Unmuted. Unmute it. Welcome to the conference call of Krones. Well, after a good start to the financial year 2022 and a strong first quarter, we want to present to you today the figures for the first half year. At first, some technical information. For all who participate via video, if you do not see fully both presenter, then you have to change system settings in Teams. Please make a right click with your mouse key at the picture and select Fit to Frame. Then you'll see the entire picture with both presenters. 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 very short email, and then I will hand over to you, and you can unmute your individual line. If you do not have the possibility to send a short email, I will ask at the end to all of you if you have further questions. I think let's start with the presentation. I think we are all interested in the details about the first half year. I will hand over first to Mr. Klenk. Christoph, the floor is yours.
Yeah. Olaf, thank you very much. Good afternoon, ladies and gentlemen. Pleasure to have you here today, we can inform you about the first half year of the Krones numbers and of course, where we are with the company. We are very happy to have achieved the financial results on one side and on the other side, of course, that we have achieved with our customers what we have promised, because we think that's equally important that our customers, even in those difficult times, are, let me say, to a certain extent, happy with what is Krones doing. Not fully because of the delivery times. If you see the results today, there might be, to some extent, in contrast to, let me say, all the challenges we have.
I would like to give you just in the beginning, before we jump into the presentation, a greater view how we see things and why we believe where we are today and why we are there today. The whole thing, the story started 2019, and those of you following us for a longer period are aware of that we are have been in not good shape financially in 2019. However, that created some readiness once COVID started in 2020, that we have been fast in recognizing what does that mean and taking measures to counterattack the COVID-19 issues. In particular, you all know, and we are not happy about that, but it was necessary, we reduced at that time significantly headcount, and with that, we created a kind of fundament to continue in the future.
Some more measures have been taken at that time, but I think that was one of the important things. Under COVID-19, we actually improved the market position of Krones. Why is that? Because almost every project we executed in 2020 under COVID-19, we kept the timeline agreed with our customers. I mean, that was a huge milestone for us since every customer was afraid of that his project would fall apart and we could not keep the timelines. The basis for it was our huge service force around the world and the remote access capabilities we had. We kept the promises we have made at that point. That created a better market position and more trust into Krones. The supply chain crisis came, the next big thing. We all know the result of it, and we took even there fast action.
There have been two things we have done. Number one, we looked at about our capacities and the utilization of it. It was clear that we cannot utilize 100% of the capacity because of the shortage of the supply chain. We have been roughly adjusted it to 90% utilization with the effect that delivery times have been increasing. Of course, at that time, a bitter pill for our customers and for Krones. This created in a second stage of it a very good environment for us because we have been communicating very honest where we are with the supply chain. Up to today, again, no major project has been fallen apart because of the timeline we have promised. We still keep the promises.
Number three, this we regard as the fundament for the pricing we can do at the moment because we believe pricing at the moment is key, that we are to almost full extent able to compensate for the cost increases. Of course, there's a proportion on cost reduction as well, but the bigger proportion is certainly on pricing power and the fundament we have created with those two actions. Being on one side, rock solid during COVID-19 in the project execution, and second, have not overpromised in the material supply shortage. I think that's the fundament that we got with those things along. Fortunately, or let me say unfortunately, Ukraine-Russian crisis has not a too big impact to us since this is only 1.5% of the revenue we have.
Now, of course, we have to deal with the upcoming, let me say, energy crisis, which is coming, where we come later to it. Last but not least, I should say, even returning out of this, let me first say the financial issues we had in 2019, the headcount reduction in 2020, COVID-19 and 2020, and the supply chain shortages. We do not lose, let me say, the Krones team. Again, a very important point since we created at that time a new target picture and a new strategy for Krones, which we communicated and which actually created future for all our team members, the 16,000 people + in the organization. Of course, we share that more on the Capital Market Day.
I think I had to explain a bit in the longer view how things have been happening and why we are today as we are today. That's for the beginning, and sorry for having a bit of longer introduction of everything. Now, here on, let me say, on the highlights, we come to everything, so I'm jumping over that because we go into any detail for that. First of all, if you look to the numbers, they are, I would say, in line with what we have promised. We have not overpromised, and I would say we go for every number in more detail. I think we jump one further step forward, and I start with the order intake. When the order intake is overwhelming, when you see that we are above EUR 3 billion after six months, I mean, record high.
Of course, that had to do with the fact that delivery times have been extended and customers are ordering over a longer period. However, number one, I would say even after deep analysis, our markets have been going down already 2018, 2019, and then, of course, COVID-19 came 2020. There are catch-up effects. I would say there is another thing coming into place, this is sustainability, because of a lot of our customers, they need to reduce their energy costs, their CO₂ footprint, and invest in, let me say, new lines. This is, let me say, something which is a fundament for it. Again, delivery times have been increased. We are at the moment roughly at 16 months, or let me say, 60 weeks and 15 months. That's where we are at the moment.
Even with that, we have a very good order intake and have a robust pipeline as far as we can see. Important is that, and I said that already, that we improved our pricing power. Ongoing story with Krones, that pricing was an issue. Those of you who know me longer, I was all the time saying, "Pricing needs to go into the DNA of Krones." I'm really happy that this has been arrived now, since the processes around that are rock solid, and we have a good visibility, we have a good possibility to drive pricing as we need to do that, and we actually brought it in a very good and large sense into the market. I would say pricing has arrived in the DNA of Krones, of course.
Now let's prove that in the future that we are really continuing that. The second thing I wanted to remark on the order intake, it's extremely high. There's despite one, let me say, we call them all the time, white elephant, big project, which is around EUR 100 million. Those are all orders which are, let me call it, standard size orders. This is important in terms of the risk we have to manage, because we all know as bigger the project is more, risky they are. This is a, let me say, a rock solid order intake in terms of how it is structured. Nevertheless, I have to say, of course, the order backlog is huge, and this gives a good foundation for 2023.
In case we will see some interruptions in world economy, it might have a good basis already that we can cover 2023. Let me say a few words about the market, markets. USA has been strong. The good thing is, as we might expect, that this could go down because of the economic situation. South America is rising. The pipeline we have in South America looks extremely good, and we believe that this will give impact on the next couple of months. Europe and China are doing very good in accordance to the average, let me say, and the average is quite high at the moment, so they are doing very good. Asia is lacking a bit behind. I mean, they had most probably the strongest impact on COVID-19 still and are in a recovery phase.
