GEA Group Aktiengesellschaft (G1A) Earnings Call Transcript & Summary

Yes, good afternoon, ladies and gentlemen, and thank you for joining us today for our Full Year and Fourth Quarter 2020 Earnings [Audio Gap] With me on the call are Stefan Klebert, our CEO; and Marcus Ketter, our CFO. Stefan will begin today's call with the highlights of fiscal 2020 and give an update on our financial targets 2022. Marcus will then cover the business and financial review before Stefan takes over again for the outlook 2021. Afterwards, we open up the Q&A session in this call. As always, I would like to start by drawing your attention to the cautionary language that is included [Audio Gap] harbor statement as in the material that we have distributed today. And with that, I will hand it over to you, Stefan.

Thank you very much, Oliver, and good afternoon, everybody. It's my pleasure to welcome you to our [Audio Gap] conference day. I do [Audio Gap] you and your families are still doing well in this extraordinary time. We began 2020 convinced that our primary focus would be pushing ahead with our efficiency measures aimed at making GEA even stronger. Who could have predicted that we could be confronted by an entirely different set of challenges. The unexpected and overwhelming theme of 2020 was, of course, the COVID-19 pandemic. We were not immune to its impact, which affected all areas of life and the economy as a whole. Nevertheless, we turned GEA [Audio Gap] As a company, we reacted quickly to the situation. Already in January, we set up a global task force and rapidly took appropriate measures to ensure the safety of our employees and the continuation of operations, with our local teams organized at each site. We stated at our Capital Market Day in 2019 that our business model is robust and resilient and that we are operating in attractive end markets, and this proved to be very true in 2020. We implemented our new divisional structure. The shift went very smooth with almost no frictions. And it became very quickly visible that it was welcomed by our employees to assume responsibility again. We pushed for efficiency measures like our headcount reduction program, and we divested noncore and underperforming businesses like Royal De Boer, Japy and very recently, GEA Bock, in order to focus on our core activities. I'm also very pleased when looking at our margin development. EBITDA margin is up by almost 1.7 percentage points to 11.5%, already now at the lower end of our guided range for '22. And we achieved a net working capital to sales ratio of 7.9%. To put this into perspective, a level below 10% was not seen for at least 7 years, and we have set a new record low as well. Putting this all together, we are well on track to achieve our financial targets for '22. But more about that later. Let me summarize what we promised at the beginning of 2020 and what we have finally achieved. We issued our guidance for 2020 right at the time when the equity markets were at a peak stress level in March 2020. At that time, we were one of the few companies who issued a guidance at all. And we were often asked how reliable our guidance is or will be. Let's have a look at the facts. We expected organic sales to decline between [Audio Gap] The decline by 2.6% [Audio Gap] the midpoint of that range. For EBITDA before restructuring measures, we initially guided a range of between EUR 430 million and EUR 480 million. We upgraded the guidance twice, finally, to more than EUR 500 million. At the end, we reached EUR 532 million, far better than we initially anticipated. Excluding for currency fluctuations, the figure is even higher, coming in at EUR 542 million. Lastly, return on capital employed. And initially, we guided for a range of 9% to 11%, and we closed the year with a very strong ROCE of 17.1%. On the back of this strong set of results, we are proposing a dividend of EUR 0.85 per share. Coming to ESG, a very important topic for GEA and a topic that is really very close to my heart. We did not allow the pandemic to distract us from our efforts in conveying climate change and becoming more sustainable. At GEA, our products are already helping mitigate key global challenges, such as safeguarding global food supplies and conserving resources. As an international industrial solution leader, we take our global responsibility very seriously even in these unprecedented times and remain committed to our claim "engineering for a better world." Our climate protection efforts were recognized once again with an A-minus rating in 2020 in the prestigious CDP sustainability ranking. Moreover, GEA's effort in reducing its own water usage and its many customer solutions were also assessed by CDP for the first time in 2020 and were immediately awarded [Audio Gap] rating. We are also delighted by the fact that we listened right from the beginning -- that we listed, right from the beginning, in the new DAX 50 ESG index. As a strong signal, how important ESG topics are for GEA, we have published a stand-alone sustainability report for the first time today. Let me now give you an update on where we stand with regards to our journey to '22. On Slide 8, the EBITDA margin turnaround becomes very visible. The blue bars on the right represents the EBITDA margin before restructuring of the fiscal years 2019 and 2020. And the bars before 2019, the lower number represents the EBITDA margin before restructuring, however, not accounting for the IFRS 16 effect, which is only visible from 2019 onwards. To provide you a longer history as well as a better comparability, we added the IFRS 16 effect of 2019, which was EUR 67 million, through the according EBITDA before restructuring in the years before 2019. Thereby, we calculated the pro forma margin, which you can see at the upper end of the bars. So what does the graph show? The margin reached the trough in 2019 at 9.8%. In 2020, we shifted to the new organization and setup and implemented measures to sustainability-reduced costs. The result is that the margin increased in 2020 by 1.7 percentage points, and we are now back on a margin level which exceeds 2018. And as you know, our target is to go even higher driven by the measures which we have presented at our Capital Market Day in 2019. With this chart, we give you an update on the measures which we presented at the Capital Market Day in September 2019 and where we currently stand. The green loading bar shows you how far the measures are already implemented. Below, you see the approximate amount of savings of the entire program as well as how much was already achieved by the end of 2020. With respect to the operating efficiency, that's mainly the headcount 800 program. All measures are already implemented, and we are currently harvesting our remaining savings. That means you can expect a further contribution of about EUR 10 million in the current fiscal year. The footprint optimization has started and is on track. We are currently close to breaking ground for our new plant in Poland. Reallocation of production will start early next year. However, we have already seen some savings due to the transfer of production hours from Europe to China. At procurement, we are already reaping the benefits. Around half of the overall expected savings were already achieved in 2020, and we expect the remaining savings to be realized, almost evenly distributed, in '21 and '22. Coming to sales efficiency increase. With regards to this building block, we have already implemented many measures like appropriate incentive schemes and aligned steering of sales and service force, but did not see any positive P&L impact so far. The reason is that we need stronger top line momentum to see these measures really kicking in, and this was not the case because of COVID-19. However, the new incentive system already led to better contract negotiations, helping us on the net working capital side. Finally, ERP. This building block is of utmost importance for GEA, even if it is eating into our margin until it's finished. The reason is that the harmonization of our IT environment is a prerequisite for more efficiency processes. This all being said, and given that we have reached already the lower end of the range at 11.5% now, we upgraded our guidance for '22. All the benefits which we have achieved so far are sustainable, and we do not have to share them with other parties. And this also accounts for the savings to come. Therefore, we leave the upper end for the time being unchanged, but increased the lower end by 1 percentage point to a new range of 12.5% to 13.5%. And as you can see, we are striving for another margin improvement in '21. With that, I hand over to Marcus, who will walk you through the development of the full year as well as the fourth quarter 2020. And I will take over later for the outlook section again. So thank you.

