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

Ladies and gentlemen, welcome to the Q2 2025 Earnings Call. I am George, the Chorus Call operator. [Operator Instructions] The conference is being recorded. 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.

Yes. Good afternoon, and thank you for joining our conference call on our financial results for the first half of 2025. And thank you all for your flexibility for rescheduling the call for 1 hour due to organizational reasons. Thank you for being with us. 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 with the presentation that we made available on our web page this morning. Following the presentation, we will open the floor to your questions. So let's get started on Page 5 with the business highlights. With stable net results -- stable net sales, and a positive operating results, we achieved a solid business performance in the first half of 2025. At around EUR 1.5 million, net sales were nominally slightly below the prior year level. But adjusted for currency effects, they slightly increased. On the other -- other than in the first half of 2024, growth was driven by the medical division instead of the safety division. Earnings before interest and taxes could not keep up with net sales as our EBIT fell short of the prior year figure at just over EUR 20 million. This was due in particular to the positive one-off effects in the prior year, which are now not repeating. As a reminder, last year, we had divested a noncore business in the Netherlands and an unused lot of land totaling at around EUR 20 million in one-off effects. Next to these base effects, currency effects and custom duties had a negative impact on earnings. Considering the missing base effects and the substantial headwind from currencies and tariffs, the earnings performance is actually quite good for our typical seasonality. In addition, the order intake makes us confident about the further course of our business for the remainder of the year. In the first 6 months, demand for our technology for life increased significantly to around EUR 1.7 billion. Despite the difficult economic conditions caused by the U.S. customs policy, we were able to grow order intake in both divisions and all regions and even achieved the highest order intake in its first half year since the record half of 2020. This gives us a good foundation for accelerated net sales growth in the coming months. In addition to the good demand, we were able to improve our operating cash flow, which came back into positive territory at around EUR 18 million after minus EUR 5 million in the prior year period. The performance of the [indiscernible] shares was successful as well. The price of our common shares rose by more than 1/3 and the price of our preferred shares by more than 40% in the first half of the year. In May, the preferred shares, which are listed in the SDAX were also included in the tech TecDAX. This makes us even more visible to tech investors. Our goal remains improving profitability. In some cases, this might include the reduction of complexity. Therefore, I would like to share some news regarding our U.S. site in Telford, Pennsylvania and our new Neonatal care business. Neo care is the smallest care area within the business unit therapy and it operates with a rather complex setup since operations divided over 2 sites, Lübeck in Germany and Telford in Pennsylvania in the U.S. due to the reasons of the acquisition of the business from [indiscernible] originally in Hatboro, which is nearby Telford. So to ensure the long-term success, we have now decided to consolidate the 2 existing sites into 1. This means all related activities will be consolidated in Lübeck by the end of 2026. By bringing both units together into one optimized location, we will improve efficiency, reduce fixed costs and enable stronger platform development while continuing to deliver high-quality solutions to its customers. The U.S. property will be divested. Ladies and gentlemen, as communicated 2 weeks ago, we confirmed our annual guidance. I will come back to this in our outlook at the end of the presentation. With that, I turn now over to Gert-Hartwig for a review of the financials. Gert-Hartwig, please.

