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So welcome to the Conference Call of Krones under the headline, Krones continued profitable growth under difficult conditions. We want to present you today the figures of the first 9 months 2022. At first, some technical information. For all who want to participate via video, if you do not see fully both presenters, 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. And then you can see the entire picture. 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. In order to ask these questions, please inform me just by sending a short e-mail to olaf.scholz@krones.com. And I will hand over to you and you can unmute your individual line. If you have not the possibility to send me a short e-mail, I will ask at the end, all of you for further questions again. So let's start with the presentation. I think we are all interested in the details about the first 9 months 2022. So I will hand over to Mr. Klenk Christoph, the floor is yours.
Yes, Olaf, thank you. A warm welcome to everybody of you, ladies and gentlemen. It's a pleasure to have you here this afternoon. And we would call today's call between the extremes because I think everybody is aware of when we look into the newspapers or in the news, we can be all depressed by what we can read every day. And on the other side, we see Krones, how we're developing even in those challenging times in the right direction.
And before we start with the numbers, one short reflection to the recent drinktec, that's the biggest exhibition we have in our industry, where we took a lot of momentum because the innovations were the right things we had on the show. Second, I would say the items we discussed, in particular, beyond tomorrow was important for our customers and for the whole Krones team that gave a very, very good momentum in terms of being confirmed on the things we have developed and the things we have executed over the last 2, 3 years. I would say we are very proud of our team because the success we have up to now is based on an absolute good team spirit and everybody has brought his part to that success. In particular, when you look to all the challenges we have because we have more teams being, let me say, in regard of the material shortages, the corona issues, the energy issues we have, that the task force we have, have a number which we have not seen yet. And despite all of that, things are going okay. Before we come to the presentation, of course, you have read already the numbers are good. The order intake is huge. We are very happy that we are at this particular point on that high number. We are growing despite all the problems in terms of revenues. We have, as I said, material shortages and so on. And that even profitability is increasing based on the performance programs we have and on the first effects we have out of the pricing strategy we were driving for the last 18, 24 months. So if you go to the first slide, Olaf, please, it's me. You see here a summary of, let me say, the biggest and important numbers we have. But I don't want to jump into those because you see all of them in detail. And here, you have an overview how the order intake rose; we come to that in a moment. The revenue growth we have at the moment, EBITDA on the other level of the guidance we have and the free cash flow, which is what the time of the year, very good. So I jump immediately in the presentation because we think the Q&A later on will be more interesting. First of all about order intake. I mean, you see that the third quarter has EUR 1.5 billion, roughly, just EUR 7 million below that EUR 1.5 billion, so we got quarter 3 as strong as the first 2 quarters and that's very remarkable. And we have to be honest. We didn't expect by the beginning of the year that the order intake was so constant even with the increase of the delivery times we have. But I would say the pickup demand we see is huge. We see certainly because the delivery times are longer that customers are planning a bit more into the future. But we believe the biggest point is for us. And the tailwind we have is, I said it in the beginning, that we have not overpromised up to today. And we hope this will keep the same way and we managed that that we have not overpromised and that our projects even during corona times and then during the material shortages we had that we kept the delivery times and, let me say, start-up times of the lines we are shipping. And that's the important factor why we believe that order intake is, I mean, I'm aware of that all order intakes in the industry are high, but ours is, I would say, in particular, high that this is on this very high level. And to all details, I think we'll come later on. I have to say all regions are performing quite good, despite maybe middle Germany, that's not so -- Middle Europe, which is Germany, Austria and Switzerland, which is maybe not so good, but all the rest has been performing pretty well. And with that, I hand over to Norbert that he is going to continue.
Okay. Thank you, Christoph, and also a warm welcome from my side. So on the revenue side; you see an increase of 15.2% versus same period last year. And also the Q3 by itself is 14.7% above Q3 last year and quite remarkable.
It's the highest Q3 revenue of Krones' history ever. And the second time that Q3 was above EUR 1 billion. First time was 2019 with exactly EUR 1 billion in revenue. And what Christoph mentioned, our early communication with the customers beginning middle of last year, where we saw the supply chain shortages coming. And the extension of the lead time, that's a big advantage for us now because almost all projects are on time. We have hardly any delays. And if we have them very often, it's the customer on his side who has delays. So that is one of the major reasons, why the order intake is so strong and positive because the customer realized we keep our promises. Also the 9 months this year is already 5.3% above the first 9 months before the pandemic started, so 9 months 2019. Here you see the regional spread of our revenues and the development. And we said it's a regained strength in the industrial countries. When you look at North and Central America, 21.8% of our year-to-date sales is in that region, coming from 18.6% 2020, already 21% last year and still increasing. Also Europe, very strong, 32.2% of the total revenue share in Europe. And also a little bit surprising for most people, probably China, also from our business, a slight increase of share of 8.6% of total revenue. On the weak side, and that's what we expected from day 1 when the pandemic started. South America as well as Middle East and Africa because here, the long-term impacts of the pandemic and the economic downturn is stronger. And the recovery time will be longer than in the industrial countries. More or less neutral, Asia Pacific. When we look at the EBITDA development, EUR 270 million after 9 months, 27% above last year. And that clearly shows that all the actions we did to improve efficiency in our company shows impact. The margin, 8.9%, accumulated versus 8% last year and 6% the year before and also remarkable Q3 by itself, 9.0%. Those of you who know Krones for a longer