Last but not least, for us, Eastern Europe and Central Asia, where Russia is included, is doing even very well. We have compensated in the other countries the order intake, which is missing from the Russian customers and the Belarus customers. That's in a nutshell where we are with order intake. With that, I hand over to Norbert that you see all the other numbers.
Thank you, Christoph. Yes, we did not expect more than 50% order intake increase. When you read the newspapers, VDMA total machine building business, Germany + 2% in the first half year. That is remarkable. We expected increase, but not to this huge extent. On the revenue side, of course, it's not quite so dynamic compared to the order intake. Clearly, we increased our delivery times. We had to, and we are still limited by the supply chain issues. The increase of 15.4% compared to a not so strong first half year the year before is good, but we could have done more with more materials available.
The second quarter is +18% versus 12.8% in the first quarter. In all segments, you will see later in the segment report, all segments have a significant revenue increase. We are already above pre-COVID level, 5% above 2019 first half year. This is not price driven. The price increases, what Christoph just mentioned, maybe some of you remember the first one we announced in August last year, the second one in April this year. Now, with the long lead times, there is very limited, very little price increase in those numbers. To be fair, on the other side, also from the material cost increases, that is not all in here because we also had longer contracts with our suppliers.
That goes hand in hand, more or less. What you see here is primarily volume driven compared to last year and also to 2019. Now, you also know that in our guidance, we said sales increase of 5%-8%, and we were debating whether we keep it at this point of time or not. Now the point is, the second half last year was significantly higher. You can see that. If we continue with the same sales volume in the second half, like in the first half, mathematically, we end up at 9% above last year.
The question mark is still the supply chain, not only on our side, also on the customer side, because if the customer has problems with his supplies or with his building construction work, then we have seen that last year, they push out projects and then the revenue realization will be postponed as well. We are a little bit careful here. We have a chance to make more, but we will wait how the third quarter goes. From a regional perspective, Christoph mentioned order intake. There we had North and Central America very strong. Here you also see North and Central America on the revenue side quite strong, increasing in the last two years, now to 21.6%.
With a huge order backlog, it's easy to forecast that this year will increase. Also very positive, Europe, 33%, stronger than the last three years. Good recovery. China, 8.5%, despite the COVID lockdowns we have seen in the Shanghai area and other areas. Also Asia Pacific on the revenue side, still very strong. Middle East, Africa, a little bit weaker than the previous two years. Also South America from the revenue side, weaker, but with a huge order intake this year in South America. Not surprisingly, Eastern Europe, Russia, Central Asia, lower, compared to previous years due to the crisis we have in Russia and Ukraine. Profit development, EUR 175 million, 8.8%, after two quarters.
Both quarters, similar profitability, 8.8%. This is also something that is not quite normal standard for Krones. Because usually, Krones has in the past very strong first and last quarters due to the seasonality of the service business around the world. This year, we could manage that both quarters were equally strong in terms of profitability as well as also sales. It shows that the profit improvement programs of the last two and a half years show positive impacts. Also that, let's say, we were able to manage the supply chain issues as Christoph mentioned. We did not disappoint our customers. We were able to fulfill the projects as planned, and that certainly gave us a lot of credit, which also is shown in the order intake this year.
For the total year, our outlook 8%-9% is of course still valid. On the EBT level, it looks even a bit a little bit better. EUR 113 million increase of almost 50%. You can see just graphically that the right column 2022 with two quarters is almost same level as three quarters last year. Last year, EUR 118 million. This year, EUR 113 million. The second quarter was a little bit stronger, 5.9% versus 5.5% in the first quarter. Our major cost drivers, personnel expenses and material expenses.
I think not surprisingly, the material ratio, the personnel ratio went down because this year we see the impact of the restructuring we did in the last 2 years, 30.6%. On the material cost side, same percentage as last year, despite material price increases. I said there is still a lot to come because not all of the material prices has materialized through the P&L yet. But more importantly, the new machine business grew stronger than the service business this year, because it also fell much shorter in the crisis 2020 to 2021. Now it's recovering stronger. The new machine business has, by itself, higher material quota than the service business, which has more personnel costs in the ratio. From that perspective, it's a good development from our perspective.
Headcount development pretty stable. You can see June this year, exactly the same or almost the same in Germany as six months ago. We are increasing outside Germany. That's primarily service technicians. We continue to even strengthen further our global service network because as Christoph mentioned at the beginning, this was a big winner in the pandemic when people cannot travel across different countries. Here we continue to grow. Also we are hiring more specialists also especially outside Germany in the area for software development and automation because let's put it this way, in some countries, they are easier to find and to hire than in Germany. It's difficult everywhere, but in our areas it's extremely difficult as we all know.
Working capital development, first half this year versus the June last year and the year before, 21.6%. Also here we are going into the right direction, improving to make our, let's say, achieve our targets, significantly lower than the previous years. You can see, of course, we have, let's put it this way, a little bit of windfall profit tailwind from the higher order intake because the higher order intake also creates higher prepayments from the customers. On the right side, the left columns at the bottom, that's the increase prepayments in percentage of average sales in the last 12 months. Inventory, we have an increase of around 2 percentage points, but that's intentionally.
Wherever we can, we try to improve and increase safety stock, and for our parts to, let's say, be more resilient in the supply chain. Our plan is to keep that level of around 15% also in the years to come. Payables and receivables, improvements compared to two years ago, but no improvement compared to last year at this point of time, or even slight deterioration. Here is the focus for us for the time to come, for the next years. Here we have not only targets, but also plans how to improve it over the next three years. ROCE development, that's let's say the number three big key KPI that we report since end of last year, beginning of this year, 11.8%.
We said this year we should be in the range of 10%-12%, which we will achieve. Okay. Segments. Segment development. Here, our major segment, Filling and Packaging Technology. It's the same segment what we called until last year, Filling and Decoration, but Filling and Packaging makes it clearer. Strong increase in sales, 16%, close to the overall group increase. EBITDA margin of 9.6% after six months. Here, the fact that the new machine business increased much more than the service business had a negative impact on the margin.
