GEA Group Aktiengesellschaft (G1A) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the GEA Group Q2 2022 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Oliver Luckenbach, Head of IR. Please go ahead.

Yes. Thank you very much, operator, and good afternoon, ladies and gentlemen, and thank you for joining us today for our second quarter 2022 earnings conference call. 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 the second quarter, and Marcus will then cover the business and financial review, followed again by Stefan for the outlook 2022. Afterwards, we will open up the call for the Q&A session. As always, I would like to start by drawing your attention to the cautionary language that is included in our safe harbor statement as in the material that we have distributed today. And with that, I hand it over to you, Stefan.

Thank you very much, Oliver, and good afternoon, everybody. It's my pleasure to welcome you to our conference call today. Let me start with a quick review of the second quarter of 2022. We guided for EUR 1.3 billion to EUR 1.4 billion order intake, and slightly exceeded the upper end of that range with EUR 1.403 billion, a growth of 8.5% or 6.7% in organic terms year-over-year. Sales grew organically by 8.9% year-over-year, the strongest organic sales growth rate for about 10 years at GEA. What makes me proud on this number is the fact that it was achieved despite ongoing shortages in our supply chain. I think it's a great result. This organic sales growth translated into an increase of EBITDA before restructuring expenses by EUR 13 million to EUR 167 million. However, despite the cost headwinds from raw material prices, wages and travel expenses, the margin slightly declined by only 0.1 percentage points to 13.2%. Without the Ukraine war, EBITDA before structuring expenses would have been higher by a mid- to high single-digit million euro amount. Last but certainly not least, return on capital employed. We reached 29.7% on a last 4 quarter basis, an improvement of 8.3 percentage points year-over-year and very close to the upper end of the guided range of 24% to 30% for the current fiscal year. So in total, despite the challenges, we were able to generate a solid top and bottom line performance. And if the current external headwinds such as the war in the Ukraine did not existed, the quarter would have been even better. Thus, we confirm our guidance for the group for fiscal year '22. However, we have some minor shifts on the divisional levels, which Marcus will elaborate on. Let me now provide an update on our share buyback program, which we started last year in August. We resumed the second tranche of the program on 6th July '22. The tranche has a volume of EUR 170 million, which will be spent until the end of this year. The purpose of the buyback program has not changed. We intend to hold the shares as treasury shares, and by doing so, we keep full flexibility. So far, as per 30th of June '22, we have spent about EUR 130 million for EUR 3.2 million or 1.7% of the outstanding shares in the first tranche as per 30th June '22. As per 9th August, the total volume of repurchase shares increased to 4.3 million or 2.4% of the outstanding shares. This second tranche has furthermore an ESG feature. At a share buyback program, executing -- the executing broker guarantees a discount to the volume-weighted average price of VWAP, we decided to donate part of that discount to Viva con Agua, with whom we entered into a 3-year partnership. Viva con Agua is a Hamburg-based charity which promotes access to clean drinking water, sanitation and hygiene. GEA is the first company in Germany, embedding an ESG feature in a share buyback program. We have furthermore linked our main credit line to the achievement of ESG-related targets, which Marcus will explain later on. Now I would like to address a topic which we were very frequently asked about in the most recent weeks. How would a possible power shortage impact our production. Fortunately, natural gas is mostly used for heating purposes at GEA in Europe. Only a minor part of our production currently uses natural gas, such as paint shops, acceptance tests, or the washing of cars. Electricity based solutions are being established for the case that natural gas will not be available anymore. Thus, the direct risk on our ability to produce is very limited. What might happen to our suppliers or the entire supply chain, including logistics, however, is not in our hand. A reminder, our entire energy bill for the year '21 was around EUR 20 million, and we expect this number approximately to double in the year '22. A headwind, which is digestible by our guidance. With that, I hand over to Marcus, who will lead you through the financial details of the quarter.