period of time, you know that usually Q2 and Q3 especially were not so strong on profitability. That had something to do with seasonality of our aftersales business. Now this year, the seasonality is not as strong as in the past, so very good aftersales business in Q3 this year. And also a remarkable profit increase, profitability increase goes together with over-proportional increase of new machine business, new machine sales. And you know that with new machines, new projects, in general, our margins are lower than with the life cycle business. And of course, we stay with our statement that we will reach the upper range of our guidance of 8% to 9%. Even a little better; on the EBT development, plus 49% versus same period last year, pretty much the same amount of EBT after 9 months versus 12 months last year and 5.8% accumulated EBT level. The individual third quarter was at 6.0% EBT. And the 2 major drivers when we look at cost, cost structures, our personnel and material expenses. And you see that the share of personnel expenses in ratio to our sales decreased further to 29.9%. So this year, we have the full impact of the actions we did restructuring process, improvements from the previous years in our P&L. And you also see that it's still a slight improvement because after 6 months, the ratio was 30.6%, so after 9 months 29.9%, so a very good development here. Also on the material cost side, even though on first sight, it doesn't look as there would be a change. So it's the same material ratio compared to last year. But with significant higher material costs and also with a significant higher share of new machine business in the revenues that, by its nature, has higher material expenses versus aftersales and service business. Development of our employees worldwide, 16,795 end of September. That's almost 500 more than end of December. But on the other hand, it's 3% increase of FTE versus 15% increase in revenues. So that's also part of the lower ratio and the improvement in profitability. And where did the buildup take place? Out of the almost 500, 190 was in Germany and the majority 300 outside Germany. And most of that in service areas, service technicians, but also software people that we cannot find in Germany. We build them up outside Germany, the majority. And service technicians we need because we know from the order backlog that next year and especially 2024, we have a huge order workload to install the projects and the equipment that we have received as orders this year. Working capital, a significant decline compared to last year. So working capital ratio to sales is 20.5% versus 26% last year and 28% the year before. So also here a significant improvement. Of course the higher sales and higher business activities helps. On the other hand, we made progress in the accounts payables compared to the past. Of course, to last year, there's on the accounts payable, it's only a small or a small deterioration because the suppliers' position in negotiation right now is extremely strong, as you can imagine. Inventory, this is a planned buildup that we started last year in order to make sure that whatever we can to stabilize the supply chain is done. So it's not good on the working capital. But for the overall business and to fulfill our commitments to the customers, it's needed and helpful. And the received prepayments, of course, that portion is growing with the order intake. Return on capital employed, 12.4%. So of course, this is a result of better profit, better results, but also a decrease in working capital. And at the same time, our other assets are more or less stable, so no increase in there. And this is also in the upper range of our guidance on this KPI. Now when we look at the 3 segments, what we have at Krones? I think the good news is that all 3 segments are growing. And all 3 segments are increasing their profitability, every one of them. So when we look at the first one, filling and packaging technology, which is the majority of our business, roughly 80%. So here, the increase in revenue, 15% is pretty much the same as the overall increase of the group. EBITDA margin, 9.6%. So here also an improvement compared to last year and the year before, despite the fact that the share of new machine business and sales has increased significantly and that has traditionally a lower margin than the aftersales business and despite the fact that the material prices were significantly higher than in the last 2 years. And our guidance for revenue growth here was also raised from 8% to 10%. It was 5% to 7%. Process technology; you know that segment has a difficult history with not being successful, so slowly, but steadily, this is improving profit wise as well as revenue wise. Year-to-date, revenue plus 13.5%. Here we expect a strong Q4. And that's why here we see a year-to-year increase between 20% to 25% this year compared to last year. Originally we expected 10% to 15%. And also the EBITDA margin currently at 5.5% is in full line with our target. And we expect a slight improvement here until year-end. Intralogistics, also significant revenue increase, 17%. And currently EBITDA margin 4.6%, which is currently in the lower range of the 4% to 6%. But here we are also very confident that in this segment, Q4 will have or will contribute to further profit improvement. So financially, this is not really new. We are a very solid, resilient company with a very good cash position and also liquidity reserves and equity of almost 41%. Something that makes me sleep; CFO, very well, also in turbulent times, plus, of course, we have, let's say, a little war-chest for future acquisitions in case we can complete one that makes really sense for our company. Cash flow statement, also positive development, starting with better earnings before tax than last year, of course, but that also materializes then in higher cash flow from operations, EUR 210 million versus EUR 182 million. CapEx, a little bit increased, 16%, similar like the business increase compared to last year. So free cash flow, EUR 132 million versus EUR 108 million last year, also very positive development. And you see it also here in the summary, just free cash flow, the charts in the middle development from 2019 to '21 and '22. And similar cash conversion rates next to it. Here, of course, and, still 100% or above is extremely high. The reason why it's not that high compared to last year is just that we have such a strong growth in net income, 40%. And that brings me to the outlook already, and that is not -- no surprise for you. So we increased our guidance for revenue growth in October from 5% to 8% to 10% to 12% and EBITDA margin same 8% to 9% and ROCE, 10% to 12%. And we're very confident that all 3 KPIs in the guidance we will achieve in the upper part of the corridor or the range. And having said that; I hand over to the last words to Christoph.
Here are the key takeaways. You have heard that we have a record order intake and our order backlog and just one sentence to that in addition. I mean, we showed to all of you on drinktec during the Capital Market Day, where we have been was the realization. And this was of course, on PowerPoint and I would say on the fair.