2020, we had a positive impact because the new machine business went down dramatically whereas the service business also went down, but by far not as much as the new machine business. This goes also into the right direction. The pricing impacts are with POC and all the delivery times we have in the many projects. It's a fluid development, but the smallest part of the price increases we announced are included in here. The major parts will come in the next 12 to 18 months. To be fair, also the major part of the material cost increases will still come. We are sure that we will definitely compensate or overcompensate the material price increases with our product price increases. We have another topic in here.
Due to the supply chain issues, we have quite a bit of inefficiencies in our manufacturing assembly processes. Because what we do is we start with new equipment to assemble it, then the people realize there's something missing, then they put it aside, start with a new machine, and assemble as much as they can until something is missing again, then they put it aside. Once the parts come, then they take the old machine, continue with the old machine. In addition, we had to rent additional space and warehouses to store all those, let's say, semi-finished machines. This is definitely not a very efficient process at this point of time, which costs capacity and also efficiency. Process Technology, let's say the positive development continues.
We have seen last year a turnaround on the profitability side with similar volume. This year in the first six months, also 15% sales increase and 5.3% EBITDA margin after six months versus 0.9% same period last year. Some of you might remember end of last year, we have achieved 6% or 6.3%. We are also very confident that this margin will further increase, and we will certainly meet our target of 5%-7% for the Process Technology. Last but not least, Intralogistics.
Here you see a huge revenue increase from 2021 to 2020, which was primarily because 2020, Northern Italy was in a shutdown, and Intralogistics was not deemed system-relevant, like all our beverage production or beverage equipment production. 2021 was catch up to an unusual low 2020, with more than 60% increase. This year so far, 8.7% sales increase. You also see that the turnaround in profitability, the positive development continues. We are at 3.9% for the half year. This is not yet in the announced range of 4%-6%, but we are very confident that at year-end, we will be certainly in this range.
That means also profit improvement in the second half of this year as well as volume improvement. We know the projects, we have the projects and we just have to execute in the remaining months of this year. Financially, no real change. We are very solid, 40% equity. We hardly use any credit lines. We have EUR 390 million cash, despite the fact that we paid EUR 44 million dividends in the second quarter. Some might ask, "Well, why do you keep so much cash and don't do something or more useful with it?" Well, there are two reasons for it. One reason is, of course, we need cash to work off all the orders that we got in the future.
Second, on purpose, we keep, let's say, a war chest in cash so that we are able to do smaller or medium-sized acquisitions quickly, easily, when the chances come up. Free cash flow, first half year. Okay, we of course start with a higher EBT. That helps here. On the other hand, the other non-cash changes are lower than last year. That is primarily depreciation. We have less depreciation than last year. Change in working capital is negative because working capital is increasing with the business also compared to last year, absolutely. In ratio to sales, as we have seen with 21%, we are improving.
CapEx are EUR 10 million higher than last year, but in line with what we have planned. Free cash flow, EUR 68 million this year versus EUR 35 million the year before. Here you see, and I you know want to comment this, the development of free cash flow and cash conversion rates, this year versus last year and the year before. This goes all into the right direction. Now I give back to Christoph.
Norbert, thanks a lot. Yeah. We have seen now the numbers. Now, what is the first thing which is lying ahead of us is of course, the impact of a potential energy and gas shortage on Krones. We want to give you a bit of a highlight what we see for Krones and how we classify the world that you see, with what impact do we calculate at the moment. First of all, the global network around the world. Just to see some numbers, what we have, I don't want to explain that, but you see that we are very diverse in terms of how we execute in sales and service, and to some extent in production, our business. You see on the right-hand side that we have 80% of our production hours in Germany, which is of course an issue.
We have some of it, 2 or 3% in Italy. Those are the two countries which are affected most. Let's jump to the next slide. We have actually three categories where we have looked closer to it, and two we want to explain to you. On the right-hand side, you see actually Krones. I would put it in a nutshell, yes, we are exposed to gas because around, let me say 50% of our energy we receive, and I explain that to a certain extent, is gas. If you see the numbers here, and they are split down, don't forget we run our power plants internally, and they create heat and electricity, but they are mainly gas fueled. That's the reason why I say 50% of our energy consumption is gas.
It's 50,000 MWh per year what we use. We have done a detailed plan. One, the gas emergency plan might be executed. We spoke to those operating the gas network once the Bundesnetzagentur when they are going to reduce the gas consumption or going to limit that for us, we have a clear plan how we can step by step shut our gas consumption down. I would say we have built three scenarios because we don't believe it will be a complete shutdown. This we excluded. We have a scenario for that, but we don't think that's a reasonable scenario. We have a scenario where we see a bit of better supply and a little bit worse supply.
In those categories, we are pretty sure that we have no interruption of our production. Why is that? Because we have no energy-intensive process running, and gas is mainly used for heating. With a lot of activities we have right now, we can compensate for a certain extent. Of course, office buildings, and that's easy. We are all used to home offices and mobile working. I think that should be not an issue. We are pretty sure that with what we have in place, we can continue our operation. Now, the second question, this is on the left-hand side of the slide, is what about our customers? Because I think that's a more important point, and no doubt breweries are energy intensive because any beer needs to be cooked before and later on cooled.
They use a lot of gas. I would say that the European brewing industry is to a large extent depending on gas. Now, if you look to the overall, and that's an important assessment, the overall customer base we have, 15% of those are in markets heavily depending on Russia. This is Germany, Italy, Poland, and Austria. Those are the four countries where we regard very critical in that regard and all the rest. We talk to those customers. They see it, how to say, relatively easy in Europe. Outside of Europe, this is not a debate at all. Nevertheless, everybody wants to reduce energy because that's even a chance for us. Reducing CO₂ footprint and energy consumption globally is a big point for us. I would say this is.
This might impact ourselves for the order intake once this 15% of our order intake might be affected, but it will be not totally affected. The second thing is we see even a big chance in that, because we see that inquiries for energy reduction programs, and we have several in place. I mean, we mentioned that many times. For example, the Inveo program we have over years already. Now this becomes really, really a strong movement. At the moment, we cannot offer so much quotes like the customers are requesting. We strongly believe that this is a huge booster for order intake and a good substance for further business. I would say this is something positive.
