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Good afternoon, and welcome to the conference call of Krones AG. At our customer's request, this conference will be recorded. May I now hand you over to Mr. Christoph Klenk, CEO; and Michael Andersen, CFO.
Thank you very much. Welcome to our Q3 Conference Call. First, I will give the word to Christoph Klenk for a short introduction and remark.
Good afternoon, ladies and gentlemen. You might be surprised that I'm joining today, but it's very simply about the current situation, which we have announced yesterday. The actual results are not where they should be, and we wanted to underline with my presence that we take the situation serious. And that's why Michael and myself decided to join together today.Before I hand back to Michael, and he is running through the presentation, a few statements from me. First of all, we are optimistic about the future of Krones. Of course, you would thin, why? Because we believe our markets are fundamentally okay, and we still strongly believe in our long-term targets, which is a growth of 5% plus 2%, and this is still today and tomorrow the case; and of course, in the 8% profitability and working capital of 22%, which, of course, we announced yesterday that we have slightly postponed that to 2021.However, and this is something I would like to emphasize, there is a second aspect in the current situation. And we believe that the current situation will give us, as a management, more room for fundamental measures to drive profitability in the future because we believe that even, I would say, an organization and whatever it is, what is the supervisory board or the management of the company has to recognize that only the fundamental decisions are driven forward, profitability can be managed. And since we are not achieving the promised targets of 7% profitability this year, everybody has recognized that we need to move with bigger steps forward. And that's the reason why we strongly believe in the 8%, even in case coming a little bit later.And this is the statement I would like to make in the beginning, and now I'll hand back to Michael. Thank you.
Thank you, Christoph. Then, let's move to the presentation. So on Page 2, we have, as always, our key KPIs. So we'll start with the order intake. We were able to maintain a high level of volume for the first 9 months but had no growth in the last quarter. And this means that we are, of course, still growing our installed base, which provides a solid base for our after-sales business going forward.Sales increased 7%. So also good volume and especially also good volume in Q3. However, we had a bad margin in Q3, which we also see in the low profitability of 5.2% that we had for the first 9 months, including some one-time expenses regarding our global footprint, where we made the provisions for some restructuring efforts in August for a small double-digit euro amount. Adjusted for this one-time effect, we are just below 6%, but of course, still below 6.7% from last year.The absolute EBIT reported has been some EUR 29 million lower than last year and operationally still slightly lower. So not satisfactory. Why? We are facing cost increases in general, as also previously communicated, and the price increase that we announced from 1st of May still has a limited impact on our P&L for 2018.If we then look at our operating free cash flow, it's minus EUR 130 million but some EUR 80 million better than the first 9 months last year. So I would say I'm happy to see that it's still moving in the right direction even though we were not able to improve in Q3 compared to last year. Part of it is -- has to do with the fact that we -- Q2 had some shortages in source, and we have had to source significantly already in Q3 for the volume for Q4.If we then move on to Page 3. You see here, again, the solid -- you see here a solid Q3 performance of some EUR 900 million, below the average level we had in the first 2 quarters. And again, I must emphasize that this is, of course, very important because the installed base is growing. And again, this provides us a solid base for our after-sales business.So why are we lower in our -- why are we not growing as fast in the last quarter? This has to do with the price increase where -- that, as also earlier said, starts to hit the volume. And I do also expect that in Q4, we will also see a lower level of order intake than what we had last year because we strongly want to emphasize the price and the payment terms improvement. And this will, of course, short term, hit our volume.Yes, backlog is also below that. I think it's some EUR 1.5 billion in the September. So very strong backlog, highest ever. However, we have seen a few movements in the backlog, where some few customers have requested us to postpone delivery times, and this has hit our expectation of revenue for 2018.If we then move on to sales on -- revenue on Page 4. Here, you see the EUR 900 million. So a very solid performance in Q3 in terms of volume. The currency is also -- the translation effect is also negatively impacting us here. Year-to-date, we are faced with a mid-double-digit negative euro amount in terms of translation effects.And other important comments to make here. You see that the split per quarter is almost equally split. This has something to do with the fact that we have adopted the IFRS 15, and therefore, delivery time plays a less significant role and is more workload-related. And this is also why we are not expecting to achieve the same level of sales in Q4 as we were able to achieve last year.However, we still expect roughly EUR 200 million higher than the average of the first 3 quarters. So still a very solid revenue for the last quarter. This is also why we are not able -- we do not expect that we can maintain our 7% growth that we had in the first 9 months, and