Thank you, Stefan, and welcome, everyone, to our H1 results call. Let's turn to Page 7 for a group overview. As usual, I would quote all growth rates on a currency-adjusted basis. We continue to see strong demand for our technology for life in both segments and all regions. Order intake rose by more than 10% to over EUR 1.7 billion in the first half of '25. The Americas led the growth with an increase of around 25%, followed by EMEA and APAC. In Germany, the order volume was slightly above the prior year. In the second quarter alone, orders grew by more than 14%, fueled by broad-based momentum in the Americas, EMEA and Germany. Net sales rose by 1.8% in the second quarter after a slight decline in the first quarter. In the first half of the year, net sales increased by 0.4% to around EUR 1.5 billion. APAC's strong performance and the noticeable increase in Germany offset the declines in EMEA and the Americas. We maintained a 44.8% gross margin as the slight dip in the safety division was fully offset by an increase in the medical division. Our functional expenses rose around 6% in H1, driven by the absence of last year's EUR 20 million one-off income and a one-off wage agreement payment for employees in Germany. Excluding the positive one-off effects mentioned above, the cost increase amounted to 2.9% in the first half of the year and 1.2% in the second quarter. Our operating result and profitability improved over the course of the year of first half after modest Q1 EBIT -- Q2 EBIT reached EUR 20 million, lifting our EBIT margin from 0.1% in Q1 to 2.6% in Q2. In the prior year second quarter, however, both figures have been much higher at around EUR 41 million and 5.2%. For the 6-month period, EBIT totaled EUR 20.4 million with a 1.3% EBIT margin, below last year's EBIT of EUR 55.8 million and 3.7% EBIT margin, respectively. Main reason for this decline were the positive one-off effects from the prior year, which are now missing. In addition to these base effects, headwinds from currencies and customs strained as the euro appreciated sharply against key trading currencies. We carefully monitor the development of foreign currencies and manage these risks proactively through hedging and price adjustments. Having said that, FX had a negative impact of roughly EUR 20 million. Finally, our rolling 12-month DVA be treated to around EUR 17 million. Let's now take a closer look at the development of the medical division on Page 8. We grew order intake by almost 15% to more than EUR 1 billion in the first half of '25, driven by strong demand for ventilators, anesthesia machines, work services and consumers. In Q2, a mid-double-digit million euro multiyear order for hospital infrastructure for Mexico further powered our growth in the Americas. Even without this large order, demand in the medical division rose year-on-year. In the second quarter, order intake in the medical division decreased by around 25%, thanks to significant growth in all regions. Net sales rose by 5% in the second quarter after a significant decline in the first quarter. Looking at the first 6 months, net sales increased by around 2% to EUR 851 million, mainly driven by APAC and Germany. In APAC, mainly India and China drove our growth. However, growth in the People's Republic cooled down considerably in the second quarter, underscoring market volatility in China. We resolved Q1 supply chain disruption and production is up and running again. We expect sales to accelerate as soon as the current quarter. Despite currency headwinds and higher custom duties, our gross margin expanded by 1.2 percentage points in Q1 and 0.2 percentage points in H1, thanks to a favorable country mix and lower quality expenses from field. Functional expenses rose by around 5% in the first half of '25 and by around 4% in the second quarter. Excluding the proportionate positive one-off effects from the sale of the property in the U.S., the increase amounted to 4.4% in the first half of the year and 3% in the second quarter. Our Q2 EBIT improved considerably from minus EUR 12.9 million to minus EUR 5.9 million, lifting the EBIT margin from minus 3% to minus 1.4%. For H1, EBIT amounted to around minus EUR 34 million and was therefore significantly below the prior year figure of around minus EUR 24 million. The EBIT margin decreased from minus 2.9% to minus 4%. Our rolling 12-month DVA improved by around EUR 5 million to minus EUR 60 million. I will now turn to our safety division on Page 9. In H1, order intake rose by more than 4%, driven by engineered solutions, respiratory and personal protection products and gas detection. Orders for occupational health and safety normalized after last year's large order from the German Armed Forces for protective filters. EMEA and the Americas delivered strong double-digit order growth. APAC saw a pull down. In the second quarter, order intake was just under the prior year level with robust single-digit growth in Germany and EMEA, balanced by a decline in the Americas and APAC. Q2 net sales declined 2% and H1 fell 1.4% as the decline in EMEA and the Americas was not fully offset by growth in Germany and APAC. Our business often has fluctuations of order intake and net sales from one quarter to the next without too much need to read across for the longer-term development. These ups and downs are normal in our business. For the full year '25, we expect net sales growth in safety over a strong prior year. This requires a further acceleration of order intake in the coming months. Lower net sales and currency headwinds drove a gross margin drop of 1.4 percentage points in the second quarter and 0.2 percentage points in the first 6 months. Functional expenses rose down 8% in H1, mainly reflecting the absence of last year's income from the sale of our fire alarm system business in the Netherlands and higher marketing spend. The strong relative increase in functional expenses in the second quarter is due to the aforementioned base effect. Excluding the extraordinary [indiscernible], the increase in the first half of the year amounted to 0.8% in the second quarter. Functional expenses would have decreased by 1.5%. Q2 EBIT reached EUR 26 million in the second quarter after roughly EUR 54 million in the prior year quarter. The EBIT margin fell from 15.1% to 7.6%. After the first 6 months, the EBIT came to EUR 54 million, down from EUR 80 million. The EBIT margin was 8.2% after 11.9% in the prior year period. Rolling 12-months DVA decreased significantly by around EUR 21 million to around EUR 77 million, coming from EUR 98 million in the prior year period. That concludes the safety division review. Let's move on to the development of our cash flow and our capital structure on Slide 10. In H1, we delivered a significant improvement in operating cash flow despite the lower earnings of roughly EUR 18 million coming from an outflow of around minus EUR 5 million in the prior year period. This was mainly due to effective working capital management, especially better development of trade receivables and other liabilities like the cash inflow from FX derivatives. Investing activities used about EUR 60 million in H1 versus [ EUR 11 million ] a year ago, resulting in a free cash flow of around minus EUR 42 million after minus EUR 16 million in the prior year period. We modestly reduced net financial debt, keeping our leverage at a healthy 0.9 net financial debt to EBITDA. Net working capital also remained at the prior year level at around EUR 739 million. Lower rolling 12-month EBIT paired with stable capital employed brought our 12-month return on capital employed to around 9.9%, down from 10.9%. Our equity ratio as of June 30 stood at 49.1%, just slightly below year-end '24 level. Now I would like to hand back to Stefan Drager for our outlook on Page 12.