Even on the breweries, the Brewnomic, I would say on the Capital Market Day, we can go deeper into that you understand what we are doing there, is a good thing for us. If you look to the Krones side and the customer, you see some yellow traffic lights. Now last but not least, I should name that, the critical thing is our suppliers. This is difficult to judge at the moment. We spoke to all of them. I would say our procurement has done a perfect job to figure out where we are. Number one, for this year, we don't see for our production an effect because we have ordered what we need and this is under execution.
The big question is, if the chemical industry has a problem with gas, we might have a problem on the supplier side. That's clear because if we need plastics or cables or whatever, this is a critical thing. At the moment, at first we shifted the supply chains more to Europe. Now we are looking to outside of Europe. I think at the moment, there is still some potential that we could even that compensate. This traffic light would be as well on yellow at the moment once the energy supply is on the level we expect. In a nutshell, I would say from what we know today, and this is again what we know today, we believe that we can handle this energy gas issue for us with a, let me say, reasonable impact on maybe 2023.
We don't see an impact on 2022. Yeah. Finally to the outlook 2022. I mean, based on all what we stated here, the strong market position we have, the pricing power we got, I would say the supply chain management from procurement and all the related, departments, as well as the ability of our team to handle the supply chain shortage internally, flexible. We are very confident that we achieve the targets promised, and I would call it on the upper end of the targets you have seen here. That's where we are. We strongly believe in a good 2022, I would say, difficult to say, but not issues coming up which we have not envisioned at the moment.
Therefore, I would say with a good feeling that what we promise here, we can really keep. I would say in a nutshell, you have the points here. I just wanted to repeat with the high order intake we have, that's an excellent basis for 2023. If you look to, let me say, the economic outlook worldwide, I would say that could be even a very good buffer to compensate what is coming up. For 2023, I have to say limitation will be supply chain. This is a statement we want to make here today. Let's see how this develops. All the rest, I would say, is on the right way for the future. So far from Norbert and myself, and now we are open for questions and answers. Thank you.
Well, thanks to Norbert and to Christoph. I've already received some emails, and also I have here a hand from Mr. Sven Weier. He also was the first one who sent us an email. The first question is Sven Weier from UBS. Sven, your questions, please.
Yeah. Thank you, Olaf, and good afternoon from my side. First question is on the order intake. I think you already mentioned the structure of the order intake in Q2 was quite broad, also regionally, so that seems quite a good quality. I was just wondering what you've seen so far in the third quarter. Seems that, you know, the pipeline is still solid, seems to be continuing, and also maybe frame your expectations for drinktec. Do you think there is maybe some hesitance ahead of the trade show and then some more orders coming up after? Or how should we think about drinktec this year? That's the first one. Thank you.
Thank you, Mr. Weier. Pipeline for Q3 looks good, rock solid. It's really then on the level we have seen in the previous quarters. I doubt a bit because we have summer vacations, so even naturally this has cooled down a bit. Again, the pipeline looks extremely good. Rock solid projects. I would say rock solid mix, what we see coming up. I would say we are optimistic that this will be a good Q3, and I could even say even Q4 looks from, let me say, the perspective we have, the pipeline looks good. I mean, the heaven has to fall down that those things are really going wrong. We see it in good shape at the moment.
To drinktec, to be honest, we believe it has no impact on order intake at all in the meantime. Because number one, since we have so long delivery times, customers think in longer terms. They think about, let me say, even season 2024 and not 2023 once they order. That's one of the things. Since everybody was not certain if drinktec will really happen because of COVID-19, nobody has based anything related to the show in terms of order placement. I do not expect that everybody holds one order back because of that, because they are looking all the time for timing. I do not expect that we have surprisingly upcoming orders because our sales network is so dense that I don't think that there is anything in the market which comes then up as a surprise.
This might sound strange. The exhibition will not have impact on order intake. I would say the exhibition has changed to a certain extent that we talk more about the problems of the future and the solutions we supply after tomorrow, because our customers have so big issues that the top management and C-level wants to talk about the three big things. They have to deal with sustainability on one side, how they can save resources, and of course, for those running PET, what they do with PET. There are three big things to be discussed, and we believe it's more communication rather than ordering.
Okay. Understood. Thank you. The second question was just on the order backlog. Out of the EUR 3 billion, how much of that is actually still due for this year? How does that number compare against what you had at the same time last year?
Norbert Broger, you know?
Good question. I don't have, let's say, the answer in the right figures. I mean, we have enough order backlog and also the materials to complete those orders that we can achieve similar sales in the second half of this year, maybe slightly more than in the first half. The rest goes all into next year. I mean, the good thing for us is we are not used to order backlogs of EUR 3.1 billion. I checked 2020. We had in May or February, we had EUR 1.1 billion. It's almost tripled the order backlog, which is a new situation for everyone in the industry, for our customers and for us. For us, it helps in certain ways.
We have better planning capability or security. We have ordered material 12 months out. Normally, we do this 3 months out. We have more possibilities, let's say, to use the flexible assembly and production with this order backlog, with this big one and the low products available. If we run into a recession, which is not unlikely for maybe Western Europe or North America, of course, this order backlog helps us to get past a recession at least for one year. Then we see how 2024 develops.
Let me put it this way. For the core segment, I would say it's an average run rate per month, what we are going to utilize out of the order backlog, because the limitation is simply the supply chain. We anticipated even that we might increase a little bit revenue in the second half, which will not come true. That was beginning of the year. We run it relatively comparable to the first half year. We will have some catch-up effects in Intralogistics and processing, which is stronger in the second half of the year. You saw that even in the slides we presented, because we will even generate there higher EBITDA levels than shown after half a year.
The run rate will be the same, and we are carrying over most probably a huge order backlog in 2023. Which will be, to some extent, even then, hopefully by the end of the year, even running into 2024.
Understood, because that's also the third question I had was just on the, I think you're kind of sold out for next year already.
Yes.
What kind of production increase does this actually imply? I mean, you said, you know, you, the organization is already at a bit of a limit. So how much can you actually increase the production next year?
