GEA Group Aktiengesellschaft (G1A) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. My name is Florian Geiger from the Investor Relations Department of GEA Group. I would like to welcome you to our analyst call regarding the planned noncash impairments for Q4 2019. I'm joined this afternoon by our CFO, Marcus Ketter. In a minute, Marcus will give you some more background on the news we published today. Afterwards, we are happy to answer the questions you may have. Let me now hand over to Marcus, please.

Yes. Hello, everyone. I see good interest. Actually, we have [ over ] 30 participants here in this call. We want to give you some color why we did an ad hoc. Today with me, I also have the Head of Corporate Accounting and the Head of [ Corporate Development ]. So let's start first with the good news. The group forecast is unchanged. We confirmed that, and we narrowed actually the range as you can see here in the last paragraph of our talk. And you can also see that with our order intake at EUR 4.93 billion and expected revenue of EUR 4.88 billion, we are, with both, slightly higher than previous year. I think that's also good news, especially regarding to our order intake especially when you look at other machinery and contracting companies. We narrowed the range for EBITDA before restructuring. It's EUR 470 million to EUR 480 million, and I think that's also going to be a good number for us for last year and a good case -- basis to start for this year. The ROCE, we see currently approximately at 10%, perhaps a little bit slightly over 10%, but we haven't -- we are not completely through with our year-end close. So I think this is good news for investors' group forecast. Guidance is confirmed from our side. Nevertheless, what we needed to do, as you know, last year for us is cleaning up the house. And so in the year-end process, we also -- it's part here of the annual planning process that we are doing impairment testing and doing this during our year-end closing period. We had to impair the goodwill of our acquisition, Pavan, which was acquired in November 2017, and we are impairing the goodwill completely. That means with EUR 248 million write off, there's no more goodwill left for Pavan. This is noncash and it's -- in the past, this is what sometimes happen when you acquire a company -- companies, sometimes the business plan is achieved, sometimes not. We have a very extensive program for Pavan and we are working diligently on this actually to bring them back to performance. So we are restructuring the sales team, we are restructuring the agency network. We integrate the sales activities closer to the region and countries and with the production manufacturing sites improvements. So there's a whole program in place now with Pavan to bring them back on track. Nevertheless, we had to impair the goodwill. The second part here of our ad hoc was the accelerated recognition of restructuring expenses. We gave you an outlook for 2019, saying it was up to EUR 55 million in restructuring expenses. We were now faster than expected when we did this announcement in September on our Capital Markets Day. We were able actually to determine how many people at which sites had to leave the company, and we were able then to inform the workers' council accordingly. And this is the prerequisite to be able to do such an accrual. So this is an acceleration of our restructuring expenses. There was an additional approximately EUR 5 million charge in restructuring for Pavan there, and there were some slightly less restructuring expenses than we anticipated when we set to up to EUR 55 million. So it's basically EUR 55 million plus the EUR 47 million we have additionally for Pavan -- excuse me, we have additionally for the 800 FTE lift and then EUR 5 million for Pavan and then minus approximately EUR 2 million, which were less restructuring charges and others. So we'd arrive then from EUR 55 million to EUR 105 million in 2019. Overall, for the whole period, we expect to be, with restructuring charges, we gave also a range up to EUR 250 million, to be at the higher end for the period to 2022. But it is really -- we are in a very fast multiyear and therefore, we also perceive this actually as an -- this is really an acceleration of our restructuring expenses, which we had forecast actually for this year for 2020, where as I said, we were able to take this already in 2019. So this is some more color from my side on the ad hoc and also here on the noncash impairment and the acceleration of the recognition of restructuring expenses. As I said, group forecast is unchanged. So I open now up for questions.

[Operator Instructions] Our first question comes from the line of Lars Brorson from Barclays.

I had a few, if I could. Just first of all, can you remind us what charges you have taken above the line for the full year '19 and break them down between sort of the key components? Just so we understand what is taken within your EUR 470 million to EUR 480 million. That will be my first question, please.

