control, I would say.
Okay. Then I'm a little bit struggling with your statement that you have the ambition to reduce delivery times to 40 weeks to 50 weeks. So if I look at your statements regarding project pipeline Q3, Q4. So based on this statement, the order backlog will increase further strongly towards the year-end. Then we are not talking about 60 weeks, but perhaps 65 weeks or something. And you think also on the prospects for 2023, even expecting that the order backlog might not reach the 2022 level, I do not have the impression that we will see a slump. So even if you increase your sales level let's say to EUR 4.4 billion next year, then the order backlog would not decline?
Yes. Totally correct. Maybe I expressed myself not in the right way as normal. Yes, maybe because we are -- and that's the reason why I said earlier, we are looking into our capacity planning up to 2025. You are totally correct. In 2023, we are not going to reduce at all. It might even increase. 2024 might be a chance that we are -- in case we built external supply further up in terms of having suppliers helping us, then it could be that we could do more on it and maybe get a bit better. But I would say 23% is already laid down and sealed. Delivery times will be long, and it would even move into 2024. So I would say it's a matter of, let me say, 24 months, 25 months we really can attack that. You're absolutely correct.
And then you need more or less to have EUR 5 billion sales?
Yes, which is anyway the plan.
Without excesses.
This is not fully clarified.
Okay. And last point on the free cash flow. So if I look exclusively on the second quarter, we had a slightly negative free cash flow, which was always the case or in many cases, such a case in the past years. Nevertheless, what is your expectation here for the full year? I think in terms of inventories, and you mentioned this, it is hard here to reduce the level with regard to sales. And what is your expectation for 2022?
Yes. For the second half, similar free cash flow plus/minus 10% as last year second half.
Thanks, Peter, for the questions. I see that Sven Weier from U.S. has an additional question. Sven?
Yes. Was just on the service business, first of all, if you could quantify the revenue growth rate that we had in the first half on services, whether you would see the full year outlook for services consistent with the 8% or more or less? And what kind of spare capacity you have on the service side in 2023? I guess there you have small flexibility to ramp up.
^ The plus 15 point something percentage growth in revenue in the first 6 months translates roughly in 20% new machine equipment and around 10% life cycle service business what we have. And we will see a Q3 that is lower on the service side and a Q4 traditionally higher. But in total, similar growth rate like in the first 6 months, so to continue on a level of around 10%.
And your second question, I mean this is a very big question for us. How do we meet and long term see the service business? Our installed machine base is increasing. And let me say, in many markets, the requirements of having qualified service parts and manpower is increasing. And we see at the moment that '23 is quite manageable with the resources we have on board by end of 2023, beginning of 2020. So 2 things are increasing. That's the number of new machines we have to install and commission in the market; and second, that the installed base is going up.
And at the moment, we have a huge program. When you put service technicians into the Internet, I think we are among the first 3 showing up because we are in desperate need worldwide about service technicians, even in case we put a lot on remote and into digital service centers at the moment because we believe that's the long term. And we have a huge program in place around the world to get service technicians on board and if you look, for example, in the U.S., the installed base is increasing. And in order to settle that problem, we have a big program internally that let me say, our service technicians from Asia can get a green card in order to move to the U.S. or stay permanent there. Or the Mexican employees we have, that they can move with equivalent measures to North America and stay there. So that's an important -- very important measurement for us long term to secure our service business that we allocate the right people to the right spot.
And maybe in addition to also Mr. Rothenaicher's question, with the order backlog because now we have a much better visibility with a big order backlog than in the past. And we know we will have outside assembly and commissioning, let's say, second half of 2024, beginning of 2025, a very high level of what we will have to do then to finish projects that are now in the order backlog. And as Christoph said, we are preparing already for that -- and that will then, depending of course, on the order intake situation, lead also to a reduction of order backlog because we don't think that the industry in the long run will accept and live with 60 weeks lead time coming from maybe 20 weeks, so eventually somewhere in between.
And don't be afraid of in case we hire service tenancies. That's not at all critical. Once their business would go down, they would be immediately somewhere else and have a job. That's definitely not the issue. So there's no risk in hiring them, any which we can get is generating revenue and profitability.
The last question I had was just on the tax rate. I can see that it was again below what you had in the past, so running at around 20%. I mean is that kind of a new run rate also for the future? Or does it go back more to the high 20s?
I think I have to get back to you on the tax rate. To be honest, I haven't really checked the half year tax rate in detail what's behind, but what we are expecting is a run rate of about 25% in the future.
Okay. So that has structurally come down a bit against the past?
So it will be a little bit higher than last year. We had some positive 1.1x impact last year, but also lower than what we traditionally had a little bit.
So thanks to Sven. My mail folder regarding question is empty, I don't know if Peter has reraised his hand and have an additional question or is raising from before? No, I don't think so. I'll have an additional look. Any questions from anybody who is on the phone, just on the phone? No, it's nearly 1.5 hour of our conference call, I think.
Yes. I would say thanks a lot for listening today, and you see us both her optimistic because we still believe chances are higher than risks. I hope this statement would stay true. And looking very, very much forward to see you on drinktec for the Capital Market Day, I mean that would be a huge event for us and more than a pleasure to welcome you and see you personally and giving you some more insights into how do we want to continue in the future. Thanks a lot. Have a hopefully in front of you, good summer vacation, all the best. Thank you.
Thank you. Bye-bye.