Drägerwerk AG & Co. KGaA (DRW3) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Drägerwerk Full Year 2024 Earnings Conference Call. I'm Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Stefan Drager, CEO. Please go ahead, sir.

Yes. Good afternoon, and thank you for joining our conference call on our financial results for the fiscal year 2024. I have with me today Gert-Hartwig Lescow, CFO; as well as Tom Fischler and Nikolaus Hammerschmidt, both Investor Relations. We would like to take you through the results for the presentation that we made available on our web page this morning. Following the presentation, we will open the floor to your questions. Let's get started on Page 5 with the business highlights. 2024 was a successful year for Dräger with a robust business performance and a significant improvement in profitability. While net sales were slightly below our expectations, we maintained a strong performance, achieving around EUR 3.4 billion, matching the prior year's figure. This is an outstanding achievement considering that we benefited from strong catch-up effects in '23, driven by the improved delivery capabilities and a surge in demand for ventilators in China. And importantly, although business in China fell in '24 by almost half to what it was in '23, we successfully compensated this impact through substantial growth in the rest of the world, highlighting the resilience and adaptability of our business. Our EBIT increased by EUR 28 million to EUR 194 million, thanks to our operating business and also supported by one-off effects totaling around EUR 22 million. With earnings growing stronger than net sales, our EBIT margin increased from 4.9% to 5.8% in the full year, ending just above our expectations. Our order intake also developed positively and exceeded the high level of the prior year at around EUR 3.4 billion. This underlines the sustained demand for our Technology for Life and gives us confidence for the future. Following our dividend policy, we are going to distribute around 30% of group net profit to our shareholders, resulting in another dividend increase. I will come back to this topic at the end of our presentation. Improving profitability remains our primary focus. In the medium term, we want to contribute to this by strengthening our innovative power and expanding our business model with expertise in the areas of interoperability and systems business. In the prior year, we promoted the implementation of these goals by introducing more innovations. These included important product approvals such as our new Vista patient monitoring system and our updated Babyleo TN500 open care warmer, among others. Moreover, we started with the implementation of our new site concept in Germany. I'll comment this in a few minutes. Regarding our FDA warning letter, the expected FDA inspection in Andover has taken place in November, and it did not reveal any formal deficiencies, that's to say no FDA Form 483 was issued and that means 0 findings. We are awaiting the final list of the warning letter from FDA even if it is currently not foreseeable when this will take place. Due to the restructuring within the FDA, processing appears to be delayed. In terms of sustainability, we achieved several milestones in '24. On the one hand, an Executive Board department for sustainability and quality has been created, which is headed by our new Board Member, Stefanie Hirsch, since July '24. On the other hand, we have defined 3 focus areas to implement our sustainability strategy. Let's take a closer look at this on the following pages. So we come to Page 6, Dräger's impact on people and environment. Ladies and gentlemen, for us, our guiding principle is Technology for Life. This means we take responsibility. It gives greater meaning to our work and creates a sustainable foundation for our business model. We are aware that we have a footprint. Of course, we do. And we believe that the overall positive aspect of the footprint is larger than the negative footprint. And the result of our being, our existence in the world is overall positive. On the one hand, we improve healthcare with our medical technology and help sick people heal with our devices and services. On the other hand, the occupational safety, all over the world, we help with our safety technology. And the purpose of Technology for Life gives our work a greater meaning and makes us an attractive employer. And we reinforce this part, the S on the ESG by offering employees fair pay in addition to reliable and meaningful employment. We also make a positive contribution on the local and global gross domestic products with the salaries, the taxes, the earnings that we pay out. Around 10% of our net sales is invested in research and development. On the other hand, here on the left side of the clock, we need resources for our products that are not yet returned to a complete material cycle. We also contribute to climate change as part of our business activities, and our employees are exposed to risk of accident in work and unequal treatment. We also cannot rule out human rights and environmental risk completely. Without ignoring the negative effect on people and the environment, we therefore say we love our footprint. But what we also say is there is no sustainability without profitability and vice versa. Our focus, therefore, remains on our corporate objective #1, namely improving profitability. Our goals remain to increase the EBIT margin by an average of 1 percentage point every year. Now let's turn to the next, sustainability, Page 7, with the strategy. With the strategy, we are concentrating our efforts on focused topics in the areas of environment and society, customer and products and company and employees. In these 3 areas is our aim to improve along measurable targets. We are certain that no lasting economic progress can be achieved without social, environmental sustainability