that's why we downgraded our outlook for the full year from 6% to 4%, which is partly to do with less revenue recognition, which comes from some of these delays or later delivery times of some projects and also partly to do with the currency impact.The level of our after-sales business continued to outperform last year. However, we had expected a slightly higher level of after-sales business than we were able to achieve in Q3, which of course, also to some extent, negatively influenced our earnings year-to-date and full year. We do expect that at the end of the year, because of our huge installed base in the Northern Hemisphere that -- especially in some regions of the world where some of it was relatively good that a lot of business would be generated due to the high utilization that our customers had of their installed lines.If we move to Page 5. We still see a relatively good allocation between our 7 regions. Emerging markets were up to 53%. So 200 basis points higher than the same period last year. Also, most regions did better than last year. But if we should highlight a few, North America, still lower like also previous. And that is, of course, partly to do with currency but not only currency. And APAC is also slightly behind, partly due to some timing -- not timing, sorry, but that we were not participating in some large projects because we maintained the focus on the price, and therefore, we stepped out maybe earlier than we would otherwise have done previously.On Page 6, we see the earnings, the EBT. So operationally, we reached almost 6% for the first 6 -- sorry, 9 months, while if we look at the Q3 alone, operationally, we were slightly above 5%. And here, we see the impact from the cost increases that are hitting us, especially on both material and on personnel side. And we still have, as mentioned earlier, no real change when it comes to price increase, that is first, absent 2019 issue unfortunately for the bottom line.The EBT in absolute terms for Q3 was roughly operationally at the same level as last year. However, the problem was, of course, that we didn't have a significant higher volume, which we did not gain really any positive effects from. If we -- why are we then reducing our targets for this year? This is, as mentioned, partly to do with volume but also partly to do with the increased cost that we have seen. Some of the points that are already mentioned but also our investments in digitalization that we still believe long term is very important for Krones. So this is why we reduced, which is a reduction of roughly EUR 20 million in absolute terms.Currency here had also a negative impact of mid-single-digit euro amount. And here, we see our issue of cost underperformance on Page 7. Product mix is impacting us negatively, and the increased price increases -- or increased costs, especially in material cost, as you can see where we ended up with 51% as material cost ratio compared to only 48% in 2017. If you look at Q3 alone, it was even higher, partly to do with the fact that we had a relatively good volume of business in the PT segment, where the material cost pressure is significantly higher. But that's not the only explanation, of course. It's also to do with rising costs.The personnel cost ratio is even slightly better than last year despite the provision for a footprint issue. This is partly to do -- so this is partly offset by the fact that, given our new profitability target, we of course, also have slightly reduced the -- it is -- the bonus that will be paid to our employees are going down as well. So that's, to some extent, offsetting this. That is why you cannot directly see maybe the impact from the restructured provision in the personnel cost ratio.If we now move to Page 8. Main message is we continue to invest in people. People is the fundamental for our growth and our business. And especially in terms of our after-sales business, it's required a lot of people to generate the business. So this the main reason behind the growth in our number of people.If we look at Page 9. We see our core segment, which had solid growth of some 6% compared to the year before. However, we also see that the market is healthy, of course and this is below expectations, for sure. Operationally, it's around 7% but still below last year, but slightly more on the core side and the 6.2% reported. The target for the full year is growth of 3% and around 8% operationally EBT margin. So slightly lower than last year. If we move to Page 10, it's our Process Technology and Beverage Production segment. Q3 was finally showing a positive contribution with some 4-point -- 1.4% EBT margin, partly to do with the high volume that we were able to achieve in this segment for Q3. Full year, we expect growth of 10%. So lower than what we previously announced because of our higher focus on profitability, which is reducing our volume and therefore also our gross margin. And that's why we now are also predicting a breakeven for this segment for this year.If we move on to working capital. I will say at least it was stable at Q3 but still at a too high level. We had the same -- roughly the same level in Q2, as we had in the months before. Return on capital employed is, of course, significantly influenced by the lower earnings, which is as well including the one-time expense. So this is why we're, of course, dropping from -- or partly why we're dropping from 15% to 12%, as you can see on the right side of the slide. If we move to Page 12, the cash flow. You'll see a free cash flow improvement of EUR 100 million that I mentioned before. So I will say I'm happy to see that the working capital is still continuing to be much better than last year, which is partly then offset by our investment in the global footprint, where you can see that we have some EUR 15 million higher in CapEx compared to last year. And