Thank you, Stefan. Also, a warm welcome [Audio Gap] coming [Audio Gap] chart, let me wrap our fiscal year for the group on this slide. Starting with order intake. The decline by 4.6% was less pronounced than the industry average in the COVID-19 pandemic. It was predominantly driven by orders exceeding EUR 5 million in single ticket size. Furthermore, the longer decision-making processes at food and beverage customers result in a lower order intake in these industries. We still experience some hesitancy about our customers to place larger orders, but when looking at the development since the pandemic started, momentum has clearly improved. The decline in sales comes predominantly from our project sales as our engineers are often restricted in getting access to customer sites. Our product sales were much less affected, and our service sales even grew, adjusted for foreign currency effects. Stefan already mentioned our strongly improved EBITDA performance despite the top line headwind. And I'm very happy that the reasons for this EBITDA development are sustainable. We improved the gross profit margin by better executing orders, especially in the Liquid & Powder Technologies division as well as better pricing. At the same time, we improved our overhead expenses with our cost savings initiatives. And as you know, we are not yet finished. The better profitability and a very strong reduction of net working capital resulted in a higher return on capital employed. And this brings me to the next performance indicator, net liquidity. The reduction of net working capital, which we are fully convinced that it is sustainable, was [Audio Gap] for the increase in net liquidity by EUR 374 million to EUR 402 million and strongly contributed to a free cash flow of EUR 626 million. To sum it up, 2020 was a challenging year due to the pandemic, but nonetheless, we were already able to increase our profitability to the lower end of our EBITDA margin range expected for the year 2022. Let's move on to Chart [Audio Gap] EBITDA bridge and the individual profit drivers. Our EBITDA was strongly above prior year's level despite a decline in top line. The decrease in sales is due to a lower volume, which should not be a surprise. Also, the fact that this development came from new machines, predominantly from the project business, should also be no surprise. The contribution from margin, however, was very strong. Better execution, in combination with a better margin profile in our new [Audio Gap] resulted in the positive development, which you see on this slide. The strong improvement in SG&A resulted from factors you know from the Q2 and Q3 reporting, COVID-19-related savings in the form of lower travel and marketing expenses as well as cost savings from our earlier-implemented savings initiatives. The decline in other expenses is predominantly driven by the bad debt provisions of, in total, EUR 16 million for [Audio Gap] This, all summed up, brings us to an EBITDA before restructuring measures of EUR 532 million or EUR 542 million, adjusted for negative translational FX effects. Switching now from the full year to the quarterly view on Chart 14. Order intake in Q4 was guided down on a year-over-year basis, but up on a sequential view. Thus, we are back to a normal seasonality. The year-over-year decline by 7.9% on a reported basis was much stronger than the organic decline by 4%. As you know, the year 2019 was very strong, especially due to large orders. However, the momentum in orders has improved from the prior quarters across all customer industries and also including beverages. Pharma did not improve sequentially. As you know, from our Q3 '20 reporting, the respective quarter benefited from one large Pharma order related to the vaccine production for COVID-19. Sales were down by 8.2% year-over-year. Organically, the decline was just 4.1%. Still, the execution of some projects is impacted by the restrictions related to COVID-19. Therefore, the weakness arises mostly from the project business. Service sales were, on an organic basis, slightly up by 0.3%. Now service sales account for 34.1% of total sales, up from 32.7% last year. EBITDA before restructuring declined by EUR 8 million, but the margin expanded by 0.3 percentage points to 11.5%. Let me now turn to the divisions, starting with Separation & Flow Technologies. Order intake declined just slightly year-over-year due to FX movements. On an organic basis, order intake even increased by 4%. Dairy processing and Pharma was stronger, and food, coming from a very high level from last year's Q4, was a bit weaker. Sales were down by 9.8% year-over-year and on an organic basis, down by just 5.8%. This decline came almost exclusively from new machine sales as service sales were almost on prior year's level. Consequently, the service sales ratio increased to 44.2% from 40.4%. EBITDA declined to EUR 64 million from EUR 69 million as lower overhead costs were not able to fully compensate for the volume-driven decline in gross profit. However, gross profit margin continued to improve. Now let's move to Liquid & Powder Technologies. Order intake declined year-over-year by 18.1% on reported and by 15.4% on an organic basis. This decline is almost entirely caused by lower order intake of large orders defined as exceeding EUR 15 million in single ticket size. Last year, the respective figure was EUR 154 million. And this year, we had an order intake in this category of just EUR 74 million, less than half. However, we clearly see an improvement in order intake momentum compared to the prior quarters. Looking ahead, we do see some slight improvement in customer sentiment as many countries are emerging from COVID-19 lockdowns. For example, in Dairy, we see that the pipeline is getting better. We are in discussions with customers about larger projects, and solutions are sought to increase our customers' exposure to retail-like consumption. In the food channel -- in food, the channel for plant-based solutions is very lively. Also, instant coffee looks pretty good. Beverages is still softer compared to last year. The pipeline for larger projects is currently not that strong, but the pipeline for smaller projects is improving. All in all, the sentiment for order intake is getting better. Sales declined by 9.1% year-over-year on a reported basis or by 5.4% on an organic basis. Despite the backlog at the beginning of the quarter being above the prior year's level, travel restrictions as well as restrictions to get access to the sites of our customers were challenging to generate a higher sales figure. Organic service sales were down by 7% year-over-year. The service sales share slightly declined to 23.4% from 23.8% in Q4 2019. EBITDA before restructuring measures increased to EUR 44 million from EUR 40 million year-over-year. The respective margin increased to 9.9% from 8.2%. The improvement was caused by higher gross profit mainly due to better order execution as well as better margin quality in our order backlog. As a result, also gross profit margin improved. Let me now talk about Food & Healthcare Technologies. Order intake declined by 4.3% year-over-year or 2.8% organically. While the Pharma business is slightly up versus prior year, food was down driven by some project delays. We do see some customer industries' activity picking up, most