in our supply chains and vice versa. Our main goal in the field of environment and society is to reach a CO2 neutrality by the year 2045. To this end, we are actively involved in reducing Scope 1, 2 and 3 emissions. Moreover, we are promoting environmentally friendly and socially responsible business practices by establishing sustainable supply chains. In the field of customer and products, we want to develop new products according to the eco-design criteria and aim to lower their CO2 footprint. We approach the overarching principle of a close circular economy through material reduction in the area of product and transport packaging and through individual pilot studies and actions as part of product development. This enables us to consciously expand our portfolio of environmentally friendly products and services, offering sustainable solutions to our customers. Furthermore, we support the environmental and cost objectives of our customers through innovative and efficient measures. When it comes to company and employees, one of our main goals is to get them the lost time incident rate below 4 points by implementing our Vision Zero program. Hence, we focus on securing employee loyalty and commitment through greater workplace safety and the promotion of health. We also want to strengthen diversity by reaching a female share of 30% in management positions by 2035. We will continue to develop training programs in order to prepare our employees for any future challenges. Now please turn to Page 8. Ladies and gentlemen, when I talk about profitability and sustainability, I also have to mention our new location strategy in Germany, which aims to optimize resource utilization for domestic operations. Currently, we have 17 sales and service hubs nationwide, employing around 2,000 people. These facilities act as bases for our field service teams and serve as training facilities for our German customers. In addition, there are also so-called customer project locations. That's to say, locations that result from individual contractual relationship with the customer. In recent years, our space requirements have changed. Digital collaboration has grown due to the coronavirus pandemic and has integrated new forms of work into everybody's life. We are, therefore, examining the extent to which we can consolidate locations in order to use them more effectively and meet future requirements. We want to create an attractive future-proof working environment, taking into account the trend towards more mobile working. We are creating locations that are equipped for the future and those on -- and whose premises are adapted to working methods. At the same time, we keep our focus on the customer. As part of the new concept, we will close 8 locations out of the 17 by '26 and make changes such as downsizing at 4 other locations in addition. We are planning to do this with the existing workforce. Our aim is to improve services for our employees and customers. Of course, there will be some savings from rental and ancillary costs, which amount to around EUR 1 million per year, but our focus is on a qualitative benefit. This includes an improved performance for our customers through the expansion and modernization of our academy capacities and space as well as the digitalization of the range of workshops and improved processing and capacity management through centralization of the workshops. The full savings per year will become effective for the first time in '27. In addition, there are further indirect costs, for instance, complexity reductions. This more needs-based use of our resources will also contribute to more sustainability at Dräger. Ladies and gentlemen, before I hand over to Gert-Hartwig for the financials, I would like to elaborate on our strategic goals in the area of defense and security on Page 9. The start of the Russian war against Ukraine has ushered in a new era and dramatically changed the security situation. Expenditure on modernizing our armed forces is therefore being significantly increased. This is a development that will also affect us. Just as the German Army is defending our national borders, we also have a mission. We protect those who protect us. We do this with our Technology for Life, in other words, products that protect, support and save people's lives. We already have trusting relationships with important defense authorities, public clients and as their supplier, also with producers of military equipment. Our aim is to systematically develop these relationships further and to position ourselves as a partner and solution provider in the context of strategic defense programs. In this way, we want to drive forward the structured expansion of our market position. Unlike in the past, we now have considerable project inquiries and offers in the pipeline, although it's not always certain whether these will actually materialize. These deals also have very long lead times. Nevertheless, our prospects are very promising because we can use our unique expertise and skills, which have made us one of the world's leading manufacturer of safety technology. As part of its '24 national security and defense strategy, the German government has defined key technologies that we have been covering in our product portfolio for many years. This includes, for example, breathing air monitoring and supply for military vehicles, sensor technology and space protection, as well as our personal NBC protection. Our total net sales in the defense business are currently still below the EUR 100 million threshold. However, due to the changed security situation, we expect a substantial increase in the coming years as we believe that our sales team in this area will be able to more than triple by 2028. With that, I turn over to Gert-Hartwig, who will explain our business development in more detail. And I will then turn to the dividend and outlook. Gert-Hartwig, please.