Okay. I mean, what we have done, let me say, when you look 3 years back, number one, we have even outsourced more than we had in the past. We were working strongly about that last few years, so that helps in terms of capacity. Second, we said it earlier, for the new machine business, we have only 90% of our capacities utilized. I would say a big thing would lie into we don't have the supply chain inefficiencies anymore. This would generate for us, let me say, a lot of possible more capacity. So I would say this would be in a range of 10%-15% without doing significantly anything on the headcount. Again, even in 2023, at least for the first 6 months, we are limited by the supply chain.
That has not improved to a level anybody thought, and we are quite happy that we are dealing with that. Just that you get a feeling how we deal with that. We have every 6 weeks a planning meeting dealing with capacity up to 2025. Because our question is how much capacity can we increase without overdoing it? Not that we ruin, let me say, the very good level we have achieved now in terms of capacity versus headcount. We don't want to spoil that. On the other side, we need to catch up to certain extent our delivery times because we can't live long-term with 18 months. We need to go down further. That's a consideration. It will be not 5 months anymore, but somewhere in between would be a good level where we could be.
This is something every six weeks to be shown at and looked at, and it's today only driven by supply chain issues, nothing else.
The 10%-15% would be the entire supply chain plus your spare capacity, or is that just the supply chain effect you would have?
Supply chain effect.
Just supply chain. Okay. Thank you. That's it for now.
Thanks to you, Sven. The next questioner is Jorge González from Hauck Aufhäuser Lampe. Jorge, your questions, please.
Hello. Thank you very much for taking my questions, Christoph and Norbert. Three questions, if I may. The first one, also regarding the guidance. If I understood well, you were commenting that for the second part of the year, you're expecting similar sales than in the first part of the year, despite the price increases tailwinds that you're going to experience now in the second part of the year. I was curious if you can give us some color or elaborate a little bit on the plant utilization for the second part of the year.
Also regarding the guidance, your guess is because all these potential headwinds regarding this to the energy supply, or it is more the general situation in the supply chain, what is making you not increase your guidance at this point? Also regarding this, in the presentation, you are showing that you have your own electricity generation. I was also curious if, in case you cannot use gas to generate your own electricity, if you are going to be able to sell the gas, so you compensate for obviously the need to buy electricity from other sources.
Okay. Thank you, Mr. González, for your questions. I take the first part regarding guidance and headwinds and utilization. We have everything in our order book to make the second half at least as good from a revenue perspective as the first part. Probably with lower revenues in the third quarter, a little higher in the fourth quarter, but for the whole six months combined, definitely minimum the same as the first six months. However, headwind is supply chain and energy and gas is a topic, but that will not affect, if at all, 2022. That might have an impact depending on what Vladimir Putin is doing, beginning of January next year.
The supply chain, let's put it this way, we don't expect further deterioration on our side, but, I mean, we have many, many customers who also have supply chain issues, and we have learned from last year that, let's say, our internal revenue forecast, we missed a little bit because several customers could not progress in the projects with us as much as they have planned and we have planned. We have project delays on the customer side, which means also revenue will be pushed into next year. That is, let's say, our question mark, and we said we want to see how Q3 develops on the revenue side and the project and, then we have a clear picture for year-end.
For the time being, we keep all three KPIs and say we will achieve all three at the upper limit. For us it's due to the supply chain topic, especially on the customer side, too early to say that the sales will be higher than what our guidance says.
Okay. Regarding the-
Yes.
The gas, the electricity generation.
Yeah. Yeah. I would say the scenario looks a bit different for us. Whatever we can get on gas, we are running our own internal power plants. That's important for us. We would not go to, let me say, selling gas. That wouldn't make sense for us because, again, I said it in the beginning, that once the authorities with this emergency plan for gas would limited our, let me say, access to gas, this will not completely go down. That's our assessment. We will still keep running those power plants. We have a bit of a advantage because those power plants are supplying even heat to the local city here, and this gives us a bit of better position in terms of energy safety. That's the reason why there is no consideration of selling gas to compensate for the electricity.
Second, we have even in case we shut down the power plants completely, as of today, we can say we get the access to the electricity we need because we spoke to the suppliers in depth and figuring out the scenarios. I would say, again, what I said earlier, that we maintain our operations and this would harm us, of course, but not to the extent that revenue or profitability would not come.
Completely understood. Thank you very much.
Don't have it.
Maybe final question. What was the role of key accounts in the second quarter? I understand this big EUR 100 million was from a big account. What do you expect for the third quarter in terms of key accounts also role?
Yeah. To correct that, the EUR 100 million, what we call white elephant, has nothing to do with the key account. This, these are projects, bigger magnitude. This, for example, is a complete brewery, brew house, including bottling and packaging. The customer, we can say, is from Ethiopia, and has, again, nothing to do with key account.
Mm.
The key account proportion we have at the moment in the order intake, which is on average around 30%, the top 10 to 12 customers is 30% of our order intake or revenue. There's no difference. I would say it is in the same mix like we had it previously. I would say there's nothing seen that has gone in the other direction. While in the past we had a bit more non-key accounts because they have been more courageous in placing orders in the critical times, while now it's back on the normal levels we have.
Okay.
Mr. González, maybe I understood you wrong, but this big order in Ethiopia was in the first quarter, not in the second.
Yeah.
No major single project in the second quarter.
Yeah.
Normal, regular, let's say, run rate business of Krones in the second quarter.
Yep. Okay. Thank you. Thank you for explaining that. Thank you very much. That is all from my side.
Welcome.
Thanks to you, Jorge, for your questions. The next questioner is Richard Schramm from HSBC. Mr. Schramm, may I get your questions?
I've been muted, maybe, Mr. Schramm. We can't hear anything.
I thought we have solved the problem with the microphone at Mr. Schramm's line, but perhaps it doesn't. Mr. Schramm, you can also send me a short email with your question, then I would hand over to-
Okay. Maybe it's working. We hear something.
Mr. Schramm, can you hear us? Okay. I hand over. I ask later also once again, Mr. Schramm, to you. I hand over to, who's the next one? Give me a second. Yeah. Sebastian Growe. Sebastian Growe from BNP Paribas. Your questions, please.
Hi, good afternoon. Can you hear me to start with?
Yes.