notably, Pharma. Sales were down by 10.1% year-over-year on a reported basis. Organic sales were down by 8.6%. The decline is due to Q4 '19 being a strong comparison, and as you know already from our Q3 '20 reporting, COVID-19 affected the execution of some projects. Reported sales -- service sales, however, increased by 1.4% year-over-year or by 3.4% organically. The service sales share increased further to 28.2% from 25% last year. EBITDA increased year-over-year to EUR 21 million compared to EUR 19 million prior year. The according margin improved to now 9.1% from 7.5%. Gross margin [Audio Gap] is due to better execution. Overhead costs were down year-over-year. Moving to Chart 18 to Farm Technologies. As in the prior quarter, it is the only division with an increase in order intake. On a reported basis, order intake improved year-over-year by 7.6% and organically, by a whopping 16.5%. We experienced good order momentum from North America, Germany and Russia. The overall positive trend for automated milking equipment has continued and was accompanied by high menu order intake in North America. Sales declined year-over-year by 4.4%, but on an organic basis, sales increased by 2.6%. Some headwind came, especially in Q4 2020, from the discontinuation of a product line in barn equipment, affecting especially our sales in North America. Service sales were down year-over-year by 3.3%, but this was only due to FX effects. Organically, service sales were up by 4.5%. The service sales share increased to 43.2% from 42.7%. EBITDA declined to EUR 20 million from EUR 22 million year-over-year as the decline in gross profit could not be fully compensated by lower overhead costs. Finally, we are now turning to Refrigeration Technologies. The decline in order intake by 21.3% year-over-year on a reported and by still 17.7% on an organic basis is mostly due to postponements of orders in the project business. The good development in Q3 '20 was due to some pent-up demand. However, due to postponements, the pipeline looks promising, but the visibility is still limited due to COVID-19. On a reported basis, sales declined year-over-year by 9.8% and on an organic basis, by 5.2%. Besides the challenges resulting from COVID-19 in the form of restrictions for travel and access to customer sites, also a significantly lower starting backlog compared to last year, was a drag to sales. Service sales declined organically by 3.7% year-over-year, which is predominantly driven by a weaker oil and gas business. The service sales share, however, increased to 36.6%, up from 35.7% in last year's quarter. EBITDA declined to EUR 13 million from EUR 18 million a year ago. As gross profit remains stable, gross profit margin increased, supported by favorable mix effects. However, overhead costs increased due to higher FX effects as well as the impact from the bad debt provisions and negatively impacted EBITDA. Let's now continue with net working capital on Slide 20 [Audio Gap] able to reduce our net working capital to a record low. On a year-over-year view, our net working capital position improved outstandingly by EUR 315 million or 6.1 percentage points compared to sales. Just 15 months ago at the [Audio Gap] Q3 2019, to be precise, we were at the all-time high of EUR 941 million or 19.2% of sales. Now we stand at EUR 367 million or 7.9% only, which is even considerably below the record low of 9.4% as per end of Q4 2014. This is a great achievement, and I'm proud that we have reached such an improvement in a short period of time. We are convinced that this improvement is sustainable. Therefore, we update our medium-term guidance for the net working capital to sales ratio to 8% to 10%. Coming now to another important topic, cash generation. Despite all the operational challenges related to COVID-19, we generated an operating cash flow of EUR 328 million in Q4 alone and EUR 780 million in the fiscal year. This is a great achievement. And the only reason why it is below last year's quarter level is that, in 2020, we were able to structurally reduce our net working capital already in the quarters 1 to 3. This is reflected in an operating cash flow, as I said, of EUR 718 million for the whole year. Cash outflow related to CapEx is with EUR 43 million, EUR 16 million less negative than last year due to lower investments into our global SAP project, but that was only for licensees. In the net financial cash bridge is one item which is unusual in timing, the dividend. Normally, it is paid in a lump sum in Q2. But this year, we paid the first half in Q2 and the second half after our rescheduled AGM in November. To sum it up, as a result of our strong net cash flow, our net cash position at the end of Q4 2020 improved by EUR 374 million to EUR 402 million. This strengthens our financial position further, which I will discuss on my next slide. Let me now talk about our financial headroom, a key topic in the current environment. On the left, you see our available cash credit lines as well as their respective utilization and maturity structure. Of the EUR 381 million credit facilities expiring this year, EUR 300 million have [Audio Gap] up due to the uncertainty arising from the global pandemic. These [Audio Gap] consist of EUR 100 million credit line with the European Investment Bank and a EUR 200 million syndicated credit line, the latter one [Audio Gap] including an option of 1 year. The other EUR 81 million constitute evergreen credit lines. Potential prolongations of aforementioned cash credit facilities depend on actual capital requirements and will be decided in due course. Regarding the syndicated credit line of EUR 650 million expiring in 2022, we will initiate extension measures to secure the financial headroom of GEA shortly. We expect that our current investment-grade rating will enable us to prolong credit facilities at favorable conditions. Continuing now on the right side of the slide. The only KPI which slightly weakened compared to last year's Q4 is the equity position as our dividend exceeds our reported profit for the period due to restructuring expenses. All other KPIs have improved partly significantly compared to last year's Q4. In particular, the positive development of the net position driven by net liquidity improvement of EUR 374 million in Q4 alone should be emphasized here. I can only repeat what I said in the past calls. GEA is very solidly funded on a diversified financing structure. Finally, I want to explain a more technical controlling topic, which we already addressed at the Capital Markets Day in September 2019. You may remember that we have some entities which include businesses related to 2 or more divisions. These so-called zebra entities are now, as of January 1, 2021, and therefore, earlier than originally expected, split up into several profit centers which are allocated by their business to their respective division, as you can see here on the slide. This leads to a higher transparency at a division level. On a group level, there's no impact at all. You'll find a slide in the appendix of our presentation with the respective impact on sales and EBITDA on a division level. However, this makes the KPIs per division a bit harder to compare with prior year's numbers. Therefore, we will explain these differences in each quarterly call. With that, I hand it back to Stefan.