Okay. So the biggest charge is actually for our program, [ Reshape ]. That's around EUR 72 million this year. Then we have another program called [ Create ], where we are changing actually to 5 divisional areas, that's around EUR 9.7 million. And then we have different other initiatives there, which add up then to EUR 105 million. So we also have, for example, financial transformation, there's a certain charge. So it's all actually the -- what we have shown earlier. And the biggest change, as I said, is in the EUR 47 million additional charges for the 800 FTE layoff and another EUR 5 million then for Pavan. That's all in 2019, Lars.

Yes, I'm sorry. So -- but those are taken -- I'm sorry, they're taken below the line, right? They're excluded from your operating adjusted EBITDA. I just -- so sorry, my question was slightly different. I just wanted to get a sense for the key components of the nonrecurring items within your EUR 470 million to EUR 480 million adjusted EBITDA for '19. There was obviously the backlog write-down in the first half of 2019. There have been [ Pavan ] charges. I wanted to get a sense of what is taken above the line, just to get a sense of what is true underlying operating EBITDA for the year, please?

Okay. No. I now understand. But this is not actually part of the ad hoc. So this is actually what we said in the Q3 release, we can't tell you -- I can't tell you anything for Q4. But as you have seen, we said special items of, in total, EUR 47 million at that point in time. So that's all the information you will find in our Q3 presentation.

Well, I have that, of course. I was wondering whether you would give us color on Q4. It sounds like you can't.

No, I can't give you color on Q4. So on Q4 numbers, we do this on March 17. This is color actually on the ad hoc, why we did the ad hoc. But as I said, group forecast is unchanged.

Can I separately ask to -- any other impairments you expect to take or maybe you can't talk about that either? I mean I understand the Pavan charge, that's very clear. My understanding was that you let us believe that the Q3 stated there were more impairments coming through around potentially accounts receivables, overdues, inventories. Can you give me some sense for whether there will be more noncash impairment coming in addition to the Pavan charge in Q4?

Well, we are still -- yes, we are still actually in the year-end closing and nothing to any magnitude of what we did here. There might be some charges here and there, but it's nothing to the magnitude, and we would actually also communicate this on March 17. But this is the big-ticket item here.

Thirdly, if I can, to working capital in Q4. Are you able to help us a little bit with what you've seen from a working capital standpoint in the quarter? As in, is there an actual improvement coming through there?

Well, yes, you can expect that actually that we are, as every year-end close, we're working diligently, actually getting the net working capital down. Expect that. And for 2020, this year, this is not only going to seasonally but also structurally, we're going to have improvements or -- lowering the net working capital. That's all I can give you on this on today.

But on Q4 specifically, I'm not interested in 2020 forecast at this stage. I was more curious as to whether you...

I just told you, right? I said expect to see actually improvements as we have every year at year-end.

Well, year-over-year I was after and not sequentially. Can I just ask separately to demand trends? Any more you can say? I mean obviously, 1.35 for the quarter Q4. You've been cruising at sort of 1.2, so you've seen quite a nice step-up in the order intake in Q4. Can you give us a little bit of color around that? Is that more sort of lumpy, bigger orders? Or are you seeing a sort of underlying improvement in terms of your base order trends? And if so, where?

Well, we see -- as I said, there's going to be the call on March 17, but we see a good demand for our products. And this is all the color I can give you today. This is really about -- Lars, this is really today about the ad hoc release. This is not a pre call to March 17, okay?

And our next question comes from the line of Sebastian Growe.