M&A is lower with roughly EUR 20 million because of the lower M&A activities in the beginning of this year.If we move on to EBITDA on Page 13. EBITDA was, for the first 9 months, 7.7% reported and adjusted for the one-time cost, a bit higher than 8% for the first 9 months of this year.If we then move on to our internationalization efforts in the PT, Process Technology, part of our business. As also mentioned on the Capital Market Day, we have a disproportionate number of people in our core markets, meaning Europe, compared to where the business is. This is what you basically can see on the right-hand side of this slide here. And this is why we are continuing to work on our internationalization efforts that we have mentioned many times before. So I'm not going into why, but I think it's obvious why we're doing it. Local solutions for our customers locally.You see here some of the things we've been doing in the last couple of years. Javlyn and Trans-Market was consistent back in '16 and '17 in North America. We started our dairy activities in Germany, and we also started our cooperation with one of our partners in Singapore for the Asian market. Still a long way to go, but at least it's moving. And this is why we continue to focus on expanding our global footprint also in the Process Technology segment.And this is why, as you can see on Page 15, in the last couple of months, actually 1.5, we have been adding 2 important members to the Krones family: one in China, which is primarily a brewery-focused business but also to some extent, a dairy-focused business in China with some 170 people. So this is low-cost option for not only the local Asian market but also for other parts of the world that can provide competitive solutions for us globally. And then we also added another member to the family in the beginning of this month, where we have bought a company in Wisconsin. That is adding some 125 new colleagues to the Krones family. And they are strong in fruit, dairy and beverage -- brewery in the U.S. market, which is one of the largest beverage markets in the world. And this is why we believe it's important to have a footprint as well with the right capabilities.Last page, Page 16. You then see our new targets for this year, the 4% top line growth. Hardly any efforts from acquisition for this year -- hardly any benefits or volume from the acquisitions, slightly but not anything significantly, a 6.5% operational EBT margin and working capital to sales level of 28%.Our midterm target, as Christoph said, remains unchanged. But given the time pressure, we have delay -- timing issue, but we still, as Christoph mentioned, firmly believe that it's achievable.Yes, that marks the end of my presentation. And then we leave it to the floor, to questions, which I think is even more important to you guys. So questions, please? If any questions. I think so.
Ms. Felicitas von-Bismarck from Deutsche Bank.
I have a couple of questions. The first would be on your price increases. Do you actually realize that your customers are reacting -- there's some hesitance in placing orders for this? And how much drop do you expect in the last quarter? You mentioned that?
Yes. For sure, we do see a negative reaction, of course, of our customers. They want to try to see if we really, really mean it. So this is why we are not growing in Q3 compared to Q3 a year before. And this was expected. So I do not expect the one-time EUR 1 billion that we achieved last year -- in last year's Q4. How much? I would hesitate to state that right now. I think what is important for us is that we get the price increase through and the markets realize that we mean it seriously. We are improving our profitability of the orders that we are taking in compared to before. So it is moving in the right direction. It's not a slam dunk, of course. It takes time to get it through, but it's -- Krones is committed to raise the price, if we need it, as you can also see, on our profitability.
And do you see your competitors actually moving ahead with price increases as well?
Difficult to say. I would say that if I were a competitor, as also mentioned before, I want to make sure that Krones means it seriously. And for that, I would like to wait a bit to see if they really mean it seriously, which I hope they are trying to see the effects from. I can also, for sure, find example inside Krones where we -- maybe we're not as diligent as we overall want to be for whatever reasons. But we are moving in this direction. Competitors then hopefully see that now and will then start to consider what to do. And then hopefully, in the next, I don't know, couple of months, whatever a couple of months means, they will start to move. We at least believe there's a good foundation for everybody to change the price level because we are not the only one that are facing these challenges that we are facing.
Yes. And then -- another question. Your order intake this quarter, the flat one, right? And how does that split up between the 2 divisions? Did you see like flat developments in both divisions? Or was one up and one down?
So I would say on the processing part of the business, so the brewery business that we also spent some time on at Capital Market Day, we are seeing, for this first 9 months, a lower volume. So this relative here of that part of the business is going down. But for obvious reasons, we want to make money there. And we, therefore, unfortunately, right now, are not able to offer the right competitive solutions. And therefore, we have to step away from some business that we maybe earlier would have taken. And this, we would, for sure, like to take later. But for that, we need this internationalization to be able to offer the right solutions to our customers.
Okay. So it's fair to say that the core business is actually growing still in terms of order intake?