Thank you, Stefan. I would like to extend also a warm welcome to everyone joining this conference call for our results for the fiscal year 2024. Please turn to Page 11 for a review on the Dräger group. As usual, I will be stating currency adjusted figures whenever referring to growth rates. As Stefan mentioned, demand for our Technology for Life remains strong. Overall orders increased by 3.4% to around EUR 3.4 billion, with growth in both divisions. In the APAC region, demand declined due to the challenging market conditions in China, impacting all -- most Western medtech suppliers. However, growth in other regions allowed us to compensate for this downturn. In Q4, order intake increased by 8.6%, supported by both divisions and across all regions. Net sales remained robust at around EUR 3.4 billion, matching the level of the previous year despite the known base effects like higher order backlog in the prior year. Net of currency effects, net sales increased by 0.5%, thanks to the growth in the safety division, which compensated the decline in the medical division. In nominal terms, net sales of the group were stable at around 0.1% below the prior year figure. In Q4, net sales increased by 2.6% to around EUR 1.1 billion, driven by both -- by growth in both divisions and all regions except EMEA. Benefiting from favorable pricing and reduced quality costs, among other factors, our group's gross profit margin rose by 1.6 percentage points to 44.9% at the end of the year. Functional expenses increased by 1.8% in 2024. This resulted, in particular, from the increase in personnel expense owing to higher employee figures and remuneration. But also the one-off effects had a positive effect on the expense development. As Stefan mentioned, our earnings were positively affected by one-off effects of around EUR 22 million. With around EUR 15 million, the impact in our safety division was stronger than in our medical division with around EUR 7 million. The total one-off effects consists of positive one-off effects totaling approximately EUR 37 million, offset by negative one-off effects of around EUR 15 million. The positive one-off effects largely included the sale of a local non-core division in the Netherlands and the sale of real estate in the U.S. in the second quarter. These sales amounted to around EUR 20 million in total. In addition, the positive one-off effects included the sale of a building in Spain in the third quarter of around EUR 10 million. Around EUR 32 million of the one-off effects are included in the functional expenses. The adverse effect includes the depreciation in connection with the valuation of an associate in Q4. This depreciation is included in the financial result before interest result. All details are included in the Annual Report in Note 40. Including the EUR 22 million from the one-off effects, our EBIT increased by around 17% to EUR 194 million in 2024. Consequently, our EBIT margin rose from 4.9% to 5.8%. In the fourth quarter, our EBIT of around EUR 114 million was also significantly higher than the prior year's figure of around EUR 90 million. The EBIT margin rose by 2.1 percentage points to 10.6%. The full year EBIT development is in line with our medium-term goal to increase the EBIT margin by 1 percentage point per annum on average. Even when excluding the one-off effects of roughly EUR 22 million, the underlying profitability in 2024 is roughly 5.1%, exceeding the prior year's margin that itself had substantial tailwinds from the China effect and the high order book. We remain committed to our plan to improve the midterm profitability further. The guided 2025 EBIT margin includes an additional margin improvement on the higher end of the guidance range. Our DVA in 2024 was just below the prior year figure of around EUR 54 million. Let us now take a closer look at the development of the 2 divisions, starting with the medical division on Page 12. Following a slight decline in the prior year, our order intake in the medical division rose by 1.2%. This was primarily due to higher demand for our services and warming therapy devices. The lower order value in the APAC and EMEA regions was more than offset by an increase in the Americas and Germany. Demand improved notably towards the year's end. In Q4, orders rose by around 10%, driven by all regions as well as a high demand for ventilators and hospital infrastructure. So a