Thank you, Stefan. Also a warm welcome from my side. Starting with the headline numbers of Q2 2022. The organic increase of order intake was 6.7% year-over-year with large orders contributing positively to that growth rate. Two large orders were booked in Q2 2022 with a total volume of EUR 52 million. In last year's Q2, we only booked 1 large order in the amount of EUR 80 million. As Stefan already mentioned, organic sales were satisfactory. On an organic basis, sales grew by 8.9% year-over-year, driven by both new machines and service sales. The organic sales growth translated in higher EBITDA before restructuring expenses, which improved to EUR 167 million. The respective margin, however, decreased slightly by 0.1 percentage points to 13.2% due to wage increases and higher travel expense. Let me give you also some color here on our gross margin. Gross margin reported for the second quarter was 32.7% million. Last year's quarter was 33.7%. So that looks like a 100% -- 100 percentage points -- basis points -- sorry, basis points decrease. However, that's not the case. You need to see that there were approximately EUR 20 million restructuring expenses in the gross margin related to the global manufacturing footprint project. So neutralizing the EUR 20 million restructuring expenses, gross margin adjusted, so to speak, then without the research expenses, was actually 34.2% in comparison to last year which is an increase of about 60 basis points. So the swing in total is 160 basis points, neutralizing the restructuring expense of EUR 20 million in the gross margin. Due to the further improvement of capital employed and EBIT during the last 4 quarters, ROCE considerably increased. The high profitability translated into higher cash generation and thus resulted in the increase of net liquidity by EUR 61 million to EUR 264 million. In addition to that, own shares were bought for EUR 131 and are held as treasury shares. So all in all, a very successful quarter despite an environment which remains quite challenging. Looking a bit deeper into the group performance. Order intake grew to EUR 1.4 billion, and all divisions contributed to that growth, except for heating and refrigeration technologies due to recent divestments. Regarding order sizes, the strongest absolute growth contribution came from the base business. Sales grew organically for the sixth consecutive quarter and was once again driven by the service business. Organic service sales grew by a strong 13.1% year-over-year and new machines grew also by a very satisfactory 6.8%. The service sales share was 34.6%, 0.8 percentage points higher than last year. Gross profit increased, and this increase was driven by both businesses, new machines, but even more so by services. Increasing operating costs were compensated. However, while absolute EBITDA increased. The respective margin declined by only 0.1 percentage points. Now let me continue with the figures for Separation and Flow Technologies. Order intake grew organically by an outstanding 13.6% year-over-year with EUR 420 million, a new record was set. This growth was especially driven by a strong demand in the customer industry and dairy processing also the customer industry, chemical and marine reported good growth. Regarding the pipeline, demand for smaller projects is currently more active than for larger ones, especially in dairy processing. Activity in beverage is softening, while the customer industry environment benefits from growing demand for biogas solutions. Activity in the oil and gas industry is increasing due to the relative high energy prices. Organic sales grew by 6.4% year-over-year, driven by the organic service sales growth of 15.1%. New machine sales were mainly affected by supply chain shortages. As a result of the significant difference in the growth pattern, the service sales share increased by a strong 3.5 percentage points to 46.9%. This represents a new record level for sale in quarter. Talking about records also order backlog reached a new record level with EUR 650 million, up 38% year-over-year. Thus, the order book is well filled and indicates further sales growth. EBITDA increased significantly by EUR 13 million to EUR 87 million, and the EBITDA margin improved also significantly by 1.4 percentage points to 25.2%. This development was driven by the strong organic sales, service sales growth and good capacity utilization. Gross profit was therefore significantly higher than last year and more than compensated for higher operating costs. Due to the most recent very satisfactory development, we raised the EBITDA guidance at Separation & Flow Technologies from slightly to significantly growing in 2022. Let's move on to Liquid & Powder Technologies. Order intake increased organically by 0.2% year-over-year. One of the 2 large orders in the quarter were booked at Liquid & Powder Technologies. This order was in dairy processing and amounted to EUR 32 million. Regarding the pipeline, the environment remains good, and we do currently not see any sequential slowdown, especially the pilots for dairy processing as well as for chemical look promising. Organic sales increased by 9.3% year-over-year, especially the service business contributed strongly with an organic growth of 13.9% year-over-year, but also the new machines business grew solidly by 8.1% on an organic basis. The service sales share rose by 0.5 percentage points to 20.6%. Going forward, sales should continue to grow solidly as the backlog remains at its record level of EUR 1.5 billion. The assumption of solid sales growth going forward, however, requires the supply chain bottlenecks are not worsening, of course. EBITDA before restructuring expenses increased by EUR 3 million to EUR 39 million. The respective margin, however, declined by 0.4 percentage points to 9.1%. Gross profit increased due to higher sales volume, but operating costs increased as well due to increased activities in the new food segments. Continuing with Food & Healthcare Technologies. Order intake increased organically by 4.4% year-over-year. Growth was also driven by 1 large order exceeding EUR 50 million in the customer industry farmer. At EUR 282 million Q2 2022 order intake is now at the highest level since Q4 2018. Our food-related applications are expected to continue their positive performance in the short term. The current environment in pharma is still favorable and has not changed compared to prior quarters. Organic sales, however, grew by just 1.2% percent year-over-year, while service sales grew organically by 8.6% year-over-year. New machine sales declined organically by 1.7% as execution here is still impacted by supply chain shortages. As in the prior quarter, the shortages occurred, especially in electronics. As a result of the new machine sales, decline in the service sales growth, the services share strongly increased by 2.4 percentage points to 30.7%. From an order backlog perspective, the situation remains very satisfactorily. Backlog reached a new record level of EUR 699 million. However, due to the lighter than anticipated new machine sales so far, we updated the sales guidance for food and health care technologies from significantly to slightly growing. This is -- also has an impact on the guidance for EBITDA, which is now expected to grow slightly instead of significantly. Coming back to the quarterly development of EBITDA. Gross profit increased slightly just offsetting cost price inflation but was not able to compensate for the increase in operating costs. Thus, EBITDA declined by EUR 1 million to EUR 20 million and the margin