Very good. What a relief. Let's start on the FPT segment, filling and packaging. Mr. Broger, you pointed to some inefficiencies due to supply chain constraints, missing components, et cetera. Could you quantify the impact, please, and also eventually give us a number with regard to dimension build-up of semi-finished goods in the quarter?
No, we cannot quantify it. Probably if we could really quantify it, would be difficult to tell you because then you would already calculate what the profit has to be in, as soon as the situation improves. To be honest, this is very difficult. It's inefficiencies in many processes, not only on the shop floor, but also it creates inefficiencies in purchasing, even in sales to discuss with the customers why we have delays. We're working with the customers to somehow make it work so that the customer is satisfied and us. It's way beyond just manufacturing and assembly.
It continues then on-site with on-site assembly, where the timetables change, where people were waiting for equipment, last second deliveries, which might come or not, which creates, let's say, through this whole flexibility, additional costs. We have given up to try to measure this. Our hope is that the situation, hopefully beginning middle of next year, will improve, and then it will not be like a shifter that goes from left to right. It will, let's say, over a period of, I don't know, six or eight months, improve, like it deteriorated from, let's say, June last year to November last year. We don't have. I mean, we have a gut feeling, but that is not satisfying for you and also not for me.
Yeah. Probably not too bad to have some of that work. Let's then switch gears and go to demand and talk about the order pipeline a bit. If I may start as a follow-up question to Sven, i.e. what the outlook is concerned for the quarter three. You mentioned good order intake. Obviously we did get used, I think, to a number that was somewhere between EUR 1 billion, EUR 1.1 billion since quarter four 2020. Then obviously things have accelerated enormously in the first half. Would it be fair to say somewhere between the two, so EUR 1.3 billion-ish is probably the right yardstick to look at when it comes to quarter three? Or how should we think about the kind of decline to just get a better sense around that one?
First of all, I mean, we had historically some seasonality in the order intake, so Q4 was a bit lower than Q4. We do not expect that for this year, so we would see that's a quite stable and continuous base for the next couple of months. I would see even more the last five months, how they would develop. To give now an exact figure is really difficult. We believe it will be not as high as it has been the first two quarters. It will be not as low as, let me say, EUR 1 billion, which is more or less the standard for us in a quarter. It depends a bit how much projects are moved and not.
I would say maybe what helps you more is I would quantify that for a quarter between EUR 150 million to EUR 200 million, which could be in or out, not lost. I mean, this is not the point because we have, I mean, a relatively clear view for those we might win and have good expectation for it. But what we cannot see is how much of it will be by end of September moved into Q4. So I would say that's the reason why we are saying it might be a ratio between EUR 150 and 200 million, which was on the table. We are in the ballpark you just mentioned before.
Okay. Makes sense.
From my perspective, I would say I would be very disappointed if it would be below EUR 1.1 billion, but I would be quite happy with, very happy with EUR 1.3 billion. Don't expect EUR 1.5 billion again.
Yeah, makes sense. Okay. I would be interested in the mix from a regional perspective. Because Mr. I think, Broger, you were to say that the pipeline for Latin America is pretty strong when looking into quarter three. I think, Mr. Klenk, it was you saying that you can provide as many quotes as are needed if you look at simply the incoming interest. That suggests to me that you could have already cherry-picked until now despite this flood of orders in the first half. How should we think simply about really the cherry-picking element, the pricing quality that you're currently enjoying?
Yeah. I mean, I have to be careful with saying cherry-picking. I mean, it's a very difficult assessment and judgment. Where do we not quote? Because it's not a question of where we quote, it's more the question of where do we not quote, because historically we quoted everywhere. I mean, we have to be a bit careful on that. The cherry-picking comes definitely, or let me say the selection, I would call it cherry-picking, once the pricing comes into place and when, once the order is finally negotiated and whether it's placed with us or not. How has that shown up? In many cases, we got our prices through.
I have really to say, even there have been some cases where we lost orders, where we have been pretty sure we get that, and we stayed stable on the pricing and was gone. That's a bit of a new situation for us. If I look to Q3, I mean, the behavior in the industry is certainly the way that the customers are aware of that the price levels have increased significantly. At the moment, it's beginning a discussion that material costs are decreasing. This is a really challenging discussion at the moment. We do believe that for the next, let me say, five months in this year, the pipeline is long enough that we get somewhere the range Norbert has just said. We see that some of the projects are a bit longer in terms of their decision. Why?
Because if we ship at the moment end of 2023, with some of the projects, they will not reach the season anymore in 2024. That's really the key. I would say it has a bit depending on seasonality of our customers, what season thing they can reach. That's the reason why we believe it's reducing a bit. Again, the pipeline is extremely full. I would say there is not a big difference between Q1 and Q2, but we believe that decision-making in our customers will slow a bit down because of all these things we have around the world. What I just said, that delivery times are long. With that, I would say, I would predict a good second half of the year, not as good as the first half of the year.
Yeah. All right. Makes sense. Very last one around pricing. If you have to break down the pricing for equipment compared to services, can you give us a rough idea how price increases have trended and between the two, I mean. The other question that I would have is of the more than 50% increase in the value for order intake in the first half, how much overall is roughly price driven?
How much is price of the order-
I mean, from on the order intake.
Yeah.
I mean, the price.
Yeah. The high increase. Let me first come to your first question to say, how is the pricing differentiated between lifecycle business and new machine business? I have to bring up a third category because pricing and processing and Intralogistics is project-based and is even on a different level or different, let me say, methodology than the pricing we have on new machines, lines, lifecycle services, and then take the big projects and the project pricing we have in processing and Intralogistics. For the pricing in the new machine, we had two price increases. Norbert mentioned that earlier. One last year in August, 6%, and one this year, 4%. This is not based on a price list. This is what we do on average on the projects. Not all of it we can get from the customers.
That's important. That's something politically we put out. The pricing of each individual project is done individually, and we have price limits where we do not go below. That's actually giving us then the possibility to drive pricing as we want to have that driven. On spare parts, change parts and the lifecycle business, it's different. There we have list prices. I would say once there are long-term contracts with key accounts, then they have the same increases on their key account rates than they had in the past. There is one thing in that that could be every month different. Why? Because the long-term contracts are running in different lengths, and that's not a specific point where we can increase. It's just when the contract is ending. For lifecycle, we are more precise.