Thank you, Marcus. Let me now come to our outlook for the fiscal year 2021 and some other topics. Let me start and share with you the latest value-added output forecast for our customer industries and industrial production based on the data from Oxford Economics and IFCN. In 2020, some of our customer industries were impacted by COVID-19, namely Beverages and Chemicals, and to some extent, also food, whereas the latter just grew a bit slower and did not see a decline in output growth. Pharma was not affected by the pandemic, and also, both Dairy categories held up well. Looking forward into '21, estimates have recovered from the short-but-hefty dip after the breakout of the pandemic in early 2020. Oxford Economics now expects a recovery of value-added output growth in '21. For most of our customer industries, this translates into growth rates in the mid-single digits. Only a Dairy Farming and Dairy Processing value-added output is expected to grow slower as these customer industries did not deteriorate in 2020. In the opposite, they even grew. This development shows how important both Dairy categories are for our daily nutrition. I do believe that this picture perfectly represents the attractiveness of our customer industries. Even during a pandemic, they hold up relatively well. According to the data of Oxford Economics and IFCN, the impact of their growth patterns is very limited and followed by an immediate recovery. So how does this translate into our guidance for the fiscal year '21? This is what I will discuss with you on the next slide. Following the solid development in fiscal year 2020, we expect demand in our sales markets to improve slightly as a result of a global economic recovery, while global megatrends remain supportive. Specifically, we aim for a slight organic growth in 2021, translating into a quantitative range of 0% to 5% growth. For EBITDA before restructuring measures, we guide for a range of EUR 530 million to EUR 580 million and for return on capital employed, a range of 16% to 20%. The forecast presented does not reflect a renewed sharp rise in infections or new virus mutations, which could lead to another lockdown with an associated negative impact on global economic growth. Please bear in mind that the guidance for EBITDA and for ROCE is based on constant exchange rates. Let me now come to our key priorities for '21. First is our continued focus on operational efficiencies. Even though there is no new cost-cutting program, there is a clear message from the top to the divisions, regions and departments to look for cost-savings opportunities [Audio Gap] We are challenging continuously our managers on that topic. Priority two is global SAP. As already explained at the beginning, a harmonized IT landscape, a single source of truth, is a prerequisite for more efficient processes and analysis. Overall, the project will last until '25, but already, this year, we will start with Template 1 rollout. Third is our footprint optimization. We are breaking ground in Koszalin very soon this year in order to extend our production in Poland. This is part of our strategy to further strengthen GEA's global production network in order to increase productivity and reduce the cost base. Last but not least is ESG. Even though we are on the right path to reduce CO2 emissions and water consumption as recognized by the CDP and as the inclusion of the -- in the DAX 50 ESG shows, we need to do more. Therefore, it is a key priority for us to review our ESG targets along an ambitious sustainability framework. Now a few words on our road map for '21. Next is our Annual General Meeting on April 30, and on May 11, we will present our Q1 '21 numbers. On September 28 and 29, we will host our Capital Market Day, and I hope that we will be able to meet all of [Audio Gap] at a nice location. I just mentioned the Capital Market Day in September. We are often getting the feedback from investors and analysts that we are on a good track to deliver on our promises for '22, but at the same time, they are telling us that '22 is just around the corner and that they are interested to learn more what our plans are beyond '22. We call it [Audio Gap] and we will present and explain it to you in detail on our Capital Market Day in September, so stay tuned. With that, I hand it back to Oliver for the Q&A session.