We had a lot of these solutions based on digitalization in our machines. And we could prove to the customers that with what we have developed over the last years that this will bring really efficiency gains for them. And once we are going to do that into our machines, that's something which will give us certainly a tailwind for the future and a good fundament that we can continue on a good order intake. It might be not as high as this year, it could be. But it's -- we assume a steady growth on that because we believe we have the technological fundament for it. And that's, I think, a confirmation from the fair we had. Then revenues are recovering. And I would say we say that further down. We don't see 2022 or a third improvement of our supply chains. And even with that, we're seeing now that we have arranged things in a way that we can at least slightly get more capacity utilization out of our capacities with the way we organize ourselves. Not a too big impact, but it's good for the end of the year. Then, of course, we have the strong improvement of profitability. We spoke about that. And the measures are still going on. So the potentials are there. And don't forget, we usually think about if we do on improvement measures, we think about the internal processes. But we should not forget the services Krones has around the world and how we can push further our footprint around the world in times of services and that there is much more to take for us in the future. So this is still potential. Then Norbert said that an excellent free cash flow generation. The next point, the supply chains are stable in a manner that we managed the unstable supply chains quite good. And let's see how things develop in 2023. And last but not least, we confirmed our guidance for 2022, a pretty strong word. So we are at the end of our presentation. We do not jump immediately to Q&A, why, because I have to say goodbye to Norbert. Norbert is leaving us after 3 years. And for some of you, it might have come as a surprise. But we were right from the beginning, clear that Norbert had -- might have and as a might, might have different plans than Krones. You can say certainly later, I've heard about that. At first, I want to say those 3 years with Norbert, they have been really excellent. And they have been excellent, of course, in terms of business, because we have reflected a lot read Norbert with the team, we on the Board. So there was a lot of reflection and Norbert brought a lot of business input into this discussion. But I have to say Norbert, not early business given personally lies, I'd say this was a really, really good time and we worked very close together, had a very, very good relationship in terms there was everything shared what was on the table, controversially sometimes. But all the time with the targets to get something good out of the whole discussion for Krones and I would say that's a definition. What I'd say, it was, on the business side very good and it was on the private side, very good because it was good discussions free of any major, let me say, hidden agenda or whatever, we're heading towards getting things better. And thanks a lot for that, Norbert; that was outstanding. I can say I'm happy because I was working with you, with Norbert. I'm unhappy, because he is leaving. But I'd say again, I'm happy again because Uta is coming on board. And I have to say, you all have a chance to see Uta Anders during the Capital Market Day. Again, this was even long-term planning from both of us that Uta came early on board. And she was aware of the perspective she has. This was during the year confirmed that she's joining the Board from the 1st of January onwards. We are very happy about that. And I would say we can deliver with that change. Since Uta knows now the organization for 2 years in and out, that we can guarantee a flawless change from Norbert to Uta and can continue the path on which we are. So that's not Norbert once again thanks a lot and I would say the last word remains to you.
Thank you very much, Christoph, just very short. I'm convinced that capital communication to the capital markets will go on in a consistent way. Now in another team, you with Uta, as I said, Uta is here for 2 years now. And so that is a very good and well-planned transition. There should be no surprises.
Performance of the company is improving year-over-year. And we are confident for this future with the order backlog. We know the margins in the order backlog. And I think together, both of us, we were able to, let's say, improved maybe a little bit damaged reputation of 2019 with capital market information. I think also for you that hopefully we achieved that we are reliable management for you in this company and embedded in a very good performing company. So thank you for the last 3 years.
Thanks, Norbert. And now, Olaf?
Okay. Thanks to Christoph and especially also to Norbert, which is his last conference call today for the capital market.
So I have received several e-mails as well as I've seen we have some raising hands in Teams. So let's make it person by person. So we start with Sven Weier from UBS. Sven, you have the possibility to ask your first questions, please.
Yes. Thank you, Olaf. The first question is actually on the increased revenue guidance, right? I mean, probably we all have done the math on this. And we can see that it implies at the low end, revenues down 4% in Q4 at the high end plus 4%.
Given the backlog you have, given the good delivery you had in Q3, I mean is it more that we should place ourselves at the high end of this, that's the first one.
Okay, I can answer that. I mean the math is easy. 10% to 12% for the last quarter means minimum EUR 965 million, up to EUR 1.26 billion in Q4. And I hope you won't kill us if, at the end, it's 13%, but -- that could happen, yes.
You will be away. So we'll be then missing the killing I guess.
So it's a problem to explain it if it's a little bit higher than 12%.
If we are running out of a guidance on the upper level, I don't run away, you can be sure. And I have not been running away during the times when we have been below the level we have promised. So I'd stay here and once that happening. And I'd have to say a bit careful because the December has 1 week less. And we have to be careful because of energy savings.
So we are really reducing operations by the 21st of December significantly. So I would say, let's see how these trends are. So I would say, with service, normally it's around the 12%.
Okay. Good. And then, secondly, your comments on supply chain, right? And you said it also at the Capital Markets Day that you don't expect a major improvement also next year. Mean at the same time, we see it happening, right? We see big improvements in the automotive sector, which is maybe always first in first out on these things, so any more positive signs? I mean I know this is a daily observation, right?
But I mean, what we see from the macro side is really strong improvement, right? So it isn't that view on '23, maybe a bit cautious so?
Yes. On the Capital Markets Day, I have to correct you a little bit, Mr. Weier. We said we do not expect an improvement in the first half year. We hope for improvement in the second half.
In the meantime, we are very sure that we'll see significant improvement, definitely in the second half and most likely earlier. I mean, the last 3, 4 weeks, the discussions we had with suppliers is quite promising. Now we have to see whether they can and will fulfill it. So we are more optimistic than on Capital Market Day that we see a recovery earlier. On the other hand, you know how volatile things are. If China locks down, their harbors or anything for 2, 3 weeks in the winter time because of zero tolerance policy regarding COVID, then, we will see the next hiccup, which will have an impact on supply chain. But if that stays stable and quiet, then, we have much better indication right now that this situation will improve faster, yes.
And maybe one addition to that, that you understand that better. I mean we have organized, let me say, a special procedure that we could cover the shortage of the -- in particularly the electrical components. So today, most of the machines are commissioned here in the plant. Then we take the components out. The machine shipping without those and then they are actually implemented again once the machine out in the field.
And this particular, let me say, step. If we get better supply, we are first 2 to 3 months until we get back to the old standard process, how we build, commission and ship our machines. So that's one other delay which might hit us once things are getting really better because so far, as I said, it earlier, we are still a task force on this particular case, how do we get the electrical components into the machines. And under that smooth and solid, it's certainly 2 to 3 months.
Okay. And then my next question is on the order intake. I think you said also in the press release that you expect a, order intake in Q4. So maybe you can narrow that down a little bit more for us what good means and of course, you also said you're fully loaded until mid-2024 almost.
So is that kind of the breaking point where clients stop ordering in advance that they say it's not worthwhile ordering now something for after the summer, at least in the Northern Hemisphere? Or is that not really a breakpoint?
