GEA Group Aktiengesellschaft (G1A) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the GEA Group AG pre-close call Third Quarter 2024. [Operator Instructions]. After the speaker's presentation, there will be the question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your first speaker today, Oliver Luckenbach, Head of IR. Please go ahead.

Yes. Thank you very much, Natia, and good afternoon, ladies and gentlemen, and a warm welcome to our Q3 2024 pre-close call. With me here are my deputy, Rebecca and [ Edward]. As today's call will contain forward-looking statements. It will be conducted according to our disclaimer. I will not read the disclaimer, but please be aware of the cautionary language that is included in our safe harbor statement, which is part of our presentations that you can find in the Internet. We will now address 8 topics and afterwards, you will have time to ask us some questions. First topic, group guidance full year 2024. We confirm the group guidance we have given for full year 2024. And as you might have in mind, we have upgraded our guidance with the H1 results. So we guide for in full year 2024 organic sales growth target of 2% to 4% growth. EBITDA margin before restructuring expenses is expected to be between 14.9% and 15.2% and our return on capital employed also before restructuring expenses is expected to be in the range of 32% to 35%. With regards to customer industries, that's the second topic. In the food area, we have seen -- it was a very good growth contributor in the first half of this year, and the market environment is currently seen a stable to positive by the colleagues in our business depending on the specific application. On the beverage side, that was a strong business in 2023. In 2024, some projects are postponed or are just taking more time in the negotiations. But we managed to secure 2 large orders in the second quarter of this year in the LPT business and on the SFT business, the equipment business is seen as positive. On the pharma side has been a growing customer industry in the first half of this year, and we see a good pipeline. However, investment decisions take more time due to the overall economic situation. Dairy farming. Here, the market sentiment has not massively changed since the first half of this year with the known challenges, still high interest rates, some downward pressure on milk prices in some regions, for example, China. Dairy Processing. Here, we see some pickup in our pipeline on the project side, but negotiations are taking time -- more time, particularly with larger greenfield projects. So the -- and the market development in the equipment business for dairy processing is seen as stable in the SFT area. On the heat pump side, here, the market is still growing as expected. Topic 3 is order intake. So overall, we see a good pipeline, but the postponements, especially of large orders continue. In this context, please be aware of the relatively high comparison base of large orders of EUR 138 million in the third quarter of last year. But we have a very solid base business and a strong service business. And therefore, expect that order intake in the second half of this year will not only be higher than the comparable second half of last year but also better compared to the first half of this year due to our strong pipeline of large orders and the interest peak, which is now behind us. On the FX side, in order intake, here, we see that it's getting less negative. In Q3 last year, it was still minus 7%, Q4 last year, the negative FX impact was minus 5.4%, minus 3.9% in the first quarter of this year and minus 3.2% in the second quarter of this year. So for Q3, it should be lower than in the second quarter. And here, the number was minus 3.2%. That gets me to our fourth topic, sales. Here, you should expect for Q3 the number which is more or less in line with the guided range for the full year. So organic sales growth of 2% to 4%. And here is a similar picture with regards to FX. It's also getting less negative. Again, here are some numbers from the past. Q3 last year was minus 6%. Q4 last year was minus 4.3%. Q1 this year, the negative impact was minus 5.0%. In Q2, it was minus 3.0%. So also here, for Q3 2024, you should expect a lower number compared to the second quarter of this year. EBITDA margin before restructuring expenses, that's topic #5. Here in Q3, we expect -- so overall, the margin in Q3 to be in line with what is needed, so to speak, to achieve our full year guidance of 14.9% to 15.2%. That's it from my side. And with that, I pass over to Rebecca.

Thank you, Oliver, and hello, everybody. Let me give you some statements what to keep in mind for our cash flow in Q3. So that's topic 6. As you all know, CapEx will be very much H2 driven. We had EUR 68 million of CapEx in the first half of 2024 and are guiding for around EUR 240 million for the full year 2024. So the CapEx will be mainly used for our new lyophilization plant in Elsdorf, Germany as well as the new food test center in the United States. Net working capital to sales ratio is expected to be within the guided range of 8% to 10%. We would also like to give you an update on our ongoing share buyback program, which is topic #7. As of last week Friday, so 27th of September, we executed EUR 228.6 million. So 57% of the EUR 400 million share buyback program. This means we bought back so far 6.15 million shares, which is 3% of our shares outstanding. The average price page was EUR 37.14 so well below yesterday's closing price of EUR 44.86. Just as a reminder, the program will run until early 2025. The eighth and last topic is actually what else to keep in mind. So first of all, depreciation and amortization. In the first half of 2024, we had EUR 100 million in depreciation and amortization, and we are guiding for the full year 2024 around EUR 200 million. The financial results, so the sum of interest income and interest expense has been minus EUR 12 million in the first half of 2024, and we are expecting around minus EUR 25 million for the full year '24. Tax rate has been 24% in the first half of '24, and we are expecting around 23% for the full year. The weighted average number of shares used to calculate basic and diluted earnings per share has been EUR 169.1 million in the first half and this is going down to EUR 168.5 million in the first 9 months. If you look only at Q3 '24, we are talking about around EUR 167.4 million as the weighted average number of shares. This concludes our statements, which we wanted to share with everybody, and we are now opening up the line for any questions you might have. Natia, please start the Q&A session.