Yes. Thank you very much, Stefan and Marcus. And the operator, I return the call back to you and ask you to [Audio Gap] for the Q&A session.

[Operator Instructions] Now our first question comes from the line of Klas Bergelind from Citigroup.

So a couple from me, and I will take them one at a time. The first one is on the moving parts in the bridge for 2021. It feels like we will have around EUR 20 million of incremental savings, some EUR 10 million from procurement and then perhaps another EUR 10 million from the 800 program, the tail end of that. And then it's obviously up to us to reverse the temporary savings, which will be tricky. But on general cost inflation, am I right to assume that you won't see much wage inflation this year and can you -- and that you can handle raw materials quite well? So the question is on incremental savings 2021, on people leaving and then procurement and then underlying cost inflation.

This is Marcus. So we see that, overall, there will be some travel expense, of course, coming back, probably not in the first quarter, perhaps not even really in the second quarter, but in the second half of the year. So there, we don't know how much will be coming back. There will be something coming back, at least. But on the other hand, we have additional savings from our Headcount 800 program. And we will also have more savings from our purchasing programs. What we have seen so far, of course, is that steel prices were up, but we were able actually to have a mid-single-digit savings in our purchasing of steel so far. But let's see where the steel prices will be going. We don't expect actually right now that it's going to be too bad for us there. We will -- we're also expecting that there will be an increase in salaries this year, slightly above 2%, I would say, but that's going to be factored in our case from April 1, not from January 1. So all in all, in [Audio Gap] parts also for us here, but we think that with the full year effect, what we're going to see at Headcount 800 program, with our purchasing project, we can keep our cost increases in line. And of course, additionally, we have better execution of our new machine business and will increase our service profitability further.

Yes. So Marcus, I just want to clarify. So EUR 10 million from procurement maybe and maybe EUR 10 million from the 800 program, yes, so we get the gross savings, right, and then we can reverse on our own, the other stuff.

Yes. Exactly, yes. So I would say, at least EUR 10 million in both cases.

Okay. I mean perfect. Then my second one is on Slide 9 and the sales efficiency improvement that is yet to come through. And I guess that this is linked to the split of zebra, increased decentralization, accountability and so forth. But can we talk about the progress, the concrete actions? And if we should expect anything from the fourth in 2021? Or if that is more for 2022, when we will likely have even stronger organic growth?

Yes. Hi, Klas. Stefan speaking. I think the majority of this program, which we are working right now on, might kick in, in '22. So it is rather that we are looking at the moment really in detail at our sales force structure. So we are really going [Audio Gap] every country, in every business, do we have the right setup, how are the people steered, what is the minimum turnover we expect from one sales rep. And the second step is now to look at the back office, how [Audio Gap] do you know that we have a very decentralized structure, so we expect that we can cluster teams here together and using synergies here. This is what we are working on. It's very clear that our sales costs, we are actually still having. They are too high. We think we can do it with lower cost. We can generate here some savings and at the same time, increase efficiency in sales and put more power to the sales organization. And this is what we are working on. But the full effect might come then in '22.

Okay. Not like I thought. That's good. My very last one is on revenues. So we have the organic component certified, but also, if I could get a feel for the divestment impact and currency. Are we talking 2.5% negative from divestments and perhaps 1.5% to 2% from FX? And then I want to squeeze in a final one on the divisional guide. I mean last time, you had a slide where you guided on the divisional development, how each division should likely fall through the year. Obviously, tricky to predict exactly. But when you look at -- in the growth environment and your guidance, it feels like FHT and Farm Tech should drive this versus flattish growth elsewhere. Or are we expecting the project delays to ease on the project side, and that should then be the main driver? Just to understand the composition there.

So we released a guidance for all the divisions in our annual report, which is also public from today on. So you can doublecheck it here as well. So we see a rising business in LPT, in FHT and in Farm Technology, while we see slightly declining in SFT and in RT. But if you're...

I'm talking more about the, roughly, the magnitude that -- I mean, I know that -- I saw that, but in terms of like the relative momentum. But maybe you don't want to stretch to that.

What do you -- I don't understand your question. What do you really mean by that?

No. No, the -- how much growth in each, but maybe...

Okay. We guide a slight rise, a slight rise, slightly rising, which is always in our terminology between 0 and plus 5. But further details, you can find on our annual report, Page 120.

Hey, Klas, coming back to your question before, what are the M&A effects, just quick numbers here. So when you look at Japy and Royal De Boer, together in '19, that's EUR 45 million in sales, and there was a low single-digit loss there like EUR 1 million. And GEA Bock, which was sold, had sales in '19 of EUR 90 million, 9-0 million, and a positive EBITDA in '19 of EUR 9 million. Yes?