Yes, maybe a little bit but not a lot, not as we did in the first 2 quarters because again, we want to push through the price increase. But as I said, I can also -- I'm sure I can find -- I know can find a list of examples where we could maybe have been a bit more tough, but for various reasons, we -- on the price I mean, but for various reasons, we accepted. And I am sure that our competitors can do the same. But again, we want to drive the profitability, and this is why we are significantly lower in terms of volume. This is by far our biggest business, the core business. So it doesn't move that much, but we are stepping away from brewery business on the total picture.
Okay. And last question is on your operational profit drivers. You mentioned quite a lot of the facts now. Can you be a little bit -- can you repeat them in a row or just be a little bit more concrete of what, in fact, costs were? Do we have material price increases? We had currency effects. We had some more investments in terms of digitalization and so forth. Can you maybe try on an EBIT bridge or something like that?
Of course, I can. But -- I would like to share that with you and everybody else. But as you can see on our material cost ratio, this is by far our biggest problem. We are faced with high price pressure on the supplier front. And this is one of -- this is by far our biggest cost part, more than 50%, and this is where we need to work. But again, we have to work on not only material cost, also on the top line in terms of pricing and on the people side. And then yes, we do invest in digitalization. And it's not only EUR 1 million. It's some millions at least. And that cost us on bottom line because right now, it's more invest and not so much new orders that will have a lot of margin because it's more on investment in the future.
The next question comes from Mr. Joerg-Andre Finke from HSBC.
The first one is related to your midterm target. You said you will give an update on that in early 2019 with the preliminary -- or the full year figures. This is an update on timing then, as I understand it, if I'm correct, because Mr. Klenk at the beginning of the conference said that also the growth target will be -- you stick to that, and in the press release only margin and working capital were mentioned.
Yes, I realize that I was maybe a bit unclear. So we fundamentally still believe that can grow 5% organically each year also on the way to 2020 and also afterward. And then we want to add 2% on the top line related to acquisitions. On average, of course, 1 year may be higher than the other one, but that's our average goal. And then we're saying that we have a few years delay on the 22% and the 8%. So that's only on these 2 that we have the delay and that we are going to announce the exact timing in the beginning of next year.
Okay. Then you mentioned you recorded the one-off cost related to the production relocation. Will there be more one-off costs related to internalization of production footprint? And also, you mentioned that there will be some measures to be taken in Process Technology to bring margins up. Do we see any meaningful one-off expenses related to those 2 issues in the next quarter?
No, not in the next quarter. No, I believe so. We will, however, of course, have costs also in Q4 related to the fact that we are adding people right now, as we speak, in Hungary. And we are not letting go of the people in Germany yet because we need to make sure that we can deliver our solutions to the customers. So that type of cost will also hit our Q4 because of the fact that we basically pay double salary, so to say.
Okay. And then you mentioned at the beginning that there's potential -- or that you're still above working capital for the expected volume in Q4. And you mentioned some supply shortages there. Anything significant that we should think about?
No, I think we have that under control. It was more critical earlier. I would say, especially end of last year, we were really struggling to have the right parts to deliver on time to our customers. It's still an issue. Partly how we solve this is to basically buy a bit earlier to make sure that we have the parts when they are needed. And that's been increasing our raw materials, so to say. It's why we have then some semi-finished products on our stock that we previously would not have bought so early. It's not the high double-digit euro amount, but it's still some millions of euros that are impacting our inventories negatively in terms of working capital. But we need to make sure that we can deliver the right solution at the right time to our customers.
Okay. And the last question is just on the tax rate, which was...
Oh, in Q3?
Fourth quarter. So the 29% after 9 months, is that a reasonable run rate for the full year?
Yes, I would put that in my model, if I were you, on the full year, 29%. I think that it's more or less -- it's more a little bit of timing issue that we have between Q3 and Q2, but 29% should be roughly the average that we will land at for the full year.
Mr. Sebastian Growe from Commerzbank.
First 1 of 3, if not 4 questions. It's on the postponement again. How should we think about the timing of these project delays, more of the -- eventually with risk of cancellation, if you could quickly address that one. And then on the pricing and a follow-up to Felicitas' question before. Can you give us just a sense of what is really the status quo around this 4.5% list price increase and what eventually the net achievement might be? Or in other words, how are customers really reacting to that 4.5%? Are you meeting each other somewhere halfway? Or how should we think about it? And then on your prepared remarks, it sounded to me that eventually you're prepared to do more when it comes to the footprint going forward. Is my understanding correct here? Or do you see that the earlier defined strategy is sufficient to make 8% margin target but only with the caveat being the time of like 1 to 2 years? And finally on -- my other question. You have been becoming much more active on M&A overall, and it's not on very small companies, at least to my understanding, that you have been acquiring. Can you just shed some light on how the integration is going as we speak? So do you see anything that is growing exceptionally well, other things that are eventually going not so well? And we have obviously been hearing and discussing a lot for one of your competitors a situation that they have never really been integrating their acquired assets. So just some more understanding around the overall M&A integration work would be very helpful.