First to the Q4. I mean, the Q4, we -- and usually when we get a project on board on line and we get an order. So they are between, let me say, 8 and 16 to 24 weeks preparation and negotiation. So we know all the hot projects for the last quarter.
And with the projects being there and knowing the customers how they behave, we are on a strong belief that Q4 will be good again. I mean we have already October passed. We are aware of where we are with that. So I think it's in that going in the right direction. And interesting at the moment is that we get -- you saw in the early beginning of the presentation, how the split of the revenue is around the world. So we get to pick up a bit from Asia because they are the latecomers in recovery from COVID. We see a bit of that coming back in Africa despite some countries because there might be some political issues there. But I would say there is a recovery in different parts of the world, which are actually helping to that. So the Q4 from our point of view looks good. And to your second point, I mean this is the biggest question we have, when is the time coming that the customers are, I would say, getting into trouble because they have to plan for 2 years in advance that they are going to order a line. We thought already that might be earlier. But we see right now, we are between 16 and 18 months for some of the projects. So that's pretty long. But still, that didn't hinder them to order. And if we look to the strategic projects they have out there. We have not a concern that this is then up in a certain decreasing significantly. I would say, certainly, there could be a reduction, which we can all feel. But it's still then on, I would say, on a constant level as far as we can see over the years, if you would calculate that. And this is based on all the discussions we had on drinktec. So it's around 6 weeks old. We know that things can change fast. But I wouldn't say that the majority of the projects; is only based on a positive outlook. It's based on business cases, whether they need pass the lines to get costs down, whether they have new products to be implemented or for, let me say, energy and sustainability reasons they have to invest. So those are the 3 categories we can see at the moment. And I would say with that, I mean those types you can't be never sure. But the fundamental on which we sit and we can charge at the moment, I think that looks not had.
And maybe in addition, I think what we can say is that at this point of time, I mean, we have a huge order backlog, and it's still growing, but we don't expect a reduction of order backlog next year, end of next year.
So the EUR 1 billion order intake run rate per quarter has to wait until another day?
Hopefully, let's see.
Okay. Thank you, Mr. Klenk, and especially thank you, Mr. Broger. I think we all appreciated the last 3 years and your performance and you personally.
I have now a mix of questions over the e-mail online and also operating hands. I think let's start then with Sebastian Growe for Exane BNP. Sebastian, your question please?
I would start, great, hasn't been the case always in the past, so just have to check. On orders to start with, I would be interested in some comments on the price quality of the order intake, if you could start there.
And to me, what you see in the discussions with customers. So obviously, I think in one of the answers to Sven's question, it appears there's no sort of scrutiny from customers when it comes to pricing so that there's still a very high level of dynamic simply in the discussion. But nonetheless, if you could just talk about the quality and sort of the hesitance aspect, that would be interesting. And if I may then also touch your brain on the quarter 3 dynamics. So what sort of the sequence if one looks at the month-by-month development, we do see obviously deterioration in PMI still. So is there any sort of deviation in terms of the monthly contribution or was this rather steady? Maybe we'll start there and then I have 2 others.
Okay. First on the pricing. I mean we said that many times that pricing is based on, let me say, the fact how we see the cost development in the future because I think that's the biggest part we have to look at that once material costs are increasing, and we're all going to face most probably a huge personnel cost increase with what we see in the negotiations with the labor unions.
So this is, for us, important actually to reflect and to transfer to the customers. And I would say the sensitivity of our customers in that regard because they understand on their own side because they'd feel that every day that their costs are increasing. So there is a certain rationality once to discuss that with the customers that let me say, the overall pricing is pricing. And it's not only us of course. It's the market which is demanding more from our customers. Are the discussions easy? No, they aren't. And we just had one case yesterday where we were 100% sure to get the order and we were tough on the price and we didn't move and we didn't get it. But you have actually to stand for your pricing policy at the moment. And we are definitely perceiver to our customers that we do not go beyond certain levels, even in case we are sitting in front, like a hunting dog of disorder. And you would like to have it because it's a big one and you can't do it because you can't run the price levels. And again, this is a lot of thought what will happen in terms of cost development in the future. It's how to say, we are losing, that's no doubt. And without that, I wouldn't say we would be able to carry that pricing strategy forward, which we have at the moment. So that's where we are with the pricing. It's sensitive. And we had in this morning, the discussion, how do we deal with that? Because we know at the moment, the volume is there and how can we stay on that, even in case the volume gets lower because that's from our point of view, I have to say, Uta, Norbert and my view, the most important thing for the future being stable on pricing, whatever it takes. So that's a tough statement I know, but again, DNA of Krones needs to be pricing as well. So that's one thing. The second question about the monthly run rate, and I would really say this is for Krones difficult to say because you usually should think in quarters. Even we do that. You have in one quarter. You have one big deal in and that might look totally different than the months before. So I would say when we look repeatedly, every 3 months back and see how things have developed and you don't see a change in the characteristics of the order intake. That remains the same in terms of, let me say, size of the projects we have at the moment. Let me say, the products we have on the lines like PET, glass can, the mix is the same. So there's very little change in it at the moment. And even the regions are quite stable. It's a big shifting to Asia. And as I said that earlier, Asia is recovering but all the rest is relatively stable. And even in case we look forward into the future, when we look on what we have out in the pipeline, I wouldn't see there is a significant change in, let me say, the quality, the mix, what we see out there. So I would say it's pretty much the same. I hope, Mr. Growe that answers your questions?
It does, yes. And then on the execution part, well, it's also related to pricing still, obviously. I would be interested because you also flagged in your introductory remarks in the report that there were obviously tailwinds from the price increases.
So can you break it out how much of the growth really was related to pricing? And especially I'm interested clearly in the disconnect so to speak, i.e., what is the spillover element that goes into '23 execution, i.e., what's really the price element in the order growth compared to what have you seen in execution?
Norbert, you want to say something?