Yes. Clear.

And our next question comes from the line of Arsalan Obaidullah from Deutsche Bank.

2 questions from my side, one is looking out to '22. Obviously, you've sort of upped the bottom range of your margin guidance. Just curious about the top end of the range. As having a quick kind of flick through, correct me if I'm wrong, the individual divisions, you seem to sort of suggest a more positive margin target going by division. So I'm just wondering why that, necessarily, you haven't thought about it yet, translating that to maybe moving the top end up for the group as a whole.

Well, we -- as we said also in prior quarterly calls, I mean, we give our targets where we think -- which should be ambitious and which should be reachable. At this point in time, we said we feel quite comfortable actually moving the lower end of our guidance range in '22. We don't think that's still the pandemic going on. This -- we do not have the, let's say, the visibility yet to really be able to move also the upper end of the guidance range. That might be actually something for later this year. But at this point in time, we are just moving the lower end.

Great. And my second question is on sort of the share of service versus equipment. So looking across the divisions for the quarter, it was, I think, other than Liquid & Powder, which the share went down, I think it all went up. And so I'm just wondering how do you see this sort of profiling going forward given that, obviously, equipment sales will pick up next year? Do you sort of see that potentially sort of flattening out or in the direction of travel in terms of the share of service across that, I mean, generally?

I mean -- yes, yes. I mean you know that in the new organization, we anchored, in each division, our Chief Service Officer. That means that we are really having a clear focus on the service business because we know, and as we all know, this is an attractive business because it's very stable and it's also generating good margins. And of course, we want to increase our service business. However, you know that the absolute volume of service is always much lower than the absolute volume of a new installment. And therefore, we think that we might see a chance to slightly increase also the percentage of service. But if we can keep growing in both directions, I think that will also help us to improve our profitabilities.

And your next question comes from the line of Max Yates from Crédit Suisse.

Just my first question was around free cash flow for next year. And you've obviously given us some of the moving parts. How do you think about exceptional charges for 2021? And any sort of comments around where you think free cash flow could settle for that year as well would be helpful. That's my first question.

Yes. We're going to -- we're also going to be -- got positive this year, of course, not as much as in '20. So before the recent -- because we certainly will not be able to reduce -- will reduce net working capital as much in '21 as in '20. But including all the charges for restructuring and so on, we expect to see 200 -- around EUR 250 million-plus in free cash flow. And also, we [Audio Gap] to add on that a bit more CapEx than in the last year due to further investment in our global SAP project and also in the manufacturing footprint. We're going to be at the upper end and even above the 3.5% we guided.

Yes. Yes. Okay. And then just secondly, when you -- obviously, your guidance that you've given on EBITDA is ex FX. So could you give us a feel for what you think the FX impact would be on EBIT? Taking into account both your translation and transaction FX headwinds, should we assume sort of similar to last year, sort of low-20s million? Or how do you see that at current spot rates?

Yes, it could be. It depends on mainly where the U.S. dollar-euro exchange rate will go. If the U.S. dollar stays at around 1.20 to 1.22, we might see up to like EUR 20 million negative impact on our EBIT. That is possible, but we also increased prices, service prices, in the U.S. So we are trying to actually countermeasure that. But of course, price increases to countermeasure FX devaluation will never be completely so.

Okay. And maybe just the third question. Your balance sheet is obviously sort of pretty strong today compared to a few years ago. So I just wanted to understand sort of how you think about sort of utilizing that balance sheet. Should we expect some more activity on M&A in 2021? Or kind of should we think that actually maybe some of this money starts coming back to shareholders? I just want to understand kind of current perspectives on M&A.

Yes, Stefan speaking. I mean I already mentioned that we -- after the turnaround is made, we, generally speaking, would feel strong enough to make acquisitions if we would find the right targets, but we definitely don't feel under pressure to do so. That's also very important to mention. And we are looking out. We are looking around what kind of targets would be available. We want to keep the strength of the balance sheet to be prepared once the right target is available. But we do not feel any pressure to act immediately, but we are looking out, and we are prepared to shoot once the right deer is coming out of the forest.

Because I mean, I know you've commented on sort of size before, that you would rather -- sort of you're not sort of a big fan of doing. There are lots and lots of smaller deals. But just to understand, actually, maybe a bit more around what areas you're looking at, do you see any sort of specific white spots or particularly interesting areas, either by division, product area or region, that you would really like to add to as you sit here today?

I mean if you look at our portfolio, you see also that we have different levels of profitability within our portfolio. So we definitely like the component business. That's very clear. We definitely like businesses where we have a continuous service share and service flow. So this might be, of course, more the areas in which we are looking.

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

The first one would be around the demand side of things. You said in the introductory statement that the food and beverage momentum has clearly improved lately, and that clearly, 2020 was a slow decision-making overall. Can you comment on the pipeline for the group overall and how it has trended since, say, quarter 2 2020? And also, said around that very topic, the pipeline development for Dairy Processing in particular and the same goes really for the service business, have you seen that, there, the appetite from customers has increased and improved in the more recent past? And how would service, generally speaking, compare with the outlook statements to the top line guidance for the group of flat to 5% up?