Thank you, Gert-Hartwig. Ladies and gentlemen, the good order development and the seasonality of our business give us confidence that we will make up for the shortfall in net sales in the second half of the year. Therefore, we confirm our forecast with net sales growth in the range of 1% to 5% and an EBIT margin between 3.5% and 6.5%. DVA is expected to be in the range of minus EUR 30 million to plus EUR 80 million. With this, I would like to end the presentation and hand over to the operator to open the line for your questions.

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

Oliver Reinberg from Kepler Cheuvreux. First question would be threefold on tariffs. Can you just give us a flavor what kind of impact on earnings you have seen from tariffs in the first half of the year? And also what kind of impact do you expect for the full year? And then the third element to this kind of discussion, can you just update us what you're doing currently in terms of countermeasures? I guess there could be potential surcharges or any kind of discussions with GPOs in the U.S. Any kind of color you could provide on this kind of process would be helpful.

So I'll take the first question. The impact from duties in the first half, which essentially is the second quarter is around EUR 6 million, so in the mid-single digits, if you will. And for the full year, we expect at the now announced 15% tariff as of August 15, we expect an impact of around EUR 25 million.

And can I just ask, is it a kind of gross impact? Or is it net of any kind of potential countermeasures?

That's the gross impact for the tariff. We do have some mitigation -- sorry, that's actually after -- that's the net-net impact after some price increases. And we have see a good ability for price increases on the safety side of our business, where we have already introduced adjustments of prices, and we see very limited potential to increase prices on the medical side due, among other reasons, the fact that we have long-term contracts with GPOs, which are not changeable easily and also a general environment where price increases on the industrial side, on the safety side are quite common, whereas they are less common on the medical side of our business.

Okay. And if I think about then basically 2026, when you cannot offset much of this and mostly, I guess, is related to the medical division. Does it mean we are going to expect a kind of incremental EUR 20 million headwind next year?