Yes. I mean currently, what we see in the revenue, I mean, there is from the first price increase. So first of all, I have to say on non-new-machine business, we had several price increases starting 2021, like every 3 months a little bit; that is factored in on the new machine business.
We had the first price increase for August 1, 2020. Most of that is not in yet. I mean some of it we have POC '21, sorry, '21 price increase August 1. We have POC revenue recognition. So it's slowly but month-by-month building up impact. So the most part of that is still to be seen to come. But on the other hand, material price increases also are not finished yet. I mean, spot market, many things are going down. But we have long-term contracts, so there's also an increase. But most of that price -- the first price increase for new machines will be -- we will see in Q4 this year and then it continues also into next year. And the other price increase we made April because of the lead times, most of that will be materialized in the revenues and P&L peak middle of next year, so Q2, Q3.
Okay, sounds even better. And then on the question that we previously discussed on the supply chain availability; given that obviously some suppliers might struggle with other end markets going forward, that is probably opening then the door for you to sort of benefit from that situation that the one or the other supplier might be more desperate than it used to be the case? Or is there no sort of -- I'm not really want to talk of things and I'm just really wanted to discuss it in the sense of if there is sort of an opportunity and I'm not saying that we need to bake it in. It's just I think worthwhile talking about it.
I mean there's certainly when you talk to -- or when I talk to our purchasing guys, I mean, they were kind of frustrated because in the past, they were used to work on price reductions. In the last 2 years, they were trying to defend price increases, more or less successful, most of the time, less successful. But we can compensate with price increase on our side, plus on top of that, not getting what we ordered, so the shortages.
And this, let's say, will turn sometime next year. We have first sites, a first indication also that suppliers who were not interested or who had no capacity are cautiously indicating that they probably will get capacity. I mean, recession for most part of Europe, North America, in most industries, of course, helps that that situation will improve clearly.
Okay. That sounds good. So I won't steal your time any longer. So thanks again, also from my end, and especially, really appreciate the cooperation with you, so all the best for especially then the private life that is now starting and probably great to a greater extent. So all the best for this and hope to see you soon someday.
The next one, who can ask some questions is Daniel Gleim from Stifel. Daniel?
Yes. Good afternoon, Mr. Klenk, Mr. Broger. I have a few follow-up questions on the order momentum. You said you expect a good order intake again in the fourth quarter. And I'm just wondering whether you're thinking in the area of around EUR 1.4 billion. Is this the spirit of the message or how should we take that comment?
Well, it's always difficult to say a number. But we don't expect that things are really going south and not being on a good level. I mean I have to say they are at the end of the year, you have sometimes time problems because you might get a handshake by the by the end of December. Then you have not the official documents to bring that into the book, so that might move to the next year.
So there's a bit of uncertainty in terms of getting really things done until it's really in the books and we can show it as order intake. But despite from that, I would say, the opportunities we have in the pipeline are on the same level as in the recent quarters. The hot projects where we have planned final negotiations are on the same level. So that would bring me really to the point that if timing is okay, and that might be a bit the week time -- or the week issue at the moment that some of the timing takes longer because customers get a bit more careful. But the orders are -- do not disappear. That might be one of the reasons why we might be then a bit lower than we have been in the previous quarters because the timing is not okay. But the order activity is not going down at the moment. This, we can't see.
Could we say, I'm cautious, could we say that order intake, Q4 plus Q1 combined is most likely on a similar rate as previous quarters. Maybe that helps a little bit?
Very clear, thank you on that. Maybe we can dive a little bit deeper into the drivers behind the order intake momentum. Maybe you could comment a little bit on what you witnessed with regards to customers, large versus small and also what you realized in terms of pent-up demand versus expansion CapEx, if you can speak a little bit about how you witnessed the drivers behind this demand at the moment?
Yes. I mean, first of all, despite whether the customers are big or small, I would say, its 3 drivers; cost reduction. And I would say we might see with the recession coming up that some of the brands might suffer because consumers spend less money at this discussion we have already.
But since most of the brand owners running deep brands and having different products to fill up, let me say, the supermarket channels to make it easy. This is certainly going on and that we have seen even during the pandemic. And if you look to that, this puts them stronger under pressure in terms of cost. And whenever they have equipment, which is not state-of-the-art. They have an issue in terms of their cost levels. So a recession in the established markets is even putting pressure on our customers to change their cost structure. Now you can say it was 24 months before those lines are in operations. This might be a different subject that I think different. They think about it in the long term and they think about getting momentum on better cost structure. So that's the biggest driving factor they have. Second, these are new products. I mean, we said it on the Capital Market Day, we have at the moment, a big, let me say, boom in North America was susceptive because they changed from hot fill to aseptic. Again, sustainability background and cost background because in case you change that, you have less PET in the bottle and it's less cost. And of course, it gives a contribution to sustainability. So the other big driving factor is new products and differentiation at the point of sales. And number 3, it's still sustainability. I mean I can't really say whatever customer we talk to. The first half an hour of discussion is long-term sustainability targets and how can we achieve that? And again, this has all the time, 2 perspectives. The commitment to the targets they have set and second, it's a lot of cost savings once they are doing so. I mean those of you who have joined us on drinktec have seen that many of these initiatives even bringing leaner cost structures and that's the reason why those are driving factors. Now to the question, is that bigger or smaller customers? I would say at the moment, we see key accounts and customers being financially stronger, of course, more active. And that's a bit of a concern that the smaller ones might get a bit more in trouble once the interest rates are rising and markets getting more, unsure. The bigger ones, they are putting all cards on once we have made invest now, we will gain market share. That's, I would say, a bit the thing we see in the market as momentum supporting our order intake. I hope that gives you a bit of a taste where we stand.
Very clear. Maybe one last question. On your own CapEx plans, if we think about -- and I get that your utilization rates are being optimized and you're trying to get more out of the gate.
But if we think about capacity going forward and with these elevated order levels, is -- this a discussion you're having that you maybe expand your capacity in the coming quarters? Or do you anticipate that the order momentum eventually will come down back to EUR 1 billion, let's say, in the second half of '23. So how do you think about this opposing ends of the question?