I mean we can say that we had a quite good start in the year '21, so we also expect a good Q1. That is valid for order intake and for sales and also for profitability. So we have no, let's say, indications why we should do not good. So this is really starting very good. The pipeline is solid, I would say. And of course, larger [Audio Gap] longer time. And there might be a -- let's say, that the situation that we don't see at the moment, so many [Audio Gap] but they are also at the horizon, which we can -- what we can see. And as I said, when we look to the expectation of [Audio Gap] expect a really solid Q1, which will not hit the excellent Q1 of last year, of course, but which will be on a very comparable level, I would say, compared to Q4.

Okay. And when it comes to the pipeline and how it has trended, so my -- the impression from earlier calls really is that the pipeline has continuously moved up the ladder. And we have seen it at other industrial companies, clearly, that it's taking some time until this has really unleashed that potential. And my question simply is to what extent really the pipeline is up and ideally also by what magnitude. And I think that very, very much goes back to the Dairy Processing part of my question.

Yes. I mean as you know, we were not so much hit by the economic downstream. So our pipeline was always quite solid. And this is also how we can see it here now. And this is not that we expect any negative impact. I mean we also see, in the pipeline, as I mentioned before, a pickup [Audio Gap] of projects there. And this, with the larger project, is always a question when will they come, but I can definitely confirm that our pipeline is solid and strong. And as I said before, we started very good, and we expect a good Q1.

Okay. That sounds good. And the other question was around service. Can you comment on that one and how that compares really to the 0% to 5% sales outlook for the group?

Yes. Service, we are stable as well. And we, of course, whereby the corona restrictions, somehow, yes, in some [Audio Gap] we could not fulfill all the services because there were several restrictions. The majority of our service business are spare parts. So there also might come, once the travel restrictions are gone, there might come a bit the additional service business back. So this is also where we are quite optimistic.

Sounds encouraging. And then I have one for Marcus around working capital and clearly, was an impressive development over the course of the year 2020. I think going back to what's happened in the past, that was very much, I think, stricter monitoring as one key lever here and then also the reflection in the KPIs of your sales staff. If we think about this 8% to 10% target quota going forward, does this already cater for certain net working capital buildup eventually in the wake of the guided sales growth? And then how should we think about a particularly higher contribution going forward, very likely from the plant engineering business, which goes back to the project activity that we talked about before. Because that has higher prepayments, and I would usually assume that this should also bode well for the working capital then.

Yes. I mean of course [Audio Gap] bigger projects we get in at LPT or at the project business at Refrigeration Technology the low. We will be able to reduce our net working capital. So the 8% to 10% guidance does not imply that we are guiding a net working capital uptick here in this year. We just need to see actually how things are evolving now, how big projects are coming in, how advanced payments are going, how are projects further here in purchasing, with extending accounts payable payment terms, for example, and so on are kicking in to reduce it now from 12% to 14%. We still have a very strong monitoring on our net working capital and do not expect that this means an uptick here in net working capital. But there might be fluctuations between the quarters, of course, and therefore, we chose 8% to 10%.

[Operator Instructions] Our next question comes from the line of Madhvendra Singh from BofA.

If you could talk about the -- if you look at the savings you have achieved so far, and if you look at the opportunities in the business as you continue with your overall savings program, do you think there is upside to the numbers you have guided for 2021 and maybe 2022 as well? And what we have seen is that, even for 2020, you did guide for just about, I think, EUR 500 million of EBITDA, right, but you were able to deliver much, much better EBITDA than that. So when we look at the -- your guidance for next year, how much of -- how much should we discount for the cautious approach you would typically take on the guidance? Should we think that the higher end actually is more likely than the lower end?

Yes. I mean that's -- we understand this question. But look, on -- we are delivering good so far. We are good underway. And [Audio Gap] is what we see as a really realistic number. So we have, of course, also this year, other effects kicking in. The corona pandemic is not yet over. Nobody knows how the situation in 2, 3 months will be with all the virus mutations. So there's a lot of uncertainty still in the market. I mean what we clearly showed and what we proved, that we have a very resilient business model, that we are very good in delivering our performance improvement and that we are growing year-by-year in terms of profitability. I think that's the most important message. Let me just maybe make one thing clear because I said before that we expect the Q1 similar like Q4. This was -- this statement was based on order intake, not on sales, just to be clear [Audio Gap]

And if you could talk about the savings program, is there more room for further savings as well beyond what you have guided?

I mean we are trying everyday to see where can we find additional savings. But I know that this type of questions are always very interesting. But let's -- we walk our talk, and this is what we promise and this is what we will deliver.

In terms of the overall -- the -- going back to a more decentralized model, but still keeping the benefits of, let's say, a more integrated business as well, how far do you think you are from reaching that optimum level of the group structure? Do you think most of it is done now, and in 2021, that's when you actually see the delivery of all the progress you have made so far on the group structure?

Yes. I mean we changed the group structure completely with the 1st of January 2020. And all managers took over [Audio Gap] 2020. We managed the whole year 2020 in the new organization. So the organization is done. It might be always that we are doing some smaller [Audio Gap] changes, but we can say that the new organization is fully implemented.

Your next question comes from the line of Sebastian Kuenne from RBC.

2 questions here. First, on working capital. So working capital has done really strongly in Q4, which is great. But then this would also mean that those components went through the P&L at their low purchase costs. And now, we see a massive cost inflation for steel of 100%, stainless steel 25% up since August. What headwinds do you now see for the coming year from those cost increases? What do we have in your budget? That would be my first question. Secondly, pricing was very strong as I see last year. So accounting for almost the entire EBITDA increase, would you say that you still had some fully priced projects in 2020 which would then mean you still have some incremental pricing effects for 2021? Or was 2020 already on a really tight, let's say, budget for your sales departments, where they really had to focus on good margins and so on? So do you think you can still see some mix effect in 2021 on the EBITDA? That would be my second question.