It's not only, I would say it's 2 or 3x a year where we recalculate and check for the individual categories what should be done. This is not necessarily a price increase overall. Again, we look very carefully on lifecycle on any, let me say, category we have and the pricing of individual parts, what we need to do. That's the reason why we can compensate there very well for the material cost increase. Again, for processing Intralogistics, it's different. It's just project pricing. Everything is calculated before. It's discussed with the suppliers we need that we are sure on the pricing there.
I would still say on the main segment, Filling and Packaging, from what you see with almost 16% order. Sorry, 50. Was it 52 between 5% and 7% is price related.
Okay. That brings me to my next question, final really. We talked a lot about volumes and then potentially into 2023 in terms of really what the top line might be concerned. Margin-wise, it seems that you're also more and more gearing up to just deliver on the mid-teens range of the 10%-13%. Do you see any sort of issues with cost inflation, et cetera, that the margin is kind of kept at the current level and we don't see operating leverage or gross margin improvements coming through? Any final comment on that would be much appreciated.
Yes, right conclusions. The only thing I have to add is we need everything. We need the pricings, we need the supply chain improvements, we need the cost cutting programs we have in place, that things are working out, and we need innovation that we deal with that. You are right. The conclusion is right. We have a lot on track for return targets.
The programs we showed you, let's say in the last two years, we will do a brief update in the next Capital Market Day on the drinktec, where we stand and what additional programs we have in the pipeline to secure that the profitability improvement doesn't stop but continues until 2025 at least, that we achieve our targets for 2025.
Okay, sounds good. Thank you so much. Well done.
Thanks to Sebastian for the questions. I got some questions sent by mail by Mr. Schramm. The first one is about customers who produce new drinks at the end of the day. Innovative customers are there in our actual order intake amount or interesting amounts from these customers with new drinks. Are these customers in general financially rock solid?
If you take new drinks, which we call on one side, let me say, innovations. On the beer side, we see pretty much in North America. I would say that's a conventional technology, nothing different for us. I would say cider-based, that's one point. I would say that's a double-digit million number in order intake. If you talk about alternative proteins like oat milk or almond milk or something like that, I would say that's in the range of a lower double-digit number we have on board. For the customers, when I look to them and their financial structure, I would not see one who would be unstable in terms of the performance they have.
They have all medium or bigger size, so we have not any startup with us which is doing that. It's not a question of financing this new product. It's well-established products with customers known in the market. I would say we have two orders relatively slow in processing, which might be with the smallest, but that's a low single-digit million EUR number.
Well, thanks, Christoph, for the answer. The next question from Richard is, we talked about the inefficiency in the production, and the question is perhaps a little bit provocative, but should we not stay at the speed we have at the moment in the production to handle these inefficiencies and to stabilize or increase profitability, and not, on the other side, increase or try to increase the productivities of production and perhaps have a risk that the inefficiencies will stay at the level or increase?
I mean, we will certainly. We will want to and have to increase efficiency and that is connected with, let's say, a supply chain that is predictable, that you can plan on, and that will, let's say, calm down the whole organization from sales, purchasing, engineering, manufacturing and assembly. Of course, what we do not want to do is, once the material is available, hire 1,000 people and reduce the backlog as quick as possible. I think that is the point. The backlog has to be reduced over time, but let's say managed and on a continuous way, but not in a very short time.
I mean, we will see how this works in the industry with the competitors, but they all have the same restrictions, and we all learn from the past, from the financial crisis and so on, that we are actually, let's say, better off not with 60 weeks, but let's say with maybe 40-50 weeks instead of 20, what we had, to manage the business more efficiently.
Let us put this way, in case the capacity will be added in terms of flexibility. I said it earlier, we have outsourced a lot, so we can breeze with suppliers out there. We have done a lot over the last three years, and this is a good foundation we have. Don't forget, we have the plant in Hungary, where we have more flexibility than in the general operations. Just to give you a number, we are increasing headcount this year in Germany, most probably by 100-130. There's a big proportion of this number, not into operations. It's engineering and in particular software, because there we have the biggest bottlenecks. We are not thinking increasing capacities, where we have to take care about significantly on our own. That's not the target.
Because otherwise we smash what we have achieved over the unfortunate reduction of headcount in 2020.
Well, thanks a lot. I think this was a question from Richard Schramm, who is on the phone, and so that he could not unmute. That's the reason about this technical situation. I got also next questioner that's Peter Rothenaicher here from Baader Bank. Peter, your questions, please.
Yes. Hello. Thank you very much. One question is on the upcoming wage negotiation. What we currently hear is that the IG Metall demands an 8% wage increase. We were already aware at the beginning of the year that this year wages will increase stronger. I think currently it looks like that this burden from wage increases will even be stronger than expected. What do you see here in terms of your profitability outlook for 2023? Can you also deal with, let's say, wage increases 6%-7% or something and increase the expected profitability improvement?
Yes, we can deal with that. Right from the beginning was, from our point of view, clear that there will be huge expectations on the IG Metall side in terms of the salary increases they expect. What is really 5%, 6% or 7%, I'm not doing a justification. I do not say anything, otherwise our
side will show up tomorrow and say, "You have said in the capital market that you agree with." We don't do that. I would say the ballpark we have in mind, and we thought quite long-term about that already. That's the reason why we have included that in the price structures we have set, so that's not coming as a surprise. I would say that's not an issue. I wouldn't say it's a big issue for 2023, but in the question, do we have then to compensate this in addition with cost-cutting programs in 2023? No, that's not the point. Whatever we have in plan is already set for 2023. It's not catching us by surprise. It's not different from the past, Mr. Rothenaicher.
I have just said the numbers are bigger. It's always a mixture of pricing and productivity increases to compensate for wage and salary increases.
Yeah.
In terms of your agreement with orders, to what extent are your orders now based on price escalation clauses? What extent of the orders is already protected against unexpected further increases?
I mean, we have. I really just say, we have in some small areas, and this is particularly Intralogistics, where we have ordering huge quantities for steel. We have pricing indexes used to do the contracts. All the rest we have not, and this is good, because what we see right now that the competition has done that and is in very bad shape because the customers are claiming at the moment to get the money back because some of the indices are slowing down and that's the reason why they are in very bad shape. I have to say, if energy prices are exploding by 20 x, then maybe this might be a surprise for us. All the rest, as best as we could, those projects being on board are calculated with, let me say, the anticipated increase of material.