And first of all, midterm, we think about growth. I mean you know our growing targets, which we -- our growth targets we have. So we think about, of course, growing. However, in terms of capacity, I mean, our point is not that we are adding much more capacity to grow the infrastructure of Krones.
Our point is we need to do it as clever as possible. Yes, we might need to push through a bit more because otherwise, we would state if the orders are still on a good level, we would stay with this huge backlog and we can't live with 18 months delivery time. But we are looking for getting more outsourced in terms of receiving, for example, complete modules rather than parts and having more partners out there. We have still good let me say, capabilities to increase in the Hungarian plant. We have extended China where we have capabilities to do a bit more without growing too much here in -- or without growing here in Germany because our point is flexibility, needs to be kept. And once we are doing capacity planning, we do it over 3 years in a rolling forecast. Why? Because we are very careful how the economy might develop in '24 and '25. Again, '23 is not an issue for us. The order backlog we have. But we have to anticipate what might be in '24 and '25. And before this is not clear, and we cannot see how things are going, we would not certainly extend too much the infrastructure we have.
And the next one is Jorge Gonzalez from Hauck Aufhauser. Your questions, please?
Well, first of all, congratulations on the results. And I have a couple of follow-ups as you already answered a lot of my questions.
So first of all, regarding the -- again, the sales dynamics. Could you give us a little bit of detail of how compared the third quarter with the second quarter, especially in terms of volumes. If I have understood well, in the past, you were already at high levels of utilization, maybe close to 19%. How this compares with the second quarter, have you improved your production in that regard? And how this -- or how we should understand these high levels for next year? I mean this is a good reference of your capabilities for next year? Or do you think you can even increase this good development. And then regarding the order intake, I think you commented before that the split between the different type of products is similar than in the past. But I was wondering what wholly looks like in terms of the regions in the order intake? If there is any change, if there is more of -- if there is more of Latin America or Africa in the order intake than what we are currently seeing in the sales split especially after this explanation that you have just did regarding the growing demand because of the sustainability. I mean how that is going to work in markets and maybe are not that much on sustainability, what those markets are asking for at this point? And maybe finally, just to help us a little bit with the model. So for next year, how it's going to work in terms of prepayments, the reduction of the order intake to onetime levels? Should we expect some decrease of prepayments? Or is there any, I don't know, especially fit this year? How do you see that for next year?
And the first one, revenues and prepayments I take and you take regions, order intake, sustainability. Okay. Revenues, Q3 and Q2, there, was a slight increase from EUR 989 million to EUR 1.59 billion. We are not maxed out with our capacities.
I mean it's a matter of, let's say, hands, people, not machines or buildings on that. And as you can see, we are steadily increasing the revenues. And we think this is a healthy way to do this step by step and not try with whatever it takes over time and doing all kinds of things to make more revenue and -- or try to decrease order backlog or stop a growing order backlog. But regarding next year, there will certainly be also growth in revenues next year compared to this year. That is clear. Prepayments, I mean, it's driven by volume. So if the volume of order intake might go down a little bit in the second half of next year, then, also the prepayments volume-wise will go down. We are aware of that. And that's why we are putting additional efforts in receivables and also liabilities. So that even though the prepayments will go down, that we can compensate or overcompensate on the receivable and payment side to further improve working capital ratio.
Yes. And on the question of the split of order intake in terms of regions, I said it earlier. Asia is one of the areas which is picking up. I would say what we call Central Europe, which is Germany, Switzerland and Austria is decreasing a little bit because I would say Germany is the most sensitive one in terms of if a recession is ahead, and I don't have to tell you what you can read and feel every day here in Germany. So they're getting really careful. That's where we see the biggest impact in the negative way. But all the rest is relatively stable and balanced.
And we see even we've seen China good activity. So we are happy what is happening there. It's quite constant. We see what we call Central Asia. This is from Uzbekistan, Kyrgyzstan, Kazakhstan, all those countries. They have a quite stable level. South America is picking a bit up, but no wonder, because they have not invested heavily over the last 3 years. And North America is still very stable. And again, this is even not surprising for us because we were talking here for years that the North American equipment is completely outdated. And there must be one day where they are going to invest otherwise, everything is falling apart. And this is what we are seeing at the moment. So I would say U.S. is stable. China is stable. Europe, to a certain extent, if I exclude Germany is stable and South America and Asia is picking up. Africa has a big of a mix. There are some countries picking up. But for example, in Nigeria, we have elections coming up. And this is creating a lot of struggle in the country. So we won't see Nigeria, which is actually a good contributor to our order intake in Africa. This is not going too well at the moment. But we expect once elections are done, and there is some peace settling in. We would believe that things are going okay even in Nigeria. But this is one country out of Africa of many. So that's a quite I would say, stable mix we have around the world. Other question, sustainability and other countries where this is pushing more pushed more than the other regions. I would say, of course, Europe and North America are the leader by there. But since the big key accounts, they have targets all over the place. So the whole thing is going around the world. And I said it earlier, this is, I think, really important. Sustainability does not necessarily mean when they invest that they need significant more money to invest because we have solutions to develop where even equipment is going out of the line and where investments might be on the same level as before. But you saved a lot of energy because the equipment is smaller or the processes are different, the range. So they see benefit in investing in sustainability. And I would say it's beyond having the right motor or the right drive of a machine. It's really the process as such. And that's the reason why we see it all over the place. I would accept at the moment, Central Asia, this I would accept, a bit in China. But even in China, we sold the most complex and best equipped lines in the last 6 months, so even China is looking to that significantly. So sustainability, I would say, is really getting momentum and it's in every line and order we have.
And maybe a very quick follow-up on that, Christoph. So this is a strong view that you have for next year order intake. It's may be also explained because you are expecting the same customers to put orders?
Are you going to have a good share of repeating customers next year?
Yes, sure. I mean we have a huge set of customers repeating orders, absolutely, yes. Yes.