declined by 1.1 percentage points to 8.1%. Moving to Farm Technologies. Despite the strong order intake in prior year's Q2 as well as in the last quarter, order intake grew once again solidly by 8% organically. Growth was generally driven by strong demand for highly efficient automated milking equipment as well as service. Conventional milking equipment grew also. The mid price development remains on a favorable level for farmers. The main headwinds for our customers remain increasing costs for feed, fuel and equipment. The currently dry weather is also a drag for European farmers as this has a direct impact on crop yields and thus on feed prices. Sales increased organically by a very strong 19.7% year-over-year, both businesses, service as well as new machines contributed almost equally strong to this development. Organic service sales grew by 21% and organic new machine sales by 18.8% year-over-year. The service sales ratio increased by 0.7 percentage points to 45.1%. Order backlog stands at EUR 352 million, a new record level and an indicator for further sales growth ahead. We, therefore, raised the fiscal year 2022 sales guidance for Farm Technologies from slightly to significantly increasing. EBITDA increased by EUR 5 million to EUR 21 million and the respective margin increased by 0.4 percentage points to 11.3%. The issues were we experienced in Q1 in the profitability in the hygiene business from a delayed response to rapidly increasing input prices have been resolved. Finally, let us turn to heating and refrigeration technologies. Reported order intake declined by 7.2% year-over-year due to divestments. The organic order intake figure, however, increased by 7.8% year-over-year, driven by solid growth from medium-sized projects in the area compression technologies. The general environment is unchanged and remains favorable. The process for decarbonization is a driver for our heat pump business as well as every solution to reduce the energy intensity of heating and refrigeration solutions. Organic sales increased by 8.8% year-over-year and was driven by new machines growing by a strong 12.8%. This is the strongest growth rate for more than 2 years. Organic services grew by 3.6% year-over-year. As new machines significantly outgrew service sales, the service sales share declined by 5 percentage points. EBITDA before restructuring expenses declined by EUR 2 million to EUR 13 million and the margin declined by 0.1 percentage points to 10.6%, resulting from the missing business in Russia. The decline in gross profit driven by the divestments and the missing Russian business could not be compensated by the reduced operating costs, Closing the divisional chapter now. The strongest contribution for EBITDA came from Separation & Flow and Farm Technologies. On a reported basis, only Heating & Refrigeration Technologies had lower sales in the quarter due to divestments. All divisions, except for Heating & Refrigeration Technologies increased their gross profit mostly due to higher volumes. Operating costs increased and were predominantly driven by higher travel expenses and wages. In total, EBITDA before restructuring increased to EUR 167 million from EUR 154 million. Excluding the translational FX effect of EUR 7 million, as we have defined it in our full year guidance, our EBITDA would have still improved by EUR 6 million to EUR 160 million. As also after the divisional chapter, now one of my far topics, net working capital. Net working capital was flat year-over-year despite an increase in inventory of EUR 214 million due to supply chain challenges. The net working capital to sales ratio, however, improved by 0.4 percentage points to 7.9% due to the accelerated sales momentum. A further improvement of trade payables and net contract assets almost compensated an increase in inventories and trade receivables. The high inventory level is mostly related to the supply chain shortages resulting into different developments. First, the shortages led to higher levels of finished goods as well as work in progress. Secondly, to reduce the impact of shortages on our ability to execute orders, we are building up safety stock and thus raw material levels have increased. The increase in trade receivables mostly took place in the division's Separation & Flow and Farm Technologies. Both divisions experienced a significant increase in sales recently. Thus, the increase in trade receivables is owed to an expansion in business activity. To sum it up, yes, we are seeing an increase in net working capital. However, this should be just temporarily. As soon as the supply chain challenges fade inventory levels will decline as well. The net working capital has, of course, an impact on our free cash flow. Operating cash flow was EUR 51 million and below last year's figure of EUR 108 million. The decline is explained by the higher net working capital I just discussed. The net working capital related cash outflow in Q2 is with EUR 90 million, significantly higher than the EUR 21 million in last year's Q2. The remaining components of operating cash flow, such as taxes, restructuring and other changed in total, just a little year-over-year. CapEx-related outflow is EUR 18 million higher than last year, resulting in EUR 41 million. The increase is mainly due to investments into our new plant in Koszalin in Poland and high replacement CapEx. In total, free cash flow is worth EUR 11 million below last year's figure of EUR 94 million. Our free cash flow conversion ratio before restructuring trended downwards during the last quarters. As per end of Q2 2022, 68% of EBITDA has been converted into free cash flow on the last 4 quarters trailing basis. The negative trends during the last quarter is solely explained by the increasing outflows for net working capital, which I just showed. Net cash, including lease liabilities decreased from EUR 412 million at the end of the first quarter to EUR 264 million. Besides the negative net cash flow of EUR 6 million, the dividend payment in the amount of EUR 160 million also reduced our cash position. Let me now talk about our financial headroom. On the left, you see our available cash credit lines as well as their respective utilization and majority structure as per end of June 2022. Apart from minor changes in the volume and the utilization of the EUR 66 million evergreen credit lines, nothing has materially changed compared to the prior quarter. However, there are 2 noteworthy positive updates on the EUR 650 million syndicated credit line. First, the credit line was prolonged to 2027. Secondly, the margin of that credit line is now linked to ESG criteria. The agreed sustainability indicators are based among other factors, on the targets for reducing greenhouse gas emissions from the company's own activities, that means Scope 1 and 2, as well as the proportion of female managers in the top 3 management levels. Continuing now on the right side of the slide. Compared to the last year's Q2, the financial headroom declined by EUR 300 million. The reason is, on the one hand, explained by the cancellation of an unused credit line with the European Investment Bank of EUR 100 million; and on the other hand, a syndicated credit facility of EUR 200 million, which was solely set up due to the uncertainty from the global pandemic. The syndicated credit was not prolonged and expired in August 2021. But the positive trend of our net liquidity, including lease liabilities, has continued improving significantly by EUR 61 million to EUR 264 million year-over-year. With that, I hand back to Stefan with the outlook.