very positive momentum at the end of the year. Net sales in the medical division fell by roughly 3% in 2024. This was due to the mentioned base effects and the challenging market environment in China, which burdened our overall development in the APAC region. In Q4, on the other hand, net sales rose by 2%, thanks to the significant growth in the Americas region. As a result of successful price enforcement and lower quality expenses, our gross margin in the division increased by 1.1 percentage points in '24. In Q4, it improved even stronger by an impressive 5 percentage points. This was due to the significant increase in gross profit, mainly because of significantly lower expenses for field actions. Functional expenses increased by roughly 1% in 2024, which can be largely attributed to personnel costs. The EBIT on the medical division decreased by around 24% to around EUR 28 million, while the EBIT margin was reduced by 0.4 percentage points to 1.5%. In Q4, on the other hand, the EBIT increased significantly from around EUR 39 million to around EUR 56 million, thanks to the good operating business. The EBIT margin was 9.2% after 6.5% in the prior year quarter. Our DVA in the medical division was significantly lower in '24 at around minus EUR 50 million coming from around minus EUR 23 million in '23. I will now turn to our safety division, which delivered another good performance. We are now on Page 13. Our safety business continues to grow, both in the full year and in Q4. Order intake rose by at least 6%. This was primarily due to a much higher demand for respiratory and personal protection products and the positive development in all regions, especially in Germany. Net sales increased by around 5% in the fiscal year with all regions contributing to growth. In Q4, net sales increased by roughly 4%, driven by the Americas region as well as Germany and APAC. As a result of our effective price enforcement, our gross margin in the division went up by 2.1 percentage points in 2024. In Q4, it increased by 3.3 percentage points. Functional expenses were around 4% higher than in the prior year, mainly due to higher R&D expenses and a higher sales cost in the region. The EBIT of the safety division increased considerably in 2024 by around 28% to reach roughly EUR 166 million. The EBIT margin amounted to 11.3% after 9.2% in 2023. In Q4, the EBIT stood at EUR 57.5 million, coming from EUR 50.1 million in the prior year period. The EBIT margin was 12.5% after 11.2% in the same period of '23. Our DVA in the safety division also improved significantly by around EUR 21 million to around EUR 104 million, coming from EUR 83 million in the prior year. All in all, a very positive development in our safety business. Let's move on to some key ratios on Page 14. Despite lower operating cash flow, our free cash flow was slightly above the prior year figure at EUR 124 million. Next to the higher earnings, the biggest driver for the development was the positive effect from the increase in trade payables, but also a lower investment cash flow due to the sale of the non-core fire and gas business in the Netherlands, and the property in Spain contributed positively. Cash and cash equivalents amounted to around EUR 231 million at the end of 2024, down around EUR 41 million on the prior year figure. Net financial debt significantly improved in 2024 and amounted to EUR 165 million at the end of the year. Net financial debt to EBITDA improved as well with 0.5, leverage is on a healthy level. At the end of the first quarter, we secured an additional loan commitment from the European Investment Bank totaling EUR 100 million. This enhances our financial flexibility, supplementing our existing unused credit facilities of EUR 375 million. We have maturing debt totaling EUR 100 million in Q3 of this year and Q1 of next year. Capital employed increased by around 5% to around EUR 1.6 billion. However, the improvement in EBIT resulted in an enhanced 12-month return on capital employed of 12.1%, up from 10.9% in the same period of the prior year. Net working capital was around 13% above the prior year level at just over EUR 740 million. The positive business development, among other factors, contributed to a further strengthening of the group's equity position with an equity ratio nearing 50%. Now I hand back to Stefan Drager for the outlook, starting with our dividend proposal on Page 16.