Basically, yes, it has to be figured into our planning. We still keep the target of improving our margin 1 percent point we calendar on average. So on average, it is the same as the calendar year, the last -- so for next year, there's not something -- this is Stefan speaking, of course, Mr. Reinberg. There's not something we can do directly. We can cancel discounts and so do less promotions. But on a structural level, there is nothing that makes sense we could do for next year.

Okay. So just to confirm, the 1 percentage point margin improvement, you expect that to deliver on average even including basically the headwinds from tariffs, correct?

That is correct. That is still the goal. And we expect the headwind to continue for next year coming from both from tariffs and with somewhat related currency fluctuations from a strong euro. It's not so much the dollar-euro relation directly. We are quite well naturally hedged as a lot of our cost is also based in U.S. dollar. And so we have also considerable expenses with 1,000 employees in the U.S. and some of them being R&D people. And we have purchased a lot of our procurement with contracts all over the world in U.S. dollar. However, there are third-party currencies like the Mexican peso or the Indonesian, whatever the currency that are devaluated and all the sales that we achieved in these countries is less in euro.

Understood. Makes sense. And can I also just confirm the margin guidance you provided for this year, that is after any potential headwinds from currency and tariffs. Is that correct?

Yes, that's correct.

From all what we know until today -- so that affects...

Super. Perfect. And then last question from my side. Can you just provide a bit of more color on the performance of medical? I mean it's different directions. I mean, I guess the order intake is quite impressive, in particular, even if we strip out Mexico, I think there was a quite healthy growth. I'm not sure if you can point to any kind of specific theme here or any kind of changes on the competitive landscape that supported this kind of demand. And then secondly, when I look at the profitability, minus 4% in the first half still coming down. It may be partly down to tariff, but if you can just provide any kind of update how you feel about the kind of margin progress in medical, please?

For the medical, the outlook firstly remains unchanged in the margin outlook. Obviously, we'll get also benefit from the large order entries and that's clearly on the upper hand -- on the upper side of our previous expectation, and that's also positive on the margin. Then again, to your earlier question, we also see that we have headwind from customs and from FX. And so that balances each other. I think overall, the margin outlook remains largely unchanged.

Unchanged. And I think that's the key to understand this development, Mr. Reinberg, is despite the headwinds from the currency devaluation of the euro increase in value despite the headwind from currency and from tariffs, we keep the full range of the guidance because the margin in medical is stable or even slightly improved because of the favorable product mix and country mix. And that eventually all our efforts for bringing new products to market and the approvals, they pay off and the key products for [indiscernible] and the machine is selling very well in the United States despite the tariffs as this is a relatively high-margin product, and it is a country with reasonable good prices that helps to offset the headwind.

Super. And anything that drives a particular strength in terms of demand? I mean, have you benefited from competitive changes in ventilation?

Some extent, yes, that some players left the market. That is also clearly not to our disadvantage. There is no real short-term boost. We do some marketing campaign. I personally address the customers that the video campaign that we have no intention to leave the market, and we will be there tomorrow other than some other players. So I think that takes a long press.

Our next question comes from Alexander Galitsa with HAIB.

Really a couple of topics. Maybe starting with the safety division. I wonder what explains the weakness you see in North America in safety division in Q2 in particular? Is it more or less normalization from rather strong performance in previous quarter, Q1 in particular? Or is there something else happening that's worth mentioning? That's the first question. Then I have a question regarding the divestment of a facility you alluded to, if you would be able to quantify as of today roughly what kind of magnitude we're talking about in terms of proceeds for the facility? Then another question is on FX headwind of EUR 20 million. if you would be able to roughly quantify how much is in safety and how much is in medical? That's number three. And the very last one is just coming back on tariff headwind, which is quite material, it seems. Just wondering what makes you confident you can pick up the slack of EUR 25 million and still reach your sort of projection of 1 percentage point guidance -- 1 percentage point margin improvement if this EUR 25 million on its own almost explain 1 percentage point. So what areas should take -- pick up this slag?