Thank you very much, Marcus. So that all being said, we confirm our guidance for the full year '22, we expect organic sales to grow by more than 5% year-over-year and EBITDA margin -- and EBITDA before restructuring expenses between EUR 630 million and EUR 690 million, and the return on capital employed in the range of 24% to 30%. As you know, the risk from the direct exposure to Russia and Ukraine appears manageable from today's perspective, and does not have an impact on our guidance range, even if we expect the collapsing business in Russia to have a low double-digit impact on our full year '22 EBITDA. Contrary, the negative effect from the indirect exposure, such as a potential natural gas shortage can currently not be reliably assessed. However, as I have mentioned earlier, only 10% of our natural gas consumption is used for production, and we are preparing that effective processes can be run on both natural gas and electricity. In the prior quarter, we said that the net inflationary impact of purchasing ranges between EUR 120 million and EUR 140 million. We confirm this figure as the picture has in this regard, not materially changed. This figure is equal to around 3% of our sales, which we have already passed on or intent to pass on to our customers. This concludes my presentation. The next important note -- we are now coming to the questions.

Yes. Thank you very much, Stefan. And with that, I hand it back to the operator for the Q&A session.

[Operator Instructions] And your first question today comes from the line of Klas Bergelind from Citi.

Stefan and Marcus, it's Klas at Citi. So the first one is on order intake. So I understand that pricing was around 6% on orders again. So that means that total orders were up only slightly year-over-year looking at volume. We obviously faced a tough order come from Novozymes last year into the third. So it's likely that orders will be down quite a bit ex-pricing. Can we talk about, number one, if you can still achieve the 6%, Stefan, in the third quarter on pricing? And to what extent perhaps larger orders can push you above 1.4% flat quarter-on-quarter? Or do you think orders will start to trend a bit lower from here maybe towards the 1.3%? That's my first one.

Yes. Thank you very much, Klas. I mean, you know it is sometimes not so easy to such a capital goods company like ours on a quarterly basis only. And if we look at the first half year, we see organic growth of 13.5% organically in order intake. And I also want to remind that we have seen last year, an increase of 14% organically. And definitely, last year, we had no pricing impact at all. So if you take a single look on your -- on the Q2, it might look that we are going a little bit flattish when you take out prices. However, I can say that also our pipeline is still very, very interesting. And we also expect, let's say, larger orders in the remainder of the year, especially from LPT, of course. So it might appear a little bit like you say, for the Q2. But if you look at the half year numbers, especially on the last year and take into account that we are in not a fast-growing market, let's say, that our markets are normally growing by 2% to 4% a year or so. I think we are delivering very, very good numbers. And we are very optimistic that we definitely also will see a significant growth rate and net growth at the end of the year.

Yes. And -- No, I totally get that the point of comparison in the first quarter is quite tough, right? But are you willing to pin down sort of an order range in the third quarter? Or you're leaving it at that?

I mean, you are more or less used to that, that we are giving our order intake guidance in every analyst call. So I expected this question. And I would say we expect also in the Q3 order intake between EUR 1.3 billion and EUR 1.4 billion again. So -- which will be a very solid number, as I said before. Yes. So -- but expected in that realm. Yes.

No, that's reasonable. And my second one is on the cost side. It seems like you have the EUR 120 million, EUR 140 million well in the bag, given how pricing is running on orders and what you can see in the P&L at the moment. But what about wage inflation, which is outside? You're saying that it's now starting to weigh on margins, albeit likely. What kind of level do you see into the second half and into the next year, given that wages is creeping up not least in Germany where you have 30%, I think, of your footprint?

Yes. I mean, first of all, I want to mention that we are really working hard on prices since very early beginning of the inflation. There was no single let's say, management meeting where we not address this issue. We are frequently following up that issue. And I think you can see also in the Q2 numbers that we are very successful in bringing prices up so far. And that is the basis, let's say, of all the cost inflations we have. I mean, the wage inflation will most likely increase especially next year. I mean, for the time being, the wage increases are not so significant yet. And that's also the reason why we will continue to work on prices also at the second half of the year because it's very clear that we have to be prepared in the backlog when -- for the execution next year because it is very clear and very likely that we also will see a higher increase in wages and salary next year than we saw in the year '22.

And it's around the 5% mark compared to maybe 2.5% that you've been subdued...

Difficult to say, but it might be in that area. I mean, it is different. U.S., of course, it's a very hot market, labor market where we see the need for larger improvement. Let's see -- what in Germany, where we have, of course, a big part of our stuff in Germany, whatever comes out in the negotiations of the work councils and trade unions but it will definitely -- we expect clearly higher rates for the year '23 compared to the year '22. And that's the reason why we will continue working on prices.

Yes. That's good. Very quick final one is on demand. Dairy seems to be strong across all divisions, but beverage and chems are down in LPT. Is this you being more selective on orders or have you started to see any demand weakness in LPT, obviously, selective, what I mean there is obviously the backlog is strong and you're focusing on profitability. If you could comment there?