I'm the one starting regarding the footprint and do we need to move more or do we have more room to maneuver in terms of the footprint given the current situation. I would say this is actually what we put behind my statement, that the current situation might give us more room on that. Is it necessary to achieve the 8% profitability? Yes, I would say so. Since material costs are rising, and of course, personnel costs are, I would say, related to the profitability, so once we have more momentum in the global footprint, we strongly believe we can get bigger steps forward. That was exactly the point behind it.
Okay, very clear.
Okay. And then I'll try to cover the remaining 3. So yes, we had some postponements, not so many. But it's -- I would say, why did we mention this? Because it impacted our volume and because it was a few large projects. And therefore, that's part of the reasons why we are lower on -- from the 6% to the 4%. I think these 2 particular cases, I can -- on the line, there's no cancellation risk there. It's more on postponement. But yes, we do see cancellations here. Do we see higher than before? Not at all. I think it's normal. I don't see any risk right now that this will change. Who knows about the future? But we have not seen any signals until now. The second question was about pricing and how much of the 4.5% that we are able to put through. I'm not going to share this in terrible detail because that's -- I understand -- I hope you understand that this is a bit sensitive. But yes, we did not plan the 0.5% necessarily on the bottom line. I think that will not be a prudent business plan to have planned for this. But this is the target we are going in with. And then we may not always get the 4.5%, but we are for sure much better than 1% or 2% there. Then your last question is on M&A. As far as I understood, there was 2 elements in it. One was how successful are we in integrating these targets. I think until now, we have bought relatively small targets. I think we have basically, I think, in the past tried to implement -- integrate them quite heavily. And therefore, maybe we lost part of the operational efficiency that these targets have, where the ones we have been doing in the last 2.5, almost 3 years, that have been part of Krones we are more trying to make sure that we maintain their operational efficiency, and their benefits and more that due to the -- due to our -- the synergies that we can offer, especially on the scale side in terms of customer reach and also cost, this is where we try to sort of welcome them in the family. So I would say until now, all 3 have -- sorry, all of them that we have done until now have been doing quite nicely. Are all of them on plan? No, some of them are not on the plan. They are slightly behind, but all of them are developing positively. So I think that's good. Will more M&A come? Yes, I do believe so. Probably even in Q4, something may happen. And we still need to work on our footprint in one of the more important parts of the world, meaning APAC. So there, we are still not achieving what we would like to do, and we are working hard to see if we can get through to them. So we can find some targets that represent synergies for us and also are interesting for the current owners to become part of Krones family.
Okay. And quickly -- and thanks for the statements made on the statements you had before on the fact that the targets acquired so far have been relatively small. So [ is it -- ] from your comfort level that you could share with us in terms of revenues or so where you would still feel okay with -- when it comes to integration? And then one very -- promise, yes, final question. On the projects that you deliberately are [ within -- ] going for, especially those obviously in the Process Technology field, is there any, what can I say, global risk in the sense that you let some projects go where you would otherwise have taken them also for strategic reasons? Are you building a relationship with a customer? Or would you simply consider those, in any case, unattractive and for that reason, it's an easy decision so to speak to let these project orders go?
So it's never easy to let some projects go. But I -- we -- and this is what we -- maybe we're more focused on maintaining a good relationship with these dear customers that we have. And there, we are more, I would say, hard on the execution, on accepting that this, short term, is not a partner that we believe we are the right partner for. But of course, long term, we need -- we are committed to the house of Krones and we need to then provide competitive solutions to continue to work with these customers. So this is -- so we will let go of some also strategic orders even though it's a bit against the DNA of Krones, which I think is a good DNA. But we have to do them to make sure that we improve profitability. In terms of volume on M&A, yes, I think if you look at our leverage, yes, we can, for sure, leverage more than what we're doing today. So we could buy higher targets if the right strategic fit were there. We, for sure, also would seriously consider larger targets. But they need to be at the right price and the right strategic fit and that the synergies that we -- it's realistic that we can also achieve the synergies that we plan. But there are, unfortunately, not so many larger targets out there that we believe fits to Krones. And as you mentioned, Krones did not buy so many companies earlier. So we also need to make sure that we can absorb them. So not too many at the same time because that also takes focus away from parts of our business where we are generating significant margins and which is the ones that puts Krones forward in terms of profitability.