And farewell, Norbert, it was a pleasure.
I have also someone on my mailing list; it's Benjamin Thielmann from Berenberg. Benjamin, your questions, please.
Okay. Perfect. Congratulations to the good Q3 results from my side. I would have 3 questions, maybe question number one would be, could you tell me how high are your lead times right now? I think Mr. Klenk; you mentioned that it's roughly about 18 months right now. Did that change over the last weeks?
Yes. Well, it was still increasing a bit since the order backlog has not decreased. And we have not added capacity with the huge order intake we had. It was increasing. It's 18 months at the moment.
And historically, we come from 5 to 6 months and that has then developed over the last 12, now 18, 24 months to the 18 months, we have at the moment, yes.
The lead back and, let's say, drinktec rather gave a boost that did not help to reduce lead times rather put it in the other direction.
Yes. Okay. Maybe one question regarding your Q3 order intake. Could you give us some color how many of your orders maybe as a percentage is coming from beer producer, so from beer breweries, roughly?
I can't say that I mind beverages and most probably not at up as well. But I would say the split was comparable to the months before. So as we talk to the big key accounts and we see that as a reference, they have been ordering consistently over the last 18 months.
In some quarters, they have been stronger and some they have been weaker. But in particular, the last quarter was not bad in terms of order intake from breweries. But I would say all in all, there is no change over the last 12 to 15 months in comparison in breweries versus soft drink versus water versus other industries. That's very constant at the moment. And again, the breweries, they didn't -- their order intake is not driven by growth of markets. They are, let me say, they're placing order because of sustainability issues, replacing old lines. They have -- if we look to those bigger ones, they have a lot of old lines where they need to replace that's the driver it.
Okay, because I have a question regarding potential order postponements maybe because I speak with a couple of German breweries. And what they are facing right now is a shortage in CO2, which is a byproduct of ammonia production, which is in Europe, down 75% now.
Your order intake is very strong. And I expect it to be also strong in Q4 and this year is also going to be a very good year for you. But do you already see a change in ordering behavior of some of your customers that a lot of companies are ordering in advance now. But do you already see that some companies are postponing their orders because they see, okay, we might have to cut average production volumes in 2023 due to rising raw mats, rising energy costs or didn't that come to you yet?
Of course, we have seen orders being postponed. But not for the reason that the projects have been not accomplished, let me say when the customer has to bid something that he couldn't finish in time that he was postponing.
Yes, we have seen some postponements because they have been not so sure anymore on their business cases. But in relation to the order intake we have and the numbers we see that there is postponement of orders is very, very low. And again, I need to say, Germany, and you reflected the German Bruce in terms of brewery order intake is very, very small. I mean I couldn't think about just hopefully, I do not say something wrong. There is, a handful of lines being ordered in Germany. There is no processing equipment being ordered in larger scale in Germany. And it's not even because of us, not as we can get order. So Germany was very low on investment on breweries anyway. And I would say the CO2 problem is a European one. And it's not related to all of the breweries because some are use the natural CO2 out of the production process, where it looks totally different. You hear from most of them and the breweries, they do it, they buy it from the outside. So there's even a split into that. So it's not for all breweries or let me say all soft drink produces the same thing. Yes, there's supply chain issues with our customers because its glass, it's labels, it's CO2, name them. They have issues with all of that. But this is, in particular, again, point why they invest, just to get better. Those problems handled in new bottling lines because we have a lot of solutions that they're running more general with the bottles, for example, they have or they use less CO2 or whatever. So this brings them advantages.
I have a follow-up question from Jorge Gonzalez about POC accounting. Jorge?
Okay. So I was wondering, you commented that you are using POC accounting. But is this for all the businesses that's first question.
Yes. For new machine business, it's all POC accounting. We do that for many, many years. And no issue is not like another German company you might have in mind.
Yes. No, I was curious because -- so then if you're using a POC accounting, why we see the price increases so late? It's because you are more prudent. I mean you are not making a linear kind of accounting?
We start much later to begin working on the projects than in the past. I mean, in the past, if the lead time from getting the order to delivering from our plans was 5 months and now its 18 months. A year ago, it was 12 months.
So we start much later to work on the projects and to accumulate costs and revenues than in the past.
So does this mean that, for instance, if in a quarter, you have a better deliveries. I mean you grow suddenly double-digit in deliveries. If you're going to also catch up in price more than we should expect? Like maybe some kind of adjustment at the end, if you, I don't know, deliver before your initial expectation is like you need to?
So the planning is different. Again, we plan on the capacities. We believe we can produce. And when a customer places an order right now, he just put into this particular order to be started, let me say, with 18 months delivery. It starts to be engineered and manufactured in, let me say, 12 months and not before there's nothing happening.
And that's the reason why we have absolutely no revenue recognition in the first 12 months after this order has been placed. And then it's coming later on. And again, for the orders being produced in, let me say, 12 months, we have tried to anticipate material costs and personnel costs. And that's why we do not expect any big jump or whatever in terms of profitability. We tried to plan as reasonable as possible in accordance to what we want to achieve in terms of profit improvement, of course and in accordance to the profit improvement programs we have. But there is no -- hopefully, no -- I mean us keep surprises we take all the time, but we have in general surprises. So I would say it has been really, really thought too deep how we plan those orders once we put them into the schedule and once we have to expect cost and revenue with that.
Okay. So we should not expect any special effects in next year? Or we still go back to seasonality, normal seasonality next year? Maybe is the question from my side.
No, not analogy because it's pretty constant booked because we have this, let me say, 12 months in advance to see. So we will have no seasonality out of the new machine business. There might be a small one out of the life cycle business. This might be the case.
But this might be on the level we have seen in previous years, even maybe smaller. But new machine is pretty stable.
Okay, understood, so only for the aftermarket business?
For the aftermarket business, yes, there could be some seasonality.
I have also a question from Stefan Augustin from M&M Warburg. Stefan, your questions please.