Yes. Also a very good question. I mean we have a clear guidance, and the guidance is profit is more important than volume because if you look at our backlog, I mean, it's really -- we have a lot to do. And it's very clear that we also, in case of doubt, don't take an order if we feel or think that the margin is not sufficient. So we are very, very clear pushing on margin. And so far, we are also very successful here.

[Operator Instructions] And your next question comes from the line of William Turner, Goldman Sachs.

I have a handful of questions. The first one is on demand. And in particular, relating to your customers in Europe. Obviously, food and beverage producers, they use a lot of energy in their production processes. I was wondering, have you heard any kind of commentary on how they're thinking about their investment plans over the next 6 to 12 months, given this much higher costs that they're going to be facing. And also, do you think it's going to have any impact on your ability to put through prices? That's my first question.

Yes. Okay. Maybe I take that question. It is right. Our customers are normally energy-intensive companies. The production of food and beverage is an energy-intensive business. That's the reason, by the way, why we are focusing in the R&D departments very much on development of sustainable products. We are really -- this is one of our 4 main pillars in the R&D strategy to come up with solutions. And I could now talk about half an hour or an hour about new products we recently released to really save energy dramatically, and we are pushing that and helping our customers. However, it is also very clear, our customers are passing on the higher cost to the end markets. I mean this is what you can see and what you can hear with food and beverages. Prices are coming up, increasing significantly. What we see is that the customer behavior is changing that sometimes they change their behavior. They don't buy a premium brand butter they might buy a low-cost butter or they may made by not a premium yogurt, more a low-cost yogurt. But at the end, it doesn't matter for us because it all needs equipment and machinery. But this is what our customers are reporting that they see customer behavior changing to lower cost brands because they need to save money somehow, but our customers are passing it on to the end markets. And therefore, we also do not see any significant impact on the investment behavior from our customers.

Okay. That's very interesting. And then in terms of your suppliers, I totally understand you do -- a lot of your operations involve assembly, but then I can imagine you outsource the more energy intensive production parts that for example, any of the metallic work requires significant foundries and high energy consumption. How healthy do you see your supplier base? Have you got any concerns about the ability for some of your European suppliers being able to deliver in -- over the next 12 months?

I mean, we don't see any impact here or -- I mean, we have a very, very broad supply base. We have a lot of choices normally. We are also not so much impacted by, let's say, logistic change outside of Europe for many suppliers. So also this is not for us any material risk.

Okay. Great. And then my final question is more of a clarification. So I just want to -- have you removed your Russian orders from your order backlog? And if not, how much are they still in the order backlog?

Yes. Partly, we did that. We removed everything, which had nothing to do with humanitary needs, let's say. So also all the sanctions from the U.S. government, from G7 states and from the European Union are explicitly mentioning that company should not stop to deliver things which are necessary to support basic humanitary needs, which is actually food or pharmaceutical. So what we still deliver is everything which goes to this direction or this cluster, but all the other businesses is what we completely stopped and also removed from our backlog.

[Operator Instructions] Your next question comes from the line of Akash Gupta from JPMorgan.

Yes. My first one is on the sales growth. Maybe if you can elaborate what is driving this higher service growth? Is this due to price given price increases in service will likely flowing faster through P&L than your equipment or project business? Or is this more of a pent-up demand after the pandemic impact we had in the last couple of years?

Okay. Akash, thanks for the question. I mean, you might remember that our service excellence is one of our pillars from the Mission 26. And this is where we could talk now also hours about what we are doing here exactly. But there is a big bunch of activities going on in the service departments. It starts with having more transparency about installed base. It continues with customized pricing and very differentiated pricing activities. It continues with more active sales in service that we also sell a fixed price repairs, for instance, via our service blue collar force and so it's not coming as a surprise, let's say. It's really based on a lot of clear actions and activities, which are conducted in that stream of the Mission 26.

Basically, we should expect this service penetration that you have in your revenues to continue to grow from the levels you have seen in second quarter of this year?

Yes, clearly. But I mean the percentage of service always depends, of course, on the growth of new equipment if we might be successful, let's say, selling a EUR 100 million or EUR 120 million new equipment project that might change the perspective on the percentage of sales -- of service. But as a matter in absolute terms, we will continue to grow here in the service area, clearly.

Yes. That makes sense. And then secondly, on the energy cost, can you tell us how much of your energy cost is covered through a framework agreement where you may not have seen steep increases in cost and how much of your purchases are coming from spot market where we have seen maybe 5x to 10x price increases in the past 12 to 18 months?

Yes. I mean, first of all, I want to remind everybody that energy cost is not such a big issue for GEA. I mean, I just mentioned we spent last year, EUR 20 million, all energy, altogether. And we might spend this year the double of that. For the remainder of the year, we have almost for everything now frame contracts. So we can be very sure we can -- it's very foreseeable. And for next year, for the first half of the next year, it's about 1/3 what we have hedged in the gas price.

And my final 1 is on guidance. I mean, your EUR 630 million to EUR 690 million guidance is on constant exchange rates. But if you do a mark-to-market, with euro-dollar at 1 point -- slightly above 1. Can you tell us how much of FX translation benefit we might see on top of the guidance range?