In line with our dividend policy, we intend to distribute around 30% of our group net profit to our shareholders. Since our group net profit has increased significantly, we will increase the dividend significantly as well. We intend to propose a dividend of EUR 2.03 per preferred share and EUR 1.97 per common share to our annual shareholders' meeting in May. Provided that the group's equity ratio remains at least at 40%, we will continue to distribute 30% of our annual net profit in the coming years. With that said, let's move on to our outlook for the current year '25 on Page 17. Ladies and gentlemen, with a good demand, robust net sales and significantly improved earnings, we had a successful year '24. Of course, our EBIT benefited from the mentioned one-off effects. But on the other hand, the positive effects from '23 were missing. For '25, we expect a currency-adjusted increase in net sales of 1% to 5% and an EBIT margin between 3.5% and 6.5%. Both segments should contribute to net sales growth and a positive EBIT. Taking into account the non-operating special items of the past 2 years, which have had a positive impact on earnings, the expected EBIT margin for '25 is in line with our target of increasing the EBIT margin by 1 percentage point each year. With this, I would like to end the presentation and hand over to the operator to open the line -- the floor for your questions. Please.

[Operator Instructions] Our first question comes from Oliver Reinberg from Kepler Cheuvreux.

Three, if I may. Firstly, starting off with tariffs. I guess exposure to the U.S. should not be too significant. I guess we're talking 10%, 15% of group sales. But I was just curious. There was an article in the Handelsblatt, where probably a statement was made that if a 25% tariff would be implemented, that this could impact the operating profit of the group by around 1/3, which appears quite meaningful. And I guess the kind of color that was provided was that you talked about kind of long-term contracts that are in place here. So first question would be if you can add some kind of more color to that. And secondly, just on the defense and the opportunity that you face there. I mean, can you just talk to -- is there any kind of benefit already that you anticipate this year? And how tangible are these kind of talks that are ongoing? You talked about longer-term lead times, but I guess part of the offering could also be shorter-term realized. And the kind of EUR 300 million that you talked about, is it just pure in-house estimate? Or is it also backed up by any kind of potential plans already? And then lastly, just on the outlook. Can you provide a bit of more color what you have in mind for the divisions, both in terms of sales growth and margin expansion? And also because Q1 is coming up, I guess, in the past, it was always volatile and sometimes we had negative EBIT in Q1. Is it something we should also assume this year after the kind of special support factors have been phasing out, just to make sure that the expectation is on the right ballpark?

Yes. Let me start off with your question on the customs. So the impact will, of course, depend on any customs raised. And in the past, customs in many countries differentiate between medical and safety products. In a scenario where in the future this would not be the case anymore and in a scenario where, let's say, a flat custom fee of 25% would be levied on our products mainly imported into the U.S., that could, based on the earnings, impact our EBIT by roughly 1/3 to 1/4 of the total figure we had this year. Having said that, no such customs have been announced. And of course, we are also looking on April 2 into the U.S., how this will change. I believe or my understanding is that the expectation that going forward there will be a separation of medical and safety will remain in place, but that remains to be seen. So at this point, there is not a concrete impact. But going forward, we have obviously no confirmed plan in our hand what will happen, but we will see. But that is -- the 1/3 that you quoted is correct, and that is roughly depending on the amount. This, we will, of course, work on to reduce. But given our portfolio and the way we operate, any reaction will not be easy and will take some time.

If I may extend, Mr. Reinberg, on this scenario. [indiscernible] also quoted earlier today that it's unpredictable what happens in the Oval Office and in the economy. We already do have a scenario by now that there are tariffs imposed on products from China to the U.S. And the U.S. competitor of ours has imposed a custom surcharge on the prices in the U.S. dollar charged to U.S. customers to compensate for the tariffs because this -- the competitor has most of his products actually manufactured in China and is suffering from the customs. We are not. We are not affected yet. But we use the opportunity and also implement a custom surcharge to the same level that the other guy does. So for us, this actually works out as a windfall benefit. So it's hard to predict the effect in detail in the future. So we will see.

But the article mentioned that you can't pass that on because of the contract structure. So I mean I'm a bit surprised because most people believe that they can simply pass it on. Can you do that or not?

No and yes. We cannot pass it on in the situation where we have it in the contract, like it's cast in stone, it's hardcoded in the contract. What we can charge, a surcharge. We cannot increase -- change the price, but we can charge a surcharge. If we are the only one, it will probably not be possible. But if major U.S. companies do it, then we can stay in the trailing waters and can do it as well, even if we do not have the extra cost. So that's -- but you had more questions. So Gert-Hartwig.

So I think your -- I think there's at least one -- your last question was what's the outlook for the Q1. And as you pointed out, Q1 typically is the weakest quarter in every given year. Last year was, in fact, relatively strong, at least if one compares it to a pre-COVID average, about 1 percentage point more in net sales than we had on average in those 5 years. And so that would translate into a net sales effect if we were to return to a normal -- more normalized seasonality of about EUR 30 million, EUR 35 million, if I take last year's net sales as a guiding impact. And obviously, the quarter is not quite over. It's still -- it's very close, of course. But actually, the last few days are the strongest net sales figures. But referring to your question on the seasonality, that's what we are currently working on.

And I think...

Sorry. Go ahead.

Yes. And I think the other question was if you can add a bit more color on the sales and margin profile for the divisions for the full year.