[Operator Instructions]. And now we take our first question. And the question comes from line of Sven Weier from UBS.

The first one is regarding your order intake guidance for the second half. I mean, to what extent should we assume that this is kind of a back-end loaded guidance because I can hear the base business is good? But I think to make the guidance, you also need better large orders, and you talked about rates and slower decision-making. Or should we think this is kind of an over back-end loaded guidance? Or does it also refer to Q3 specifically?

Yes. Thank you very much, Sven, for your question. As you know, we do not -- decided not to give these kind of, let's say, detailed guidance for a particular quarter. I've tried to pin a little bit the environment for you that on the one side, we still have, let's say, a very difficult, let's say, environment in terms of large orders. This still has to do with the still high interest rates. We have now seen -- it's a good thing inclines of interest rates, not only here in Europe, but also in the United States. So this should then help the pipeline, as I said, is very, very good. Also in terms of the level of large orders of EUR 138 million in Q3 last year, that was relatively high level, probably also if you look into your model, you will find that. However, on the other side, as I've mentioned, the base business is a very good business. And you also know from the first half of this year, at least, that we had more than 10% growth in the service business. We also highlighted this at the CMD just 2 days ago. So from that perspective, we feel comfortable with what we said regarding the H2 order intake for this year.

The second question I had, if I may, I was just following up on your dairy comments because I guess we've all seen, we have record butter prices where the U.S. milk prices are almost at an all-time high. I mean we know there also has to do with the supply constraints, so maybe less favorable, but would you not think that this generally very positive price environment, very good mill feed price ratios should eventually also lead to more activity on the dairy farming side? Is there always kind of a delay between those developments?

I would say, in general, Sven, you're right that if you look on a global scale on the mill feed price ratios, if I look at the IFCN Dairy data that looks actually like a healthy milk feed price ratio. However, what we have heard from our colleagues that there's still actually high interest rates impacting the decision-making or the investment decision of the farmers. And that in certain regions, I think it always depends obviously on the milk presence in specific regions. And in some regions, there is still downward pressure on milk prices. So -- but I think what you mentioned in terms of the global environment on a global scale, it looks like moving into the right direction.

Can I have a third question? Or are we limited to 2?

No, please. One more. Yes.

I understood your margin comments, right, because I think you said the Q3 margin will be in line kind of to achieve the full year range, right, which is 14.9% to 15.2%. but Q3 last year was 15.3%. So what's your guidance meant to say that Q3 will be in the range? Or just remind me how you meant the guidance?

Yes. So Sven, right now after the first 6 months, we are at 14.9%. We already saw in Q2 in March, which was at 15.2%. And let's say, for the full year, not only to end up at the lower end at 14.9%, but at least within the range or at the upper end of the range. For sure, we need to then also more than -- or we need 15% or more than 15% and also for the third and the fourth quarter, and that is how I meant the guidance. So we need a little bit more than what we have seen in the first half so far welcome.

[Operator Instructions]. There are no further questions for today. I would now like to hand the conference over to Oliver looking back for any closing remarks.

Yes, that was very quick, but maybe nevertheless, maybe ask one more time the participants just to make sure that there is no additional question anymore because also this call will then be, let's say, the last call before we start into our quiet period and we cannot take on any further calls after this call. So just maybe as we have still some 15 minutes, maybe one final reminder to the audience. If there's any further questions, then please ask now, yes.

[Operator Instructions]. And now we'll go and take our next question for today. The question comes from the line of Max Yates of Morgan Stanley.

Thank you. Just -- could I ask a couple of questions? Just firstly on -- firstly, on pricing. I just wanted to know whether -- have you -- during the quarter or do you plan to, before year-end, put through any price rises across the businesses?

Yes. So let's say, I'm not aware of any, let's say, additional price rises or let's say, new big measures here. Which is also not really, let's say, necessary due to the overall also declining prices, let's say, on the input cost side. However, as you know, each and every of our business manager is requested to see what is possible in terms of pricing, so wherever possible, especially in all areas where we have -- or where we feel where we have a competitive advantage, then we will -- then our salespeople are, let's say, requested to go for further price increases. That is actually also a topic we mentioned. We talked about at the CMD value-based pricing. There's a lot of new products on the market where we feel the customer has a real benefit. And if that's the case, then for sure, we also try to increase prices here. But there is, let's say, no big announcement across all divisions or something like that, that you to go for further price hikes. Also, as you have seen, at least in the first 6 months, a very good development on the gross margin side and EBITDA margin side. So from pricing trends, all good, I would say.