So right now, the first half of the year, we have approximately a tailwind into the translation effect of EUR 10 million. And let's see actually how the exchange rate is going to evolve in the next 5 or next 6 months for the second half of the year. There's definitely a positive tailwind from translational effects here.

[Operator Instructions] Your next question comes from the line of Sven Weier from UBS.

It's actually a few follow-ups here. First one is just coming back on the order guidance for Q3, which is quite solid, I think. But still wondering a bit on the beverage side of things where you said it was a bit weakish in Q2, it probably stays a bit weakish, which I think, contrasts quite a bit with what some of your peers are seeing. So is that really going back to you being very picky on projects? Or is it just the strength on the beverage side that we see at the moment is in other segments that you actually serve? Or what's behind that? That's the first one.

Yes. Thank you, Sven, for the question. I mean I know who you might mean with the order intake situation in the beverage industry. However, I mean it's -- when we look at the large projects for us and the workload it's also that we are very much active in the -- in different departments with dairy projects. And that is something where we have, at the moment, a lot of very interesting orders, let's say, in the air. That is also including new food projects, which are -- where the balls are in the air. And therefore, you are right, we are somehow priced cautious. We lost some typical beverage projects already this year because of price because we said we don't do that. But the reason is as I said, that these are also, to a large extent, similar teams, where we want to focus on the margin. Yes.

Okay. Understood. The second question is just also coming back on the Q2 operating leverage or, let's say, lack of operating leverage on the EBITDA margin side despite the fact that the service organic has increased to 15% year-on-year from 9% in Q1. So is that delta and the growth rate that we saw between Q2 and Q1 really entirely due to pricing?

No, I would say it is mainly impacted by supply chain issues in FHT. We have not seen this kind of performance, which we would have last liked us to see here because in many aspects here, we have supply chain issues. That means that we also have machinery and equipment, which is almost ready, but not yet ready because small parts are missing, and that might also be, let's say, an opportunity for the remainder of the year, but this is one of the big effects what we see in FHT more than in other divisions.

Because that was also just what I was going to ask. When we think about the second half organic against the first half -- I think at the start of the year, you kind of said that the second half organic would be higher than the first half. And of course, we had a few things happening, unfortunately, in between, but your backlog is very high. There's a lot of stuff that is maybe almost finished, as you just said. So is it maybe still fair to think that the second half growth should exceed the first half, especially on new equipment, I believe?

Yes. Yes. That's our perspective and what we are optimistic on. I mean, as I said, we are very much depending, of course, on the supply chain shortages. We have some areas where we are even in short time work at the moment because of missing parts and we cannot execute the backlog like we would like to do. Everything we see looks that it might -- that the sky might clear up a little bit in the next half year. So we don't think that it will worsen. We rather think it will become slightly better especially what has things which have to do with electronic parts. So yes, that's how we look at it.

And I mean, if those things come through, then we should expect more of the traditional operating leverage than I would expect given that a lot of stuff is almost finished and just needs to be shipped.

Yes. Yes.

[Operator Instructions] Your next question comes from Lars Brorson from Barclays.

Stefan, Marcus, maybe I could just follow up on that. I had a couple, but if I can follow up on the FHT question from Sven just now. I just want to make sure, Stefan, but the message here is the issues you're facing in FHT are purely down to the supply chain constraints i.e., should we say, transitory issues, nothing more structural. And obviously, this is a business where we have historically seen, albeit prime management run into issues with Pavan in part that you, of course, rolled that back in 2019. I appreciate you've obviously downgraded the guidance divisionally for the year, but slightly rising from the EUR 100 million last year. To my mind, still looks like a 200 basis second half margin improvement versus first half looks ambitious, but it sounds like you're quite confident there. So just double checking on that, please.

Yes. I mean, you might be right. The performance within the division FHT is different, though we have a very good running organizations. We have some where we also need to improve operational things. But the biggest issue is definitely at the moment a supply chain issue that we are not able, let's say, to really execute the backlog because order intake, you also see it's quite good. And that's the biggest issue here in FHT.

Understood. Can I just clarify the raw material cost inflation? So the EUR 180 million this year, gross, obviously, net of your supply chain savings or before your supply chain savings. I was a bit confused as to what exactly is included. Can you help me with that? And just to clarify, the energy cost comes on top of that and presumably transportation and logistics. And I was also a little bit confused with your comment on energy cost. I had it down as per your commentary on the Q4 call back in March, that energy cost was about EUR 10 million last year. Going to EUR 15 million to EUR 20 million, that's clearly not the case. So just making sure I understood exactly what the energy component is and what else is included within your raw mat of EUR 180 million, please?

Yes. The energy cost, I mean, there was, to my knowledge, no other information than that it is about EUR 20 million or was about EUR 20 million in the year '21. And this year, we expect to double that. And with that, I hand over to Marcus to answer the other.

Yes. The net figure you were talking about the gross rate of a net figure of EUR 120 million, EUR 140 million includes also the rise in energy and logistics that's all the material and supplies actually cost increases.

Forgive me, Marcus, I'm confused. You say there's no change to your raw mat guide, but we've just heard you say energy costs instead of being, I guess, something less than EUR 40 million is now pegged at EUR 40 million for the year. So is EUR 180 million gross raw mat and energy and logistics cost is the right number to think about, please?