Yes. And I think you had a question on the defense impact in-house. For -- perhaps on the outlook for the division, we do not, if you will, provide a specific guidance, but it is in our plans to see an improvement in both divisions, but the improvement on the medical will be, if you will, a marginal improvement on the way to also improve our group margin. So medical will be slightly above the current year, but not in a stepwise jump. Net sales development will -- or net sales growth, we expect to come from both divisions as we have seen this year with the contribution of also, again, both divisions. What is perhaps also a key input in there is our weaker net sales and order entry was, as we had communicated previously, due to the very weak development, in fact, decline in China. And we expect China to stabilize. And this stabilization will, in particular, be -- will be more relevant for the medical division than for the safety division. And your last on the impact for the defense. This currently is not based on, if you will, a confirmed contract, in which case we would have also articulated it, I think, more forcefully, but it's supported by inquiries into contracts. They have not been signed though. So to your question, those are based on our in-house estimates on to what degree certain tenders and projects will materialize. And obviously, they will depend on the funding also, especially from Germany or other countries. That funding, it appears, will increase, but it's not confirmed yet.

But do you expect already the first benefit this year?

Possibly in order entry. Net sales, since these projects aren't typically long term in nature, net sales will be more at the back end of the horizon.

The next question comes from Christian Ehmann from Warburg Research.

I have 3 at the moment. So I'm a bit lingering on the defense segment or, let's say, the portion of sales here. So could you remind us what the current margin profile of those EUR 100 million defense contracts is at the moment? So is it accretive or is it dilutive, for example, so we can have more of an idea how high this impact could be in the future if everything materializes? The second one would be on the impact of those site closings, the cost savings. Is this already included in your guidance by growing 1% EBIT margin per year on average? And my third question would be to the surcharge system, which you've mentioned really with the tariffs. Could you please repeat how this exactly would play out over the next couple of months if we would see a plain 25% tariff impact on imported products?

So let me start with the last question. And I want to caution us a bit to not get ahead of ourselves since we are talking about the pass on, on tariffs that have not even been announced at this point. So what we were referring to is, of course, preparation on our side. And the way they may be passed on depends, obviously, on the customer segment to the degree that they can be passed on. And roughly, I would separate between medical and safety. In safety, by and large, we are in a market of private consumers, less regulated, so it will depend to what degree also our market companions experience similar effects and will need to pass them on. On the medical side, a significant portion in the U.S. of volume purchased by hospitals is through so-called GPO contracts. And they are typically frame contracts that hospitals can use. And we are in preparatory exchanges with some of the GPOs to see how to react to such an increase. And it was in that scenario that our earlier comment is to be seen because in that GPO scenario, there is no -- it is not foreseen to ad hoc change prices since we are in a regulated environment. And I would like to ask everybody and ourselves some patience to see where we actually do face customs and what volume of customs we face at this point. Your second question or your -- yes, second question was on the site closing and whether the impact of that is included in our guidance. And the answer is yes, it is included in our guidance. And the first question. Your first question was on what the current margin profile is of the defense business. And again, there, I would also ask everyone involved for some patience since I would rather not speculate on some contracts that are currently in preparation and see whether they are margin accretive or dilutive. It very much depends on the type of contracts and we have to see how we see the growth. Obviously, with such a growth potential, we expect that, that will add to our overall profitability in absolute terms. But I would, at this point, refrain from any speculation on what that is and perhaps also what country is more profitable than the others. It's too early for that.

However, I could add a little flavor to it. So in the past, it did not get so much attention, this sector. And now it gets more attention. And we found there are some examples with unacceptable low margins. So that certainly also could change in the future with our general approach that we scrutinize every single business field and site, whether it contributes to our goal of increasing profitability.

The next question comes from Alexander Galitsa from HIEB (sic) [ HAIB ].

A couple of questions from my side as well. Maybe one by one, if that's fine. First one, if you could add color or explanation what's really behind the strong increase in G&A in Q4. It's plus 37% year-on-year. That's the first one.

There is no, you see, single thing in particular that makes it special. I would say it's a base effect as it's planned more constant over the year, and the other lines of the P&L also constant over the year. So the ratio is higher in Q1, but there's nothing of significance that you should be worried.

Okay. It does seem a bit of an outlier I think over the past 8 quarters. Also throughout last year, you rarely had it more than EUR 70 million, and this year, it's EUR 91 million in Q4. So that's why I just was wondering. But anyways, I'll move on to other questions I have. The forecast for net debt that you have for 2025, I'm just wondering. So you expect basically the net debt that includes leases to go up from EUR 165 million this year -- at the end of 2024 to a range of EUR 180 million to EUR 210 million. And you mentioned that this is largely due to higher leases. What looks a bit strange is that you presumably will generate free cash flow for 2025, I estimate maybe at least in the range of EUR 80 million, almost EUR 40 million will go down to paying dividend. So theoretically, you should still have EUR 40 million in free cash flow left to reduce net debt, yet you guide for an increase, which basically would suggest that in this scenario, you plan to add EUR 70 million of lease liabilities, which would be almost more than 50% increase. So if you can just elaborate what's behind the anticipated increase in lease liabilities to that magnitude? If the consideration of what I said regarding the free cash flow is also correct?