Okay. Maybe just another couple of quick questions. Just -- you mentioned also giving us the FX guidance. Obviously, we've had some U.S. dollar weakening. I just wanted to understand, is there any effect on the margin that you foresee from sort of weaker dollar? Obviously, you've got quite a European production, quite a heavy European -- heavy production footprint. Anything that you would comment on there on thinking about the margin's impact from FX?

Yes. You are right with regard to the production footprint, which is more than also focus here in Europe. But also looking back or thinking back, we never had huge, let's say, margin impact during these times of, let's say, a little bit more volatile FX environment. So, so far, also internally, I've heard nothing that anybody mentioned anything here to me. So from that perspective, I would not expect any big impact, yes.

And maybe one comment from my side, Max, is that when we talked about FX, what Oliver mentioned, this was always about translational FX impact, not transaction. Because transaction everything in terms of transaction is directly hedged. So it's only the translational impact you're talking about.

Okay. So you have no transactional exposure?

The transaction exposure is hedged.

Okay. That wasn't my understanding but anyway. Okay. And then just maybe sort of finally, just on the order intake, you obviously mentioned a better sort of second half. I mean do you think given where your sort of sales growth guidance is for the full year, would you expect to be at a positive book-to-bill over 1x for the full year?

Yes. That's million-dollar question at this point in time. There's still some months to go. No, I wouldn't make any comments here, other than what I've just said before that overall not only looking into the pipeline, but also on a base business, service business that makes us quite comfortable.

Okay. And just to clarify, finally, on the sales guidance. You said growth will be 2% to 4% this quarter organically. That was the message. Within the 2% to 4% range for the quarter. Is that correct?

Yes, I said in the somehow need to be then as the quarter was, but it should be somewhere also in or around this guidance of 2% to 4%.

Now we're going to take our next question. And the question comes from the line of Klas Bergelind from Citi.

Oliver. Sorry, I was late on the call, but can you just comment on the large order comp that you made earlier? Because obviously, it's indeed a very tough comp year-over-year. But did you make any comment there on the sequential order development, where I think you had very large orders of EUR 15 million of close to EUR 100 million in the second quarter, EUR 98 million, because obviously, year-over-year, yes, that's a tough comp. But I'm curious about large orders sequentially. I don't know if you said anything and apologies again for being late on the call.

Yes. Klas, no problem at all. So no, I cannot and will not make any new comments here compared to what I said before. So EUR 138 million was a relatively high level last year. And also, as our CEO is saying, and that is necessarily the case. The timing of large orders is always very, very difficult. And if it's -- if you are lucky, then you have one, 2 or 3 or 4 orders in the quarter, and sometimes it's maybe a little bit less or in other very good quarters more, that's always hard to predict. But what is important to us and we also highlighted this also, let's say, with everything we have in our pipeline, looking forward, we are in steady contact in setting negotiations with our customers. We know that there's a lot in the pipeline, and that gives us, let's say, the confidence to make this comment on overall H2 compared to H2 last year and H1 this year.

Can I sort of ask it in different ways? I think in the second quarter, it was not a very large order that was the issue. It was more sort of not below that level, midsized, large, if we can call it that, when you made that comment, did you refer to any sort of specific category? Or is that an overall comment? Because [indiscernible].

Especially larger orders, yes. So above EUR 15 million, yes. So that was around EUR 15 million because I've mentioned that in [indiscernible] base business, I know that there's not this the definition. But let's say, overall, without having for sure at this point in time, any knowledge on the certain categories. But overall, let's say, the business below EUR 15 million, we see good development and also service on the service side as well.

All right. My absolute final one is on the bridge, and I'm thinking about, obviously, wage inflation and then procurement manufacturing, you had the Capital Markets Day this week, where you laid out the COGS ambition a bit longer term. But can you remind us about how these components sort of will face through the year for the current program, not sort of the extended program?

What we also said at the CMD and this was also, to a certain extent, let's say, a new number that we are expecting around about EUR 140 million of savings this year. So far, we said around EUR 120 million. That was also partly the reason why we have increased the guidance a couple of months ago with the release of our H1 numbers. So from that perspective, Johannes and his team, they are just doing a great job. He is also slightly ahead of the EUR 150 million target we set out for 2026. So from that perspective, that is also something you can expect then for the second half of this year, some more positive development or positive on the COGS side as well.

[Operator Instructions] And now we'll take our next question. And the question comes from the line of Sven Weier from UBS.