If you think on a gross perspective, yes, we think of a net perspective. And as we said last time, we want to give a net figure. So if you deduct actually what we once said that there would also be savings from the purchasing side, then you derive at around EUR 120 million to EUR 140 million in net cost increases, which also includes the rise in energy prices, logistics and the raw materials.

That's helpful. And finally, can I just confirm the CapEx guidance is obviously unchanged, but you've only spent about, I think, EUR 73 million in the first half, which is quite a meaningful ramp in the second. What exactly explains that sort of second half weighting, please, around the CapEx, unchanged CapEx guidance?

Yes. It's probably -- the CapEx number we guided was probably the ceiling, the high end. Probably we can expect a bit less than that. There is no real reason why it should accelerate that much now in the second half of the year. As always division regions actually have a high interest of CapEx. And we kept that guidance up for now. But if you take a look at the run rate, then actually, I would say that's the absolute maximum in CapEx, probably lower.

Can I squeeze a final one just on pricing. I was quite impressed with your 3% to 4% pricing on the sales line for the quarter. It looks like you're tracking sort of mid-single digits for the year, better than I thought as is the first quarter. I wonder, Stefan, whether you can give a color around what you're doing on pricing on the project side versus the product and services side. I think there was a question earlier, but gives us to a bit of granularity maybe around the pricing dynamics in the business, please?

Yes. I mean, when it comes to the large projects, we have, of course, a higher material number, let's say, in percentage wise then compared to our components. And we have then always quotations from sub-suppliers, and we always order and have, let's say, price safety back to back, let's say, like that. So whenever we close a contract for EUR 40 million, EUR 60 million, EUR 80 million or whatever, we know delivering to us what -- which supplier, and we fix also the price with that supplier. So we have no risk here. That's important to understand that's a big part of the calculation when it comes to labor, which we need because this project might run for 2 years or so. Then of course, there is inflation for the labor cost calculated, which is also adapted to the current expectations. And last but not least, if we have any things which are not really foreseeable, we have some index clauses that we are also allowed to change and to come with change orders whenever there is a need for that. So for the large projects, we also feel very safe here in what we do from a pricing point of view.

[Operator Instructions] Your next question comes from the line of Sebastian Growe from BNP Paribas.

Four questions, if I may. The first one is on the farm technology segment. The orders obviously remain on a high level. Yet, these are now down for the second quarter in a row. So can you remind us of what's driving the very strong demand for automated milking equipment, especially from a regional perspective? And what's the outlook from here in terms of demand? And then on margins in the segment, and I noticed that you saw exceptionally strong top line growth in the second quarter, yet there's barely any operating leverage. So when should we really expect the higher selling expenses to normalize or simply put operating leverage to finally kick in? And I have 2 other questions, but let's start there, please.

Okay. Thank you, Sebastian, for the question. I mean, the question of what drives the growth in Farm Technology is very clear. It's -- there's a very clear trend to automatic milking because this is efficiency. And this is also safety of operations. We have also a lot of labor shortages and especially, you can imagine that it is not so easy to find stuff for a farmer who is reliable to be every morning at 5 looking at the farm and milking cows. This is something which worked out very good 20 years ago, but it's more and more becoming a problem because farmers are not finding reliable people and staff to do their job. And that drives a huge, huge demand for automatic milking. And this is where we are benefiting here from because there are actually -- it's more or less a oligopole. There are very few suppliers for automatic milking. And we are, I would say, definitely very well positioned here with the whole product range starting with single milking -- automatic milking boxes up to large rotary systems where we can really offer also farms up to 10,000 cows or so excellent and reliable solutions. So this is where we are very well positioned. And I mean, world population is growing. The need for dairy, therefore, is also growing worldwide, and therefore, we are also very optimistic that we can continue to grow here. There might be always sometimes a cycle a little bit. But in the medium- to long-term perspective, Farm Technology is a growth story. And maybe one thing to add. We just also started to introduce automatic feeding system to the market. This is a completely new product. It is really helping to become much more sustainable because this is a fully electrically -- electric-powered system, which is -- it's working man less and is taking over the role of feeding the cows on a battery basis without any labor which is needed to do though.

Okay. Understood. And if I may take a comment on the cycle that you mentioned before. Should I take this really as you expect a moderate slowdown from here? And if you could shed some more light on the regional drivers currently. So my understanding is that China has been a very, very powerful driver here in this regard. So any comment would be much appreciated.

Yes. No, you should not take it as a warning that we are ahead of a downstream more or so. That's not the case. And also with the regions, it depends, of course, very often on large projects in that region. I mean, APAC is interesting, and it's also -- there is also a high demand for this kind of product. But as I said, we also see mainly all over the world here interesting growth rates. I mean APAC might be #1, followed by North America. But as I said, it's -- the driver is the need for automation.

Okay. Sorry, Marcus, I think I interrupted you.