So part of the lease liabilities obviously run differently on the cash flow profile since they go into the investment cash flow. But then again, the outflow is over the lifetime of the leasing contracts. And there is no unusual increase in that sense that is planned. So no extraordinary effect in your quantification. And so I'm with you. We expect also a solid cash flow for 2025.

Okay. But you would not expect lease liabilities to increase substantially in the -- or like what's your, I guess, expect -- because I understand that you -- part of the CapEx is cash CapEx, but also presumably, you finance part of your fixed asset with leases. So I wonder for 2025, do you really plan a large addition to lease liabilities or that's not the case?

No, we don't. Not, if you will, substantially out of the ordinary, if that's the question.

Okay. Understood. Okay. I think I have another one on maybe China briefly. You already mentioned a couple of things, that you expect a stabilization. If you could add any more color or maybe the most recent update you see from this market and whether stabilization means, in your case, a return to maybe even slight growth at least in China?

Stabilization means what you said. So we have seen a decline in the turnover in the first 3 quarters of '24. And stabilization means just that, so low single-digit variation. And we expect slight growth in '25 versus the lower business volume of '24. Just for the avoidance of doubt, what it doesn't mean is a return to, if you will, previously seen volumes of overall business. So '25 will, in all likelihood, be still below the '23 volume of our business in China.

The next question comes from Harald Hof from mwb research.

My question was regarding the Chinese markets, which has just been answered.

The next question comes from Virendra Chauhan from AlphaValue.

So I just have one question around your EBIT guidance for FY '25. Now if I adjust your FY '24 margins for the one-off effects that you have called out, it works out to just over 5%. And going with your longer-term outlook that you've provided, ambition to increase the margins by about 1% every year, it kind of comes in closer to 6% and higher end of the outlook that you have provided. So I'm just curious, what's driving the caution for you to give such a wide range, especially on the lower end?

Well, it's the general aspect of being cautious in an uncertain world, as you could see with the examples of the customs that it's more difficult than ever to forecast the future. So our goal is to grow by 1 percentage point per year. And you are right, it's necessary to take out the one-offs that we had in '24. It's also in '23, we had one-offs, which was the resuming of the delivery capabilities after the supply chain shortages of '22, plus the big effect from ventilation in China after lifting the corona lockdowns at the end of '22 when a lot of ventilators were needed. So these both effects contributed in '23. So there, we had officially 4.9%. But both of the effects I mentioned contributed approximately more or less than 1 percentage point. So the EBIT for '23 was more around 3-point some percent. Last year was about 4-point some percent. So about the same as the calendar year. So from our planning, if we have 5 point x percent for this year, that's in line with our promise that we gave you. We do our best to come or exceed maybe what is -- what you referred to as the higher end of the guidance. But the guidance is guidance and it is between 3.5% and 6.5%.

[Operator Instructions] We have a follow-up question from Oliver Reinberg from Kepler Cheuvreux.

Three quickly, if I may. I mean also on China, I mean, the decline of nearly 50% is quite significant and significantly above what we've seen in the industry. Most players talked about a 10% to 20% decline. I mean I understand that, obviously, the ventilators are a bit of a special base effect, but it appears also that there's a bit of market share shift happening. So I was just trying to get some kind of color. Is that basically like losing share to local competition? And also, I mean, in theory, if you put it on the positive side, it could also mean there could be more pronounced recovery potential. That's question number one. Secondly, briefly on ventilators. I think one of your competitors talked about they're going to see most likely in the first half a benefit from certain market access from competitors. I was just trying to get a feeling if you see something similar. And then lastly, it's encouraging that the FDA inspection was without any kind of findings. So I want to come back to the discussion we had earlier, whether you're willing to also provide a kind of a more dedicated midterm guidance, which points to the next 3 years or so?