Mr. Sebastian Kuenne from Berenberg.
Yes, Sebastian Kuenne. Three areas I would like you to explain in a bit more detail. Number one, Hungary, it seems to me that there were cost overruns. Can you confirm that? And can you explain what the nature of these overruns are and what you currently do to prevent this from escalating potentially? Then the second area is the staff cost inflation that you see in Germany. I think for 2018, you budgeted 3.0%, if I am not mistaken. What is your current expectation for those costs in Germany, let's say, per employee or for the workforce? And what is your budget for 2019? Yes. And the third area, capacity utilization. I had the impression that you run into production issues in Germany maybe because the facilities are packed with too many machines that are not getting out of the door. Could you just give an overview of what your current utilization is in Germany and also compare this to the previous years?
Yes, Hungary. I don't know where you got this from. We are on plan, I would say, in terms of the costs related to this. Maybe the only issue I can consider is that we were a bit more general when we started out with the CapEx for Hungary. And now we were more specific at the Capital Market Day because we were longer down the road and have signed some of the agreements with some of our key suppliers. But we are -- I would say we are still on plan in terms of time and money on Hungary. But of course, there's a few hiccups here and there. But basically, the overall message is we are on plan. On the salary cost increase, yes, correct. We had assumed around 3% price increase, and we are now facing a roughly 4% price increase for this year -- sorry, price increase, salary increase. And for 2019, I will say this is something that we need still to discuss with the unions, but we are not expecting the same high level next year like we have this year. In terms of capacity utilization, yes, we are even higher utilized this Q4 than last year. We need to get a lot of machines out of the door. This is our main focus, even a bit more than last year. So yes, we are running on full steam and even more steam than we require, even more steam this year than last year.
But then I'm a bit confused that you were high, yet you know that you run at capacity. As an outsider, I would assume that you can be even more restrictive with your orders, and i.e., you should be able to implement your price increase more easily because you already know that you are at capacity, all right. So I would expect actually lower orders with better pricing because you are at capacity. I mean, why are you not even more restrictive on your price discipline? Maybe you can explain that.
Yes. Installed capacity, I think, is at least one explanation, and Northern Hemisphere is the other explanation. So we still have a high amount of our customers in the Northern Hemisphere. And they do want to get new machines going live before the high season, which is the summer next year, for us at least in this part of the world. And that's why we always -- as long as we continue to have a higher part of our business in Northern Hemisphere, then Q4 will still be a high season. And we need to -- we are living partly out of the installed base. So we also need to be more delicate, and the orders we are taking in now has a lot to do with the workload for Q1 next year and not so much for workload for Q4 this year. But this is always a difficult balance. And in that defense, if you speak with a person with a pure finance background, he has a more one view on it. And if you look with -- talk with somebody else, it's more balanced because we also want to remain important, yes, partners of our customers. So just to say no has also some consequences, not necessarily that then this customer come back and say, ah, already next time, Krones should also grow. So it's not an easy balance, but it is going down. We're not there yet, as I said, but it's moving in the right direction.
Maybe one last question. Can you quickly explain how you incentivize your sales team to push through with the price increases? Why would I, as a salesperson, walk away from a tender if I can't get a 3% price increase? Why would I not accept a 2% or 1% price increase?
Yes. The incentivization is based on 3 factors, as I think we already discussed before. It's top line growth because we need the installed base for the group. It's profitability for the group. So at least -- and it's working capital to save. So at least the #2 should drive him in the direction of trying to get through the price increase number to the -- there are more things in the world than only the bonus program that incentivize the people. And of course, we also have some systems to make sure that they accept them. We are also talking about that we want them to put through a price increase. So this is -- they know this is a key target that we want them to achieve.
Mr. Sven Weier from UBS.
First one, coming back on this pricing topic. I was just wondering because you announced it in May and you said it doesn't really impact the orders because we have a longer lead time for those. I was just wondering if -- the Q4 order intake, is that an order intake that is like 100% really with orders that are already impacted? Or are there still orders in where you started discussions before May and so it's still going to be a blend of those different type of orders that? That would be the first question, please.