No, no, you didn't. So let's finish the questions first, of course. Talking about operating leverage, here for the EBITDA, we had sales of EUR 187 million in the second quarter, Farm Technologies in the prior quarter Q1 was EUR 147 million. There was, of course, a big step-up in the EBITDA margin. The reason for that is twofold. One, of course, there is a certain operating leverage effect there, which you can also see in comparison to Q2 '21, where we're at EUR 147 million sales and operating -- EBITDA margin of 10.9%. However, there is, of course, also an increase in selling expenses there, which mitigates certain -- which mitigates the operating leverage effect here, and that's why we end up at 11.3%. In comparison to Q1, again, it's more higher sales, but also, as you remember, we had a hit actually in the U.S. because of the hygiene our production was approximately EUR 6 million EBITDA, which was missing due to the fact that raw material prices was much faster increasing, then we actually increased our sales prices there. So that you need to take into -- also in to account in comparison to Q2 to Q1 of this year. And then as I explained to Q2 of last year, there is OpEx leverage here, but also increasing selling expenses there. So that's why year-over-year, it goes up from 10.9% to 11.3%. But I think the good message is as we said at the Q1 call, FT is going to be back on track, and we'll be able to increase prices that we're not going to see this effect of higher or faster increasing raw material prices and sales prices, again, which we did not.

Okay. Understood. And then let's move on quickly to the group EBITDA margin and on the Q2 headwinds. Stefan, I heard you say in the introductory remarks that explains the Ukraine war, the Q2 EBITDA might have been higher by a mids to high single-digit euro million amount. Should this be understood as the net headwind from the buildup of fully finished goods at FHT primarily? Or what falls into this bucket, if you will give that number?

No, it's just because of missing sales because we could not sell like we did in the year before. That's a simply impact. I mean, business collapsed. It's not even half of what we used to sell, and this is a margin which is missing out of that business.

Okay. Understood. And if you should single out the FHT headwind that you referred to as a buildup of semi-finished and the issues around supply chains. Can you give us a line number there would be -- potentially underlying margin would have been without those shortages?

I can't give you any real line number here, I apologize.

Okay. And last question -- and just briefly on the more conceptional understanding around the down trading that was asked before about when it comes to the lower distribution in consumer spending. And we said that this wouldn't have an impact on you because you would still sell enough volume, if I may put it this way. This is really true because I would still believe that the big food and beverage companies would obviously run much better on their branded products rather than on the non-line stuff. So how should we think about that in terms of their ability to spend if the mix for them is turning more negative?

So let me grab that question. Also, the non-line stuff gets manufactured on our equipment. What you're referring then to -- do they still have enough appetite for CapEx. But as I said, they need to have the volume actually. They are also for non-line stuff. And all processed food is actually -- it's our business. And therefore, we would not expect that they would be saving CapEx on the processed food machines but perhaps somewhere else on buildings, et cetera, if any. Let's see how the margin is going to go. As you have seen, there's a big Swiss company who announced actually that for all their products, they're going to raise prices by 5%. So let's see if their margin and their absolute earnings of these big food companies will really go down at the end.

[Operator Instructions] Your final question today comes from the line of Uma Samlin from Bank of America.

I was wondering if you could follow up a bit on the pricing in the backlog. And I guess, since starting of this year, the realized pricing increase seems to have accelerated. I was wondering, do you have an estimate on how much price increases that you have in the backlog? Should we expect more price increases translates into sales growth in H2 this year?

I mean it's not so easy to answer the question because you know that we have a lot of different businesses in GEA. And the question, how do we work on prices, is different. However, what we can say is that we have clear measurements, clear actions in place in all the business units in all the divisions to really come up with the prices. So there is -- it's everything we see and we can have a look at is proving that we are on the right track here.

Okay. And I guess you also mentioned that the EUR 120 million to EUR 140 million cost headwind that should be theoretically compensated by around 3% price increases. So is that reasonable to assume that if we could have much stronger price increases in H2 this year, that should be more than helpful to margins in the second half?

Yes. Yes, we are trying. We are trying, of course, to also use the opportunities which we have in that environment of high inflation. Sometimes we might be successful, sometimes not. But I think the most important thing is that we can pass on the really strong headwinds we see from the material and labor costs.

Fair enough. I guess my last question is on the buybacks. So since you announced the buyback in August last year, I guess you did the first -- if I understand correctly, you did the first tranche of the buyback until February this year. And then there was a gap between February and July. I assume that's because of the uncertainties in the market. So what triggers the decision for you to speed up the buyback now? Does it mean that you have a bit more visibility into the second half?

No, actually, a trigger that we announced that we do the buyback of EUR 300 million till the end of the year. So that was more coincidence that the market actually came down and that we were starting the buyback at that point in time where the market was on beginning of July. There, we stick to the announcement that we're going to spend EUR 300 million till the end of the year. And therefore, we needed to get going again with the share buyback program.

I will now hand the call back to Stefan Klebert, CEO, for closing remarks.

Thank you very much. So thank you for participating in our call. And my closing remarks would be the following. I think it's very important that you hopefully noticed that GEA is on track. We are performing despite all the headwinds. We are really -- we delivered a very good second quarter despite all these headwinds, which we see in the world. And we are also in a good shape and expect another solid development in Q3. And last but not least, we clearly conclude our guidance for the year '22. And we can also say that we include here also achieving our EBITDA margin target of 13.5%. With that, yes, we are at the end of the presentation, and I thank you all for...

This concludes today's conference call. Thank you for participating. You may now disconnect.