So let me start and on your first question, the safety weakness in the Americas is mainly related to lower investment spending on behalf of our customers that also operate in an environment of uncertainty somewhat. So we expect that, that will normalize to the degree or if the general environment will also stabilize. But there is no, if you will, extraordinary other factor at play at this point. To your second question, the divestment for the property in the U.S. that will be in the order of magnitude between EUR 10 million and EUR 20 million. That is, of course, not settled yet. And we expect it to materialize if things go quickly by the end of this year or some more -- sometimes in the second half of next year that will -- sorry, first half of next year that will -- can depend on several factors, including also the type of buyer and the use of the land he or she wants to make because that has to go through some authorities. And last time we sold some land that actually has delayed the process considerably. Your second -- your third question was with regards to the impact on the FX on the medical and safety division. And very roughly, they are of the same order of magnitude. There's a tad higher on the medical. But given the size of the division, proportionately, it's actually higher on the safety side. And the reason is, as we point or Stefan Drager has pointed out, there is somewhat of a smaller impact, but still negative due to the fact that we are U.S. dollar short by a small margin on the medical side. So by and large, you can cut the 2 almost in half with slightly higher than that. For the tariff headwind, which was your fourth question, of course, this will be a challenge. We are in the process of planning out what works, we believe in the long term also as a mitigating effect that at least some of the pricing measures that we implement on the safety side, they also will deliver a full year effect when we come into '26. Of course, this will not be sufficient for the large part, but that will help us. Secondly, when we talk about the medical side, part of the reason that we are not able to enforce price changes on the short term are, of course, the long-term contracts. But even longer running contracts will come to an end. So there is more potential to adjust prices in the normal course of business. What is not easily possible is to introduce short-term bottom surcharges in the medical. But to the degree that long-term contracts running out, we will be able to also implement regular price increases on the medical side.

Also what is not possibly -- but does not make sense is to make structural changes to transfer production into the U.S. at this point in time, it's either it's not possible -- simply not possible in a shorter term or from an entrepreneurial standpoint, it does not make sense to invest in such an environment given such uncertainty. So what is possible, of course, and that will be an important factor to compensate for the headwind is to be even more cautious in the planning for our spending and for the expenses. That does not mean that we will introduce a cost-cutting program as say, is repeatedly asked for, but we will scrutinize each and every euro that we spend.

Understood. May I just slip in one additional question on -- you have announced that you will be launching in the second half of the year, Silent Care Package, which you call the world's first interoperable multimodel system based on the standard. Can you just maybe add some more context to this launch? Who will be able to use this? How is this being implemented? Does it require an add-on purchase of software? Or what's the context to that?

Yes, it is -- the key is the interoperability standard STCs, so that service-oriented device connectivity that yes, it has been developed from a nucleus in Germany, and we were part of that. However, it has become an international standard. It's IEEE 11073 and also an ISO standard. And basically, what we can see all manufacturers try to hop on that train now, but we are the first ones that can offer it together with some other partners like Braun and Ascom. We have a joint offering that combines devices from several manufacturers into one seamless operating environment. That's, of course, most applicable to the higher standard Western style university, but also in some developing countries and including Mexico, we see great interest.

[Operator Instructions] Our next question comes from Virendra Chauhan with AlphaValue.

So the first one is on safety, the order weakness particularly. So would you like to kind of call out any trends because safety order growth has been relatively strong all through the last few quarters. And hence, weakness in this Q2 was a little bit unexpected. Would you like to call out any kind of trends or divergences between this performance and order book development? That would be the first one. Second question is on China. So recently, we have had this back and forth between EU and China regarding the participation of companies from either geography in tenders. So given that even China has kind of blocked European firms in participating in some tenders, do you think that would kind of be a drag for you on growth in China? And lastly, coming to your margin guidance. So the H1 margin is pretty low and significantly below the lower end of your 3.5% to 6.5% range. So what would you expect should go really well that you end up at least at the midpoint? I assume that you're really forecasting some strong growth in the back end, but what exactly is driving that kind of confidence? Or do you think maybe 3.5% to the midpoint, the lower half of that is more realistic at this point?