Yes. Unfortunately, it's still a blend, I must say. There are still some first quotations until final order. There are still some -- I don't know. I don't know how much. But for sure, in 2000 and -- Q4, there will also be a blend. 6 months or whatever is maybe the average lead time. So there will be some -- there's a mix also in Q4.
So Q1 is then really the first one where...
That will be key, I would say, to, I don't know, a 90-plus-percent, whatever, even higher maybe.
Okay, understood. And then you mentioned also the supply shortages, supply bottlenecks. I mean, any specific, I don't know, top 3 components that are in highest shortage? And wouldn't those ease now given that things are a little bit cooling down out there and the supplies are fairly ramping up some capacity? Is there still no light at the end of the tunnel as far as those bottlenecks are concerned?
I think the situation right now compared to one year ago is much better. Twelve months ago, it was really tough. I think -- yes. And I think we all, suppliers and customers, found a way to manage this. But it could be better. But for sure, the daylight is much better now than it was 12 months ago.
But there's nothing specifically sticking out, so it's...
I could mention a few, but I wouldn't do that yet on the call.
It's pretty broad, okay. And then just a housekeeping one. Do I understand correctly the charges that you do adjust, when you talk about adjusted EBT, that they all occur in the core division and not in the PT? So we don't have to make an adjustment for the PT margin for those charges?
Nothing substantial at least, yes, correct.
Okay. And then could you be a bit more specific how much it actually was in the extra quarter? I mean, only those charges that you do adjust in your margin target?
So we made some provisions also for some people, and we are in the middle of the discussions with these people. And obviously, we do not want to pay more than absolutely required or necessary. And therefore, we are not even internally sharing this number because it may create the wrong expectations or whatever. So I would -- this will, of course, become clear when we publish our final numbers because then we need to write something in our annual accounts. But we'd rather wait until we are there because then we are much further down the road with these discussions with our people that are affected.
And is it -- is this charge that you mentioned, low 20s when I do the adjustments, is that only Q3? Or is it also some charges that were already in the first half and something in Q4 that isn't really an isolated Q4 -- Q3 charge, sorry?
It's almost isolated in Q4 because there's a big restructuring provision in -- sorry, Q3, sorry. And so it's almost entirely in Q3.
Mr. Daniel Gleim from MainFirst.
My apologies for belaboring the point, but when you adjust your margin, is this only referring to the restructuring provision?
No. Also there was double salary, for example.
So the double salary is also included in the adjustment?
Yes.
You also mentioned start-up costs. It has not been specific whether this is startup for Hungary or whether this is startup for digitalization. Is that also included?
No, they are not included.
So anything related to the Hungary plans, which is not a going concern, is included in that number?
Yes. Because this is what we regard as one-time effects. We will not, of course, pay double salary when it's up and running. But this is what we regard as extraordinary cost that we are faced with this year.
So the provision has almost entirely booked in the third quarter and the fact...
It's only booked in Q3, only booked in Q3.
And the provision will not be further expanded then probably in the fourth quarter?
No, I do not think so.
What about the cost doubling? For how long do we have to expect that?
Yes. That will, for sure, also be in Q4. But I think your question also goes into next year. So we will also have double cost, for sure, in the -- part of next year.
Would you mind sharing a rough magnitude of the cost doubling?
Not -- yes, I will, for sure, share but not right now. For next year, I will say. But then yes, we will share also later on for next year.
What is the planned timing for the full ramp-up of the Hungary plant? This has changed in the recent months and weeks?
I think we were a bit more optimistic at the beginning in terms of when we would start up in the next year. We were more in -- I think I said in Q1. Now I'm saying in the beginning of 2019. So it's more towards Q2 that we are starting to get real momentum there. So I would say we are -- we were already a bit optimistic when we started out this plan in terms of how fast we could get it up and running compared to what we have now. But I think when we then got the guys to put down the plans, I think on that one, we are still on time. But I was -- I said Q1, I know, maybe a year ago. It is not Q1 anymore. It's more beginning of '18 -- '19, sorry.
You mentioned the investments into digitalization and the other initiatives that you're running would cost a few million at least. Was this referring to the third quarter? Or was this referring to the 12 months?
Full year. Full year. Yes, full year 2018.
Will it continue in '19?
Yes.
And mainly...
Yes, cost, yes. But we also start to see that the top line is moving. So the bottom line, we think, will be less in '19 than in '18. Of course, we have some products in the market that we are able to get money for, so to say.
Well, one last question on the union negotiation. Do you expect this to be settled in the fourth quarter and then to be fully published in the annual report?
You mean with the people?