Actually, I've just 2. One is we have -- we discussed that China is moving out of its zero COVID policy. And I mean, obviously, this will impact positively the supply chains.
But can you elaborate a little bit on, let's say, your personal impact or your views on that? Because I mean, corona supply chain is very much concentrated to Europe. What kind of effect could be seen there? And if you would have a, let's say unforeseen improvement in your supply chain and there would be -- or can we have the idea that there would be extra production slots available for 2023 that you could fill for, let's say, an extra premium in the pricing?
To the first one. Don't underestimate in China during the lockdown that we are producing in China for life cycle, for processing. And we are producing some of the new machines in China.
And all of those 3, they might -- they will have an impact with the COVID policy in China. And we are not so sure how things are really going into China. What we read officially here and what we hear from the Chinese colleague, this morning, I spoke with one of our leaders there. He said, at the moment, they have 200 million on the lockdown, which we don't see at all. So that's quite a bit a number, I thought and unexpected when you look that from a European angle so there's an issue. Then we have some parts which are sourced in China, which are really critical for us. And even sometimes I say, when a rubber ceiling is missing, some of our machines are not shipped because they're simply not working and you have a piece of equipment, which is might be EUR 5 and it holds you up for getting the revenue. So that's one thing. Norbert, do you want to add something?
Yes. And I think what we cannot oversee is especially electrical parts that come out of Asia via China that our suppliers need like the Siemens and other companies. And if there is something missing in their electrical components because it's not coming from Asia because the harbors are closed for 6 weeks, then we will feel it with a time delay in our supply chain later on.
So you are right, we are producing a lot in Europe. Our supply chain for our production, we buy most in Europe. But our suppliers, especially with electrical components, they buy a lot in Asia and China.
And to the second point, Mr. Augustin, the unforeseen surprises we might have because we can use capacities because we get good pricing. That might be not the case because it was 18 months delivery time. And we have not built in, let me say, remaining slots for fast deliveries because then we would treat our customers different.
We have discussed that many times, whether we should keep a very special customers, we should keep slots. But since everybody is talking to everybody in the industry, and this would be a very bad reputation of Krones in case we would have a few specialties with somebody. We are dealing on a price level. And we are fighting for that price level, regardless which customer it is. And even with the premium that they -- we can't take them on board because we have filled up the capacities. We are -- we have a bit of flexibility but not too much because otherwise, we would have to hire too many people to do that and we don't want to do that. So we want to keep that on a certain level. And for '23, because of the 18 months, most of it is done. There might be some capacities available because somebody is moving something, which is another thing. But this is a very small scale and certainly not to the level that will give that impact to profitability of Krones.
Okay, understood. Last one is actually quite a follow-up on what happened at drinktec. So now 6 weeks after what has been the, let's say, concrete ordering of new products? And is that, let's say, are those really making a difference in what the people order?
There's no difference in orders from drinktec. I am willing to say, I would say we would have to have the same order intake without drinktec as we have right now. Why is that? Because the innovations we showed, some of them have been sold already.
So you saw, for example, the fastest PET line was 100,000 PET bottles an hour of this line, we have sold already 84 and there has been, let me say, consistent selling on those lines before and after the drinktec, so a very limited impact. Then the big innovations, where there's really a next step. They come in a year, maybe 18 to 24 months from today because of the long lead times. So drinktec and the innovations we showed -- this will have impact in, let me say, profitability and revenues by the earliest 12 months from today, majority 18 to 24 months from today, not earlier. And even order intake is something between next 6 to 12 months where customers will decide on what they have seen on drinktec on those innovations, whether they're buy lines or not.
But interest on those products manifested?
Absolutely, yes, absolutely. Okay.
Thank you very much and all the best to you, Mr. Broger.
The next one I have on my list is Peter Rothenaicher from Baader-Helvea. Peter, your questions, please?
One question regarding the fourth quarter. So typically, in the past, the fourth quarter was always your one of the margin strongest quarters. Typically, service business is particularly strong.
Do you think this is also the case? One aspect might also be into logistics, where the fourth quarter is always very strong. And you indicated this that margins will improve there. So does this mean then that we can expect the margin in the fourth quarter to be also stronger than so far in the previous quarters?
Norbert, do you want to say something?
Yes, I could say something. But I don't want to put unnecessary pressure on my successor -- because, I mean, certainly, we will see improvement in volume, in PT and also Intralogistics, which will help on the profit side.
But those 2 segments will not change the overall picture of Krones. So it depends on the segment filling and packaging overall. And we don't expect deterioration in Q4, let's put it this way. And we never said, I mean we said EBITDA margin 8% to 9%. We never said 8.0% to 9.0%.
And let me put one thing on seasonality. I mean seasonality was a lot of place on our life cycle service because we have seen in the last quarter a lot of overhauls and all those things customers using during wintertime. This looks a bit different over the last 18 months since that has been more balanced out over the years.
I mean you saw us pretty consistent over 9 months now without having the typical summer we had in the past. So this was quite consistent. And we do not expect any let me say, hockey stick by the end of the year in life cycle. So it's going more continuously through the year. And that's the reason why I would say, with the statement normally, it will be not out of the frame Q4.
Okay. And with regard to free cash flow here, the usual seasonality is still valid that the fourth quarter typically is the strongest one in terms of free cash flow generation?
Yes, absolutely.
Okay. Thank you very much. Also, all the best Norbert for your future, and good luck.
I have a look on my emails. I didn't see any further emails regarding questions, also no further raising hands. Anybody with just a possibility to have a phone in his hand -- if you have questions, please unmute. I don't think so.
Christoph, Norbert, I think we are at the end of our Q&A session.
And thanks a lot for joining us today. And let's keep thumb pressed for all of us that things around the world go in the right direction and not go south at all. If this is the case, I would say, for all of us, it's good.
And it's the most important thing I'm wishing all of us. And on the other side, if things are going north, I would say, Krones has quite good future. Thanks a lot and all the best to you.
Thank you. Bye-bye. Have a good weekend.
Thank you. Bye.