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

Ladies and gentlemen, welcome to the Drägerwerk Q2 2026 Earnings Call. I'm Moritz, 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.

Good afternoon, and thank you for joining our conference call on our financial results for the first half of 2026. I have with me today Gert-Hartwig Lescow, Group CFO; as well as Thomas 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. Let's get started on Page 5 with the business highlights. With continued good demand, excellent net sales development and significantly higher profitability, we delivered a strong business performance in the first 6 months of 2026. At around EUR 1.75 billion, order intake was slightly above the high prior year level, while net sales grew by more than EUR 90 million to around EUR 1.6 billion. Thanks to the good operating business, the improved gross margin and some customs refunds, -- our EBIT more than tripled to around EUR 64 million, lifting our EBIT margin to 4.0%. As a result of the good earnings performance, our free cash flow rose considerably to around EUR 16 million from minus EUR 42 million of the prior year. As communicated last week, we raised our guidance. I will come back to this and our outlook at the end of the presentation. With that, I turn over to Gert-Hartwig for a review of the financials. Gert-Hartwig, please.

Thank you, Stefan, and welcome, everyone. Please turn to Page 7 for a group overview. As usual, all growth rates are quoted on a currency-adjusted basis. As Stefan Drager said, we continue to see good demand for our technology for life. Order intake rose by 1.8% in the first 6 months. This was driven by all regions, except the Americas, which saw a significant decline as a result of a major order for hospital infrastructure systems from Mexico in the second quarter of 2025. Despite this substantial base effect, our order entry for the group was due to a very strong development in safety on par with the prior year's quarter. Compared to order intake, net sales showed a much higher dynamics with an increase of 7.7% in the first half of the year and 8.5% in the Q2. In both reporting periods, the decline in APAC was offset by significant growth in EMEA and the Americas as well as a noticeable increase in Germany. Our gross margin in the first 6 months improved by 1.7 percentage points to 46.5%, supported by both divisions. Functional expenses rose by EUR 24 million or 4.8% in the first half of the year, driven by higher personnel costs evenly split between Germany and the rest of Europe. Freight costs and marketing expenses each accounted for roughly 1/8 of the rise. In Q2, the increase was more pronounced at 8%, mainly reflecting the same cost drivers in the second quarter. Importantly, in both periods, functional expenses grew slower than net sales and keeping it that way is our target for the full year. Looking ahead, we are watching our headcount development closely. Freight rates also remain a headwind due to geopolitical tensions in the Middle East. We are working to offset these pressures, and we remain confident in keeping full year expense growth below net sales growth. Our EBIT in the first 6 months rose significantly from around EUR 20 million to around EUR 64 million, lifting our EBIT margin from 1.3% to 4.0%. In the second quarter, our EBIT more than doubled, rising from around EUR 20 million to around EUR 46 million. Consequently, our EBIT margin climbed from 2.6% to 5.4%. In addition to the strong net sales growth, the operational business supporting a higher gross margin and slightly better currencies. Earnings were driven by a one-off of EUR 7.8 million from the customs refunds received in Q2 recognized in our cost of goods sold. Shortly after the half year balance sheet date, we received additional customs refunds of around EUR 14.2 million, including interest payments. This one-off will be recognized in our Q3 earnings. We also consider further customs refunds of around EUR 7 million to EUR 9 million to be possible. However, it is currently not clear whether, when and in what actual amount such refunds will be received. Thanks to the significant increase in EBIT, our rolling 12-month DVA also improved considerably from around EUR 17 million to around EUR 129 million. Let us now take a closer look at the development of the Medical division on Page 8. At around EUR 956 million, order intake in the first 6 months was 3.7% below the prior year figure. As I mentioned before, the main reason for this was the Mexico effect. It shows in the steep year-over-year decline in the Americas region. Adjusted for this, order volume in the Medical division would have remained around stable. Demand for anesthesia machines and ventilators as well as patient monitors declined while warming therapy devices, consumables, accessories and services went up. APAC recorded a slight decline while demand in Germany and EMEA increased noticeably. In the second quarter, the Mexico effect had a significantly stronger impact than in the first half of the year, driven by the considerable decline in the Americas, order intake decreased by 11.5%. In Germany and APAC, demand was also below the prior year figure, while EMEA recorded strong growth. Net sales rose by 7.6% to around EUR 898 million in the first half of the year. In Q2, growth was even stronger at 9.7%. In both reporting periods, the Americas were by far the biggest growth driver, followed by EMEA and Germany. Due to a favorable product mix, our gross margin in the first 6 months expanded by 2.1 percentage points to 44.6% despite negative currency developments. Functional expenses rose by around 6.2% in the first half of the year and by 9.6% in the second quarter. This is primarily due to higher personnel expenses and freight costs. Our EBIT in the Medical division was still negative at minus EUR 14.3 million after 6 months, but it improved significantly coming from minus EUR 33.7 million in the prior year period. This also applied to the EBIT margin, which rose from negative 4.0% to negative 1.6%. In Q2, EBIT came back to positive territory at EUR 4.3 million after negative EUR 5.9 million in the prior year quarter, lifting the EBIT margin from negative 1.4% to positive 0.9%. Our rolling 12-month DVA improved significantly by EUR 54.4 million to around minus EUR 5.4 million. I will now turn to our Safety division. We are on Page 9. Order intake in the first 6 months rose significantly by 9.5%, driven by strong demand in all product areas and regions. Respiratory and personal protection products, gas detection and occupational health and safety equipment were particularly in demand. Services also made a significant contribution to growth. Above all, the Americas, Germany and APAC showed strong momentum. In the second quarter, order momentum picked up even further. The division recorded strong order growth of an impressive 19.8%, thanks to very good development in all regions, particularly the Americas and APAC. Net sales rose significantly by 7.8% in the first half of the year, driven by considerable growth in the Americas and EMEA as well as an increase in Germany. The APAC region recorded a decline. In Q2, net sales increased by around 7% due to the positive development in the Americas and EMEA. In Germany, net sales were just below the prior year figure, while APAC developed more weakly. Despite higher customs expenses, our gross margin in the first 6 months increased by 1 percentage point. This was in part attributable to higher capacity utilization and lower negative currency effects. Functional expenses were 2.7% above the prior year level, primarily due to the increase in personnel and marketing expenses and freight costs. In the second quarter, functional expenses increased by 5.6%. Here, the development of personnel cost was the main driver. Our EBIT in the Safety division increased significantly in the first 6 months, EUR 54 million to EUR 78 million. This lifted the EBIT margin from around 8% to around 11%. In Q2, EBIT grew from around EUR 26 million to around EUR 42 million. The EBIT margin consequently rose from 7.6% to 11.3%. Rolling 12 months DVA improved by around EUR 57 million to around EUR 134 million. Let's move on to the development of our cash flow and other key figures on to Slide 10. In the first 6 months, we significantly improved the operating cash flow by around EUR 43 million to around EUR 60 million. In addition to the increase in earnings, this was mainly due to lower income tax payments and effective working capital management, especially better development of trade payables and contract liabilities. Higher operating cash flow as well as lower investment outflow led to an improved free cash flow by EUR 58 million. Going forward, we expect free cash flow to continue to develop positively. Looking at our net financial debt, we had a significant reduction by around EUR 79 million to around EUR 190 million. The reason for this was the increase in cash and cash equivalents due to the strong free cash flow. As a result, the already healthy ratio of our net financial debt to EBITDA further improved to 0.5. At the beginning of the first quarter, we repaid a maturing note loan in the amount of EUR 50 million with our own liquidity. Our 12-month rolling return on capital employed rose from 9.9% to 15.7%. This was due to the high EBIT in the past 4 quarters. At around EUR 798 million, net working capital was 8% higher than in the prior year. Our equity ratio as of June stood at around 52%, around 1 percentage point above the year-end level of 2025. With that, I hand back to Stefan Drager for our outlook on Page 12.