Yes, sorry that you have to hear my voice again now. Now just a quick follow-up on the previous question from Max on the order intake because my audio was a bit better at that point. Did you say that you expect the order intake to also grow 2% to 4% organically this year? Or was it kind of a book-to-bill of 1 or what was your statement, Oliver?

Yes. First of all, it's good to hear your voice and especially due to the fact that you have not been able to be in Amsterdam at our CMD. So yes, it's good to hear your voice. But no, I didn't mention anything on, let's say, organic sales growth for the intake. I also cannot answer the question on book-to-bill where it might be. I've just repeated what I said before that overall we see a good pipeline and are confident for H2.

And you mentioned the CMD. Can I just also follow up with one or 2 questions on the CMD?

Yes, we have -- yes, yes, please do so.

I was just curious because when we think about the 2030 guidance, you've chosen a different approach than with '26 because you're now guiding sales above 5% instead of a range of 4% to 6% and you're now guiding a margin range instead of saying, let's say, higher than 17% higher than 18%. And I was just wondering what -- any specific reason behind why you've chosen a different approach to the guidance this time?

Yes, I think what you can say and maybe what you have also learned from the CMD that we really have in particular, Stefan talked about also the verticals. So we really think that looking at -- we know how broad our portfolio is, but we have a lot of great technologies. We have a lot of innovations coming to the market. Also Johannes talked about this, as Stefan talked about the different verticals. So that gives us the confidence that we can also -- again, as the CAGR more than 5% until 2030. And with regards to the margin right the corridor, yes, maybe also here, let's say, some learnings from the past couple of years when we have given the guidance in 2021. For the margin that the world was in more or less perfect shape. We all know what has happened since then with COVID, with Ukraine, now with the Middle East and so on and so forth. We have supply chain challenges and so on and so forth. So for that reason, that could also maybe then be an idea to have a rather corridor than only a specific number. But it's also an ambitious corridor, and we will work hard to make this happen.

And the other one I had was just on the G&A point where you want to improve 1.5% on margins. I mean, first of all, I was wondering because I think your G&A are kind of almost double than the best-in-class in terms of percentage of sales. So would you say that there's more upside baked in? And secondly, I still remember from the old days, the former GEA fiscal 2020 program. And as that was also an approach to make the company more efficient to streamline the organization, to put away with too many local entities. And for some reason, it obviously failed. So what are the learnings from this exercise that [indiscernible] has tried in the past? And how do you do it differently this?

I think, first of all, Bernd and his team have spent a lot of efforts looking into the this [indiscernible] possible. And we have described the 3 main pillars we found here in G&A. On the other side, we also know that we are not in a best-in-class with our ratio on the other side, and that is also something you mentioned and also that's something we took into account. There's still some skepticism also with regards to, let's say, here further announcements in reducing number of legal entities or ERP integration and so on and so forth. And so from that perspective, we said, okay, let's give a number that we are very much, let's say, confident on -- and let's do the first step. And I think also here, we need to deliver. On that number and then let's have a look at the development after 2, 3 or 4 years to see if even more is possible. But for the time being, I would see this as a really -- a number we checked up and down, a number we can really stick to knowing that even if we achieve it, then we are maybe not yet best-in-class. But let's do the first step first before announcing even more ambitious targets here.

And the learnings, I mean, because again, I remember some of the things were part of the plan ages ago and it didn't work out. Maybe it's too long ago to have learnings from this?

I think, I think it's -- I mean, when GEA was tackling a lot of issues at the same point of time, and we all know where it ended in the end. So it was not only all about G&A. G&A was an area in focus. You're absolutely right. But I mean, the way to tackle G&A under OneGEA was about a completely new organizational setup for the company. And this is nothing what we are talking about now. So it's a completely different approach. It's not about reorganizing the business and giving everything a new structure, but it's really about decoupling, let's say, G&A expenses from the sales growth and to really focus on the ERP side to focus actually automatization. So I would say, it's a completely different approach, how we are doing it now. And I think since OneGEA, I mean, when the new management team came in, in 2019, the first years have been all about, let's say, fixing the issues and working on the fundamentals of the company to improve profitability. And at that point of time, the focus was not yet on G&A. So it's only actually now after having the company really in a good shape and having it on a good profitability level now that we are now thinking about the, let's say, the next phase, if you want to call it that way.

Yes, definitely sounds more evolutionary than revolutionary back in the days.

The speakers showed no further questions for today. Oliver, back over to you.

Yes. Nate, thank you very much again. Yes, dear participants, many thanks for your time and this afternoon for joining our pre-close call. And as I've mentioned earlier, with the end of this call, we start into our quiet period and are already very much looking forward to talking to you again the sixth of November, the day of the release of our Q3 numbers. All the best from the entire IR team here from Dusseldorf, Germany, stay healthy, and have a good time. Bye-bye.

This concludes today's conference call. You may now all disconnect. Have a nice day.