Okay. Mr. Reinberg, I'm happy to add more flavor to the China question. And it's a bit of everything that you had suggested could be the root cause. Well, first, there's a great, I would say, depression in China. The customer confidence index plummeted in summer '22 to a very low level. Since then so there is a perceived recession and already there is a deflation scenario today in effect in China. And it's well reflected. I think it's maybe not so directly connected for the economists, but I think it's important that the birth rate in China is the third lowest in the world. It's only lower in Korea and in the Ukraine. And that's because people do not trust in the government and in the future anymore. And so given that overall economic environment, then the next point is healthcare system. Given the demographics, there is the great fear of rising costs for healthcare because currently, China is around -- at a rate of around 6% to 7% spending of their GDP for healthcare, and that's the same level as in East European country. While, as you know, we, in Germany, are at around 14%. In the U.S., it's around 19%. So there's great fear of the Chinese government, the cost will rise. So many things that have muted our business are put in place to, say, delay or reduce the spending for healthcare in general, like the so-called, say, anticorruption campaign. Possibly also targeted in limiting the overall spending or delaying it because in the current economic scenario, the government is short on money. And then what effect does it have? It affects all medical device suppliers that are serving the market. I think I'll spell out Mindray, our probably internationally most challenging market companion. They also have for domestic China minus 11%, to my knowledge. And another medical equipment supplier, EDAN, has minus 20% on their domestic China business. So with our -- we are coming close to minus 50%. So that is worse than the domestic manufacturers. Probably, Mindray is getting a very -- the best with only minus 11%, but they are all affected. And for the international companies, there is also the effect that after this additional ventilator business, by the ending of the lockdown, the Chinese government realized that medical technology is a key important factor and has classified it as strategic, which is not easily seen or reflected. However, the European Union has done an investigation, and only a few weeks back from now, in early this year, they have published a result for over 1 year of investigation, where we, as Dräger, contributed significantly. And they found that the -- it's not a level playing field, and it's the second action after the battery electric vehicles where the European Union says, this is unacceptable. This is putting European industry at a disadvantage. And it will have counteraction, like maybe Chinese companies will be excluded in European tenders in the future. So that's being discussed because it clearly is making life more difficult for all non-Chinese players. So that altogether, certainly, we will not come back to the pre-corona level to where we were with our business. Although for this year, we believe it will recover, but only slightly from the poor level of the last year. Now your next question, ventilators. Yes, we agreed the fact that others are leaving the market. And that's not our intention. We believe it's a very healthy and sound market, where we have a lot of expertise. The grandfather of my grandfather invented the mechanical ventilator. We have the longest experience and the greatest production capacity, and very happy to have it in our market and continue to serve it. I made a personal video to customers worldwide that they can trust that we will stay. My name is on each and every product, and we have good experience in serving these markets. And there will be some benefit from others going different routes. The last question on the FDA. Lifting the warning letter. So the last step where we think it's possibly tied to is we have one approval for a monitoring software version. It's still underway. And as approvals for monitoring software were subject of the warning letter, it's quite likely that this -- successfully finishing this one, it's a proof that all the processes and the sites that have been audited successfully with no findings do really work as intended. And when this is completed, then that is -- should be the last step for the warning letter being lifted. And that I think could be expected late in this current year as that approval by itself, by definition, there's a lot of detailed work and it takes time. But that's -- it's quite likely that these are tied together from -- because there is this -- that was the subject from the original warning letter. So that is most likely what I think is going to happen.

And would you then be willing to provide a new midterm guidance again?

After that has been lifted?

Yes.

Well, the warning letter itself has no effect on our business. Actually, it has more an effect on the share price and what you, as an analyst or investor, think than on our customers. However, the product itself, which is under review, whether a new version is submitted for approval, that will have an effect on the business. That's much needed in the United States. We do have it in Europe already. And to have that same available for our U.S. customers, that will have an effect on the business. So on the midterm guidance, I would say maybe Gert-Hartwig can confirm. I would think that's already figured in because we knew at a certain point in time it would come and then the business will reflect it.

I can just confirm that. And to the degree that further details are asked for in addition to what we have said, average margin expansion of 1 percentage point. We will, as we have said previously, review that and look into that. But the bulk of the profitability improvement is already encapsulated in that statement.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Stefan Drager for any closing remarks.

Well, thank you very much, everybody online for your interest and for being with us. With this, we are coming to the end of the conference. Thank you very much, and look forward to hearing from you or seeing you sometime soon. Have a pleasant afternoon and a good rest of the week. Bye-bye.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.