Yes. So far, we -- I don't -- we don't expect, due to the contracts we have in place, we, still, we do not expect to see any major or material headwind in the first and the second quarter of this year. We are now more looking into the second half of this year when contracts are expiring, which we have in place. There could be a more material effect actually coming in the second half, but it will depend on also what kind of countermeasures we are able to achieve in purchasing. But when you take a look at steel prices alone, that could have a material cost effect there. We don't see that this will happen, for example, with copper because [Audio Gap] that copper in our products. So it's more on the steel side. That would be pretty hard to quantify, actually. But for the first 2 quarters, we are still saying [Audio Gap] to purchasing this year.

Yes. Sorry, sorry. Just to follow up on this one. Ignoring hedging and contracts on an annualized basis, you now know what the steel prices have done in the past months. Can you quantify the impact regardless of hedging, hedging then on top, of course.

We don't hedge these new prices in that sense. We have a contract with fixed prices in place there.

Yes. If you had to roll those contracts today, what do you think the annual impact would be, if you have a rough number there?

No, actually, we don't have a rough number. As I said, we are looking into it for the second half of [Audio Gap] what that actually could mean. We usually are also not buying tons of steel. Steel is actually incorporated in a part of the product which we are buying there. So -- and that will depend actually what also our supplies for these -- part of the products are doing then. So it is not that we are just buying raw steel, and we can actually make a judgment how that means, what that effect would be.

Understood. [Audio Gap] And on the pricing?

On the pricing, I mean, let's say, we are, of course, also continuously working on the [Audio Gap] there. The full effect is not yet reached, I would say. There is always still some potential, which will kick in, and it's a continuous exercise. We are also -- have -- we also have a lot of initiatives in place to make sure that all our cost savings, which we generate in purchasing, remain in our margins and that are not going out. So many, many teams are working on that in calculations to ensure that we are not giving away the savings. So this is well underway, I would say, but it always can be still a bit better and a bit higher. That's what we are working on.

And maybe a last question also on this subject, on the pricing. It was, for many years, a problem for GEA to really improve prices. Did you change something in the remuneration of your sales team? Did you -- what did you tighten there? Why are they now able to push these price increases through? What has changed?

Yes. I mean that's a good question. In the past, the GEA sales organization was incentivized -- or the majority of the sales organization incentivized by volume only. We changed that already, end of last year. And meanwhile, the vast majority of our salesmen worldwide are incentivized by volume, margin and terms and conditions.

And your next question comes from the line of Lucie Carrier from Morgan Stanley.

I have 2 questions, and I will go one at a time. The first one, I was hoping you could go back to the revenue guidance on slight organic, 0% to 5%. I just would like to understand a little bit better the moving part because if we are looking at the order intake, you are ending 2020 with a slight organic decline. And usually, we cannot see roughly 12 months across the growth type of conversion from order intake into the revenue that you generate the following year. So I was just trying to understand, on that basis, why are you confident around the organic growth, potentially even up to 5%. Is it because you expect a strong pickup of service, which is not maybe in the order intake? Or is it maybe some shorter-term, faster turnaround project, maybe in the pharma industry on the back of the COVID vaccine production? Just to try to understand the rationale here because that doesn't seem to match the historical pattern.

I mean the average turnaround of our backlog is about 6 months, not 12 months. That's the first, maybe very important information. If we look at business in SFT, for instance, a component, so this is rather 3 to 4 months service, of course, sometimes even lower. So this is what makes us very optimistic that we can achieve the target.

Okay. I didn't mean the turnaround of the backlog, but usually, the order intake in 1 year tends to be very close to revenue in the following year. That was kind of just my observation. But okay, fair enough. And my second question was around a thematic that we hear specifically at the moment from U.S. companies, but I was wondering if you were seeing any benefit from that. We hear a lot of companies talking about reshoring of production capacities, especially in the health care industry, but also, to some extent, in food and other industries. And I was just curious to know whether you were seeing already some of the strengths across your business, maybe specifically in North America.

We don't see any impact on our business on these reshoring activities.

And your last question comes from the line of Sebastian Growe from Commerzbank.

It has actually been answered. Sorry, I couldn't remove myself from the queue.

All right. Okay. So if there are no questions anymore, let me make some summary or some closing remarks. I mean what is important -- what is the important takeaway, I would say, firstly, GEA has achieved a clear turnaround despite the pandemic, which is unfortunately still here. And GEA is back on the upward trend. I hope and I think that you can clearly see that in our numbers here. Secondly, the Q1, which is, I would say, almost at the end, with 10 months, let's say -- 10 weeks, and we expect good numbers. We expect the order intake, to say a bit more precise, slightly below EUR 1.2 billion and sales clearly above EUR 1 billion. And we also expect a higher margin compared to the Q1 last year. So -- and thirdly, we have increased our midterm targets and margins. So we expect now to be, '22, in a range between 12.5% and 13.5%, and we will give you an outlook called Mission 26 at the Capital Market Day in September this year. And we will tell you what is GEA good for in the medium- to long-term run until '26. So thank you very much for your interest in GEA. And stay healthy, and have a nice day.