Marcus, not so sure if you're going to answer my questions then. But nonetheless, I'm going to try. Obviously, if one just ring-fence quarter 4, and I understand it's around the haircut you've been taking around the goodwill side of things, but nonetheless, the sales are down at the first quarter, but sales are down throughout the entire year. Can you share any ideas with us what's the driving piece behind that sales decline in the quarter 4? And then related to it, if one looks at the last 12 months rolling EBITDA until quarter 3, I would have assumed that you might land at the very high end of the guided range of EUR 450 million to EUR 490 million. Well, the sales decline is eventually one part of the explanation, but if I may go back to Lars' question around any items above the line. It seems very much that you have taken other charges and, I mean, nonrestructuring charges, sort of an, what can I say, reset of the order book, whatever, which might have explained the sort of, I thought, surprising -- at least for me, surprising EBITDA development in quarter 4. So any more color on this would be, I think, appreciated, not only for the sell side, but also for the buy side on this call.

Yes. For the sales side, actually I have to -- we are here in end of January. So for the sales side, actually, I have to postpone this to March 17. And as always, when we give you the EBITDA number, as I said, we are -- everything is under the headline of all investors, we need to be able to achieve this. So we're not through the year-end close yet. So we had to go ad hoc, basically where not all the numbers are completely finished. That's why we're still giving a range of EUR 470 million to EUR 480 million. But as I said, I'm expecting actually to be at the higher end of that range and still have a very solid feeling about the balance sheet we will be closing with on December 31. But we are not completely through our year-end closing yet. So -- but this was a necessary step when you really look at the impairment. So we give you some more color actually what we took above the line in -- on March 17.

Okay. And if I may then circle back to the working capital question that Lars raised. Can you give us any sort of idea at least if there has been decent prepayments related to the order intake? Because that would assume [ as you lap ], it's more than EUR 1.3 billion in the quarter. On my record, that's obviously in your all-time high for the corporate. The question simply is where it's coming from, and it seems [ very ] solutions-driven, and then that would be at least a helpful indication from your end.

Well, as I said, [ as you understand ], we are still doing the year-end close, we have to do more analysis where it's coming from. So I give you -- on March 17, can give you more color on this, but not today. But I ensure you, everyone here on the call, that our order intake has been solid here. And so we don't see any downfalls as we've seen at other machinery, equipment companies. But I need to postpone, really, to March 17 when I can give you more color on which regions were performing and how solutions compressors equipment are doing.

Okay. Then the very last one on the -- yes, no problem. And then back to Pavan and the write-down. Is there any change in your thinking around if Pavan is a strategic pillar of the group? Or might this open the door to any discussions also with outside interest and that potential asset after restructuring?

No. I don't think that we'll open the door to any potential divestment here. We are not saying that they are not strategically part of our group. We are simply paying the price which was paid at that point in time. It's not justified from the actual numbers and also when you look at the 3-year plan we are doing, and that was the reason for the write-off. They are strategically still part of the group. And I don't foresee this -- that we change our view on this.

And with the reset of the expectation for the business plan around Pavan, there's no change to the midterm targets presented at the Capital Market Day at this juncture?

No, there's no change to the midterm targets.

Our next question comes from the line of Nika Zimmermann from Deutsche Bank.

Just one really quick on the restructuring expenses you were mentioning earlier. You said something about EUR 500 million coming from Pavan and EUR 200 million less restructuring charges. I didn't quite get that. Could you just rewind that one?

Sure. No, I said EUR 5 million. I said EUR 5 million from restructuring plus EUR 47 million for the 800 FTE program. That makes, in total, EUR 52 million plus the higher range was EUR 55 million. So if you add this up, you come around EUR 107 million. And then I said we have EUR 2 million less restructuring charges than with what we did the calculation to come to the EUR 55 million. So then that's how we'd arrive to the EUR 105 million. It's EUR 55 million plus EUR 47 million plus EUR 5 million minus EUR 2 million in other restructuring charges.

And then -- that actually clarifies it a lot. And then just another thing. You also mentioned that you expect to be at the higher end of restructuring charges by end of 2022. Is that correct?

That is correct. We gave a range of EUR 210 million to EUR 250 million. And I said that we're going to be at the higher end of the range, and we will keep you posted while we're restructuring the company further.