I think your first question with safety, what you call weakness in order intake, it is the same, breathing behind as we included in the answer to the very first question from Oliver Reinberg. I think was the second question on the U.S., it is the same for the global business that the business in general has some fluctuations in order intake and net sales from one quarter to the next. And you shouldn't read too much across for the longer-term development. So it is a phasing issue. And in general, the market is intact and our offering is good and shouldn't be too concerned with this single quarter that we report now. So for the overall for the year, we will see further development. That is -- I hand over now to Gert-Hartwig why we are confident that the full range of the guidance is still intact.

Yes. Perhaps I jump to your second question also because I think it feeds into your guidance question, and that was, do we expect negative impact from the recent announcement in China to lock out European competitors from certain tenders. In fact, the tender volume that has been implemented in that measure of roughly EUR 5 million. That's actually above the usual tender volume that we have seen in recent years in China for our type of products. I do know that, that's different for other offerings and perhaps affects other companies differently. But for the type of business that we have seen in the past and that we expect in the future, that is actually a rare situation to have a tender that exceeds that. As a consequence, we do not expect a material impact for the type of business that we do in China. Having said that, we currently see a stabilization of the Chinese business, and we expect further stabilization and perhaps even pickup in growth, but it leads to -- to your third question regarding the guidance and how does that stand in the light of our current trading. We -- of course, we have commented on the very large order backlog, in particular, on the medical and there on the therapeutic device that delivers above group margins. And at the back of our typical seasonality, where even in the recent years, we always see a significant portion of our profit on the medical, in particular, in the second half of the year. We expect this year to be not any different. And in fact, based on the above in comparison to the prior year's higher order backlog, we see -- we expect a higher back-end loading of profitability. And with that, we see clearly the lower end of the margin on that background. But given the mix and the order momentum also the mid- and if we see a good development with the momentum could be turning with, for example, also an acceleration not only in the U.S., but also in China, also the mid- to higher end of the margin guidance to be clearly a possibility for our full year expectation.

Our last question is a follow-up from Oliver Reinberg.

The first one would be on Neonatal Care. I think you talked about the consolidation of the plant there. So a twofold question. One, is it right to assume that this is roughly 10% of medical sales? And can you provide any flavor in terms of what potential cost savings we could expect from that? And then secondly, just can you provide an update on what kind of demand you see for all kind of potential defense orders, how that is tracking?

Let me jump in and Stefan Drager will also comment on the business rationale. But as you are aware, we refrain from disclosing any individual sizes of our product areas for a couple of reasons, not least because we don't see similar figures from our market companion. So we are very reluctant to disclose that. But as Stefan Drager has pointed out, within our therapy devices, Neonatal Care is the smallest one of the different areas. So I'm not going to -- if you will counter your estimate. But bear in mind that that's just a rough order of magnitude, not a specific figure as I don't -- we don't like to specify that any further.

For the impact of the consolidation, it gives you a rough idea for this current year where the actual transition takes place, it's an extra expense of a single million-digit figure. And the years to come, it will be a saving of a single million digit figure. So the payback is approximately a little over a year. And from then on, it's safe every day.

And for your second question...

Regarding the defense business. Well, we expect and I'm glad you asked the question, that the defense business can be in the magnitude of EUR 100 million for Dräger. So there is definitely potential. And that is a, say, sizable number for the defense business altogether. That's worth to keep an eye on.

Ladies and gentlemen, this was our last question. I hand back over to the management for any closing remarks.

Well, thank you all for being with us today for your interest and for your questions. And again, for your flexibility for the rescheduling of this meeting by 1 hour. And for now, have a pleasant afternoon and a fine summer. Thank you very much. Bye.

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