Don't forget, once we get an order today, we are looking at the material right at the place of when we get the order and try as best as we can to secure that material in case we are going to execute the order in 6, 8, or 9 months. I would say there's a very stable, let me say, outlook in our order backlog for the majority of the business we have. It looks a little bit different for the high bay warehouses we do because they have lead times between 24 and 30 months. That's different. There we have the indices. In the core business, we have that very much under control, I would say.
I'm a little bit struggling with your statement that you have the ambition to reduce delivery times to 40-50 weeks. If I look at your statements regarding project pipeline Q3, Q4, based on these statements, the order backlog will increase further strongly towards the year-end.
Yeah.
We are not talking about 60 weeks, but perhaps 65 weeks or something.
Correct.
Also on the prospects for 2023, even expecting that the order backlog might not reach the 2022 level, I do not have the impression that we will see a slump. Even if you increase your sales level, let's say to EUR 4.4 billion next year, then the order backlog would not decline.
Yeah, totally correct. Maybe, maybe I expressed myself not in the right way as normal.
Right.
Yeah. Maybe because that's the reason why I said earlier, we are looking into our capacity planning up to 2025. You are totally correct. In 2023, we are not going to reduce at all. It might even increase. 2024 might be a chance that we are, in case we build external supply further up in terms of having suppliers helping us, then it could be that we could do more on it and maybe get a bit better. I would say 2023 is already nailed down and sealed. Delivery times will be long, and it would even move into 2024. I would say it's a matter of, let me say, 2024, 2025, once we really can attack that. You are absolutely correct.
You need more or less to have EUR 5 billion sales.
Yeah.
Okay.
Which is anyway the plan.
Without acquisitions.
Yeah, this is not fully clarified.
Okay. Last point on the free cash flow. If I look exclusively on the second quarter, we had a slightly negative free cash flow, which was always the case or in many cases such a case in the past years. Nevertheless, what is your expectation here for the full year? I think in terms of inventories, and you mentioned this, it is hard here to reduce the level with regard to sales. What is your expectation for 2022?
Yeah, for the second half, a similar free cash flow ±10% as last year, second half.
Okay. Thank you.
You're welcome.
Thank you, Mr. Rothenaicher.
Thanks, Peter Rothenaicher, for the questions. I see that Sven Weier from UBS has an additional question. Sven?
Yeah. Thank you, Olaf. I was just on the service business, first of all, if you could quantify the revenue growth rate that we had in the first half on services, whether you would see, you know, the full year outlook for services consistent with the 8% or more or less, and what kind of spare capacity you have on the service side then in 2023. I guess there you have more flexibility to ramp up.
The +15% growth in revenue in the first six months translates roughly into 20% new machine equipment and around 10% life cycle service business, what we have. We will see a Q3 that is lower on the service side and a Q4 traditionally higher. In total, similar growth rate like in the first six months. To continue on a level of around 10%.
Your second question, I mean, this is a very big question for us. How do we mid and long-term see the service business? Our installed machine base is increasing. Let me say, in many markets, the requirements of having qualified service parts and manpower is increasing. We see at the moment that 2023 is quite manageable with the resources we have on board. By end of 2023, beginning of 2020. Two things are increasing. That's the number of new machines we have to install and commission in the market. Second, that the installed base is going up. At the moment, we have a huge program. When you put service technicians into the internet, I think we are among the first three showing up because we are in desperate need worldwide about service technicians.
Even in case we put a lot on remote and into digital service centers at the moment because we believe that's the long term. We have huge program in place around the world to get service technicians on board. If you look, for example, in the US, the installed base is increasing. In order to settle that problem, we have a big program internally that let me say, our service technicians from Asia can get a green card in order to move to the US or stay permanent there. All the Mexican employees we have, that they can move with equivalent measures to North America stay there. That's important, very important, measurement for us long term to secure our service business, that we allocate the right people to the right spot.
Maybe in addition to Mr. Rothenaicher's question with the order backlog. Because now we have a much better visibility with the big order backlog than in the past. We know we will have outside assembly and commissioning, let's say, second half of 2024, beginning of 2025. A very high level of what we will have to do then to finish projects that are now in the order backlog. As Christoph said, we are preparing already for that. That will then, depending of course on the order intake situation, lead also to a reduction of order backlog. Because we don't think that the industry in the long run will accept and live with 60 weeks lead time coming from maybe 20 weeks. Eventually somewhere in between.
Don't be afraid of in case we hire service technicians, that's not at all critical. Once their business would go down, they would be immediately somewhere else and have a job. That's definitely not the issue. There's no risk in hiring them. Anyone we can get is generating revenue and profitability.
The last question I had was just on the tax rate. I can see that it was again below what you had in the past, so running at around 20%. I mean, is that a kind of a new run rate also for the future, or does it go back more to the high 20s?
I think I have to get back to you on the tax rate, to be honest. I haven't really checked the half-year tax rate in detail, what's behind, but what we are expecting is a run rate of about 25% in the future.
Okay. That has structurally come down a bit against the past, right?
Yeah. It will be a little bit higher than last year. We had some positive one-time impacts last year, but also lower than what we traditionally had a little bit.
Okay. Thank you.
You're welcome.
Thanks to Sven. My mail folder regarding question is empty. I don't know if Peter have re-raised his hand and have an additional question or it's a raising from before. No, I don't think so. I have an additional look. Any question from anybody who is on the phone? Just on the phone? No. It's nearly 1.5 hours of our conference call, I think.
Yeah.
No one.
I would say thanks a lot for listening today, and you see us both here optimistic because we still believe chances are higher than risks. I hope this statement will stay true. Looking very, very much forward to see you on drinktec for the Capital Market Day. I mean, that would be a huge event for us and more than a pleasure to welcome you and see you personally and giving you some more insights into how do we want to continue in the future. Thanks a lot. Have a hopefully good summer vacation in front of you. All the best. Thank you.
Thank you. Bye bye.
Bye.
Thank you.