Yes.
Yes. All of it, I think it's difficult to say. We are working hard on getting this finalized. You need 2 to dance. I don't know if everything will be settled. But we will, for sure, have a provision booked in the P&L and in the balance sheet at the end of the year. And this is what we will, for sure, disclose there because this is what basically they would want.
And maybe one last question on the wage discussion, which will start early this year. We haven't heard so much commentary yet, but the one that I heard so far was not as upbeat as you were with regards to negotiating a lower wage increase year-over-year. And the argument has been shortage of qualified labor. And is this different in your industry? Or why have you come into this conclusion that this will be softer compared to the 2018 wage increase?
I think they agree with our rate covers for next year. So that's why we are -- basically, it will be lower this year. That was the way it was -- the deal was structured. After that...
The 3%?
Sorry?
The deal was 3% for next year?
Yes. I said we are at around 4% for this year, and I said it will be lower next year. So that is still within what you are also saying.
Mr. Peter Rothenaicher from Baader Bank.
I would like to come back to the one-off. So if we do the math, it seems to be around EUR 20 million. And as I understood, it, on the one hand, includes some likely redundancies and obviously also some startup costs for Hungary. So firstly, is this all booked in your personnel costs P&L line? And secondly, why don't we see in the balance sheet here any impact on provisions? So provisions, at least the noncurrent provisions, were down significantly?
Yes. I would say at least on the P&L side, I try to -- maybe I didn't describe it quite well enough. But then the fact that we are missing our targets for 2018 means that the bonus amount that we are going to pay is much less than last year. That means that the cost for bonus in the P&L is less than last year. And therefore, for the provision for bonus, it is also less because the provision is first paid next year -- sorry, the bonus is first paid next year. That offset, to some extent, the provision for redundancies that was provided for in the balance sheet, and of course, negatively impacted P&L. So that is one element. So that at least is one element that -- that's why you cannot really see it so much in the balance sheet nor in the P&L, because these 2, to some extent, offset each other, not -- for sure not fully. So someone's dividend -- so someone's bonus we are not paying. But they are, to some extent, offsetting each other.
Okay. And then as I mentioned, you did some provisioning for the startup of Hungary. You mentioned you will have another personnel cost payment also in the upcoming quarters. But this is already then covered by the provision though?
No, no, no. It's actually not -- this we are not allowed. This is just normal salary. And this is not allowed to be provide for us -- as provision. It goes straight into the P&L.
Okay. Then with regard to your free cash flow, so typically your fourth quarter is always strong in free cash flow. Can we expect, for the full year, positive free cash flow, considerably positive free cash flow?
Yes. Q4 -- let me just find the sheet I have here somewhere on my table here. Here it is. So we do expect negative free cash flow because of the last CapEx that we will have and also the M&A deal that I alluded to. So the free cash flow from operating activities will be much better in '18 than '17. But we are investing in Hungary with cost -- CapEx. And we are also expecting a higher -- somewhat higher M&A amount going out in Q4 compared to what we had the first 9 months. But again, you need 2 to dance. Nothing is final until before both have signed the piece of paper.
Okay, good. And last question, coming back to the order backlog. How would you consider your order backlog -- quality of your order backlog now end of third quarter versus the situation 1, 2 quarters ago? Has it, in tendency, at least improved?
Yes, it has because of the fact that the margin on the order intake is going down. So the portion of the orders in -- from the price increase is, of, course going up. But still a lot of it is more before May. Therefore, the margin is improving and that starts to help us. But again, so many orders we have also not signed yet in terms of from the new price, a little so to say.
Okay. And the lastly then on your Process Technology division. Now you also lowered your guidance for profitability to breakeven from before 1% on the one hand. What is the reason though? It's, on the one hand, difficult to understand. You did some acquisitions in the area of intralogistics, which were, as you mentioned, quite profitable. Why don't we see here now better results already?
Yes. Good question, Peter. I think it's a fair question. I think I don't have a really killer argument here. The only thing I can say, it's not a lot of millions. So we do see improvement, but not as much as we would like to. So that's why we reduced it slightly, because we have an EBITDA, and how to say, a fixed-cost coverage problem. Of course, when we were letting go of volume, then the gross margin -- that's why our target is lessening and the people that we are reducing are -- will be hitting the P&L this year.
There are no further questions.
Okay. Then I thank you for joining our conference call and hope to see you guys in the next calls in the next months. Thank you very much. Have a good day.
Thank you very much.
We want to thank all the participants of this conference. Goodbye.