And our next question comes from the line of Akash Gupta from JPMorgan.

Marcus, I have a few questions related to my model. So can you comment on restructuring cash outflow that out of this EUR 105 million, what should we put in for 2019? And what should we expect for 2020?

You should expect actually 90% for 2019 as cash out of the EUR 105 million for your model. And in 2020, we haven't made any announcement actually yet where the range will be. But it's -- yes, we're going to do this on March 17 here because there are -- there could be an additional charge in 2020 when selling companies, but that's still open. That will be noncash actually, too. So not going to give -- we can give you some more color on March 17, actually.

No, no, I mean my question was more on this EUR 105 million debt. Have you spent all EUR 105 million in terms of cash outflow in 2019? Or is some of that, of this EUR 105 million, would be coming in 2020?

Okay, sorry. That's what you mean. No, no. So it's -- in total, it's 90%, as I said, but we haven't spent this in 2019. So it's approximately 40% in 2019. As I said, we are not through the -- through everything yet in year-end close, can give you exact numbers on March 17, and then the remaining 50% points, I expect to see in 2020. There has been no payout here for the EUR 47 million for the 800 FTE, for example, or also not for the restructuring of Pavan of EUR 5 million yet. That answers your question, I hope, right?

Yes. And in terms of 2020 restructuring, is it fair to assume that now there could be a lower number of charges given previously you guided around EUR 110 million to EUR 120 million and now you are bringing forward some EUR 47 million. So is it fair to assume that 2020 could be down by a similar amount?

Well, 2020 could be down by an amount if we exclude the portfolio changes we are announcing. As I said, the EUR 47 million here is really an acceleration of the restructuring expenses that would come out, and we need to see actually what we have to do with our portfolio measures, which we announced that we are going to sell companies with revenue of around EUR 200 million. So I need to give you some more color on March 17.

Okay. And finally, on Pavan. I mean when the company was acquired in 2017, we were told it had EUR 155 million in annual sales. Can you give us some indication where does it stand today just to give some rough idea on how much sales have been down since GEA acquired Pavan?

Well, the sales have not been down. It's a question of profitability. So sales have been more than EUR 175 million in 2019, slightly above that number. So sales have not been down. It's really just a question of bringing the company back to performance, which is actually a good sign. That means that from a sales perspective, we are good. But it's a question here of performance management of the company.

Our next question comes from the line of Sebastian Ubert from Societe Generale.

I have a follow-up question on Pavan, not on the sales, but on the profitability level. In 2016, it was said it has generated EUR 29 million of EBITDA, so roughly 19% margin. How bad was then the situation in 2019?

Yes. Good question. But we are not disclosing any numbers further for Pavan. They are part actually of our segments. So it has been considerably deteriorated. That's all I can give you. But we will bring it back on track.

But is it still profitable? Or is it loss-making? Maybe you can at least comment on that.

Well, if you take out the restructuring charges, it's profitable on an EBIT basis. EBIT, E-B-I-T, okay?

Okay. And the last question on Pavan is also coming back to 2017. The goodwill generated those days, was it EUR 239 million? So how can you now write off EUR 249 million? Or what's the delta?

Yes. There was -- we had a 1-year -- as you know, after -- a 1-year window. And there were adjustments actually to the balance sheet, and that increased the goodwill to EUR 248 million. That's the simple reason.

And there are no further questions at the moment. [Operator Instructions] And no further questions are coming through, so I'd like to hand the call back to Marcus for closing remarks.

Okay. Thanks, everyone. Apologies that I cannot answer your question in regards to Q4. As I said, we're going to have the call on March 17 on our numbers for fiscal year 2019. But thanks, everyone here who is on the call and who's interested in what's going on with the company. And as I said, the group forecast is unchanged, the impairments we took were noncash, and we were able to accelerate your restructuring expenses in regards to our FTE 800 program. That's goodbye then for me. Thank you.