Ladies and gentlemen, 2026 has been very successful for Dräger so far. Our strong operating business in the first 6 months and usually higher dynamic in the second half make us optimistic about the further course of the business. Therefore, we continue to expect net sales growth between 2% and 6% net of currency effects. Regarding our earnings guidance, we have made 2 positive adjustments in recent weeks. Due to the strong operating performance and the customs refunds received in the second quarter, we raised the lower end of the EBIT margin to 5.5% 2 weeks ago. Following the additional custom refunds received after the balance sheet date, we raised our guidance once more, and we now expect an EBIT margin between 6% and 8%. But even without any refunds, which are an unplanned margin tailwind in this year, we are going to perform well in 2026. This resilience is a result of our shift from net sales growth to earnings growth, which we started 10 years ago. Since then, we have been making very good progress in improving our profitability each year. And we are well on track to reach our ambition to improve the EBIT margin by 1 percentage point per year to reach 10% by the year 2030. Now is the right time to sharpen our equity story and to explain our markets and our position and the resulting growth and margin improvement. We will, therefore, host a Capital Markets Day for institutional investors and analysts on November 18, 2026, at our headquarters here in Lübeck. The entire Executive Board will present, followed by live on-site demonstrations of our innovations and use cases. Invitations will be sent out shortly. We look forward to welcoming you in person on our premises in November. With this, I would like to end the presentation and hand over to the operator to open the line for your questions, please.

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

Three questions from my side. First one to be on safety. I mean, the division continues to perform quite strongly, both in terms of top line and also margin outlook. I was wondering if you can provide us with some thoughts like how sustainable this momentum is? And also in terms of margin, we are now probably approaching the full year all-time high peak. I mean, is this a kind of level from where you see further expansion potential? Secondly, just on cost inflation. I mean, most companies now see more headwinds driven by the kind of geopolitical challenges. So I was wondering if you can provide some kind of color to what extent costs have also increased on your side? And then thirdly, I think in your prepared remarks, you also talked about that the order intake in medical in therapy devices is a bit declining. I wonder if you can share some kind of thoughts in terms of what we see in the market. I mean GE is about to launch a new anesthesia device in H2 and monitoring people talk about larger size deals and there was also kind of change in ownership. Had any of this an impact on your kind of demand level here?