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 First Quarter 2025 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Oliver Luckenbach, Head of IR. Please go ahead.

Yes. Thank you very much, Natia, and good afternoon, ladies and gentlemen. And also a warm welcome to our Q1 2025 pre-close call. With me on the call are my deputy Rebecca and [ Edward ]. 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 you can find on the internet. We will now address 9 topics, which we also discussed during recent conferences and roadshows. And afterwards, you will have some time to ask questions. First of all, we confirm our group guidance for fiscal year 2025, which is an organic sales growth between 1% and 4%, an EBITDA margin before restructuring expenses between 15.6% and 16.0% and the return on capital employed between 30% and 35%. Topic number two, customer industries. In Food, we see continued activity. On the Beverage side, the pipeline seems to be on a similar level compared to 2024. Dairy Processing continues to look promising. Dairy Farming on the one side, milk price is under pressure in China, and there's a weak environment in Japan. On the other side, there are attractive milk prices in Europe and the U.S. So overall, we expect that this business will improve during the course of 2025. On the side of Heating & Refrigeration Technologies, the pipeline shows good development. So the typical Food and Beverage-related applications remain attractive industries we serve with our decarbonization solutions. Order intake, topic number three. In general, we expect that 2025 will be another good year for GEA. The pipeline continues to look promising, and we also see that customers are coming back to negotiate large orders, but we can't pinpoint the specific quarter when orders will be signed. So from that perspective, the number of large orders in Q4 last year was higher than expected. So it's better to look at GEA's order intake on a rolling last 12 months view. With an order intake of EUR 1.6 billion Q4 2024 was a very strong quarter. So that's not the new normal. And please do also keep in mind that Q1 2024 was a decent quarter with close to EUR 1.4 billion in order intake. That gets me to topic number 4, sales. Due to the composition of our order backlog at year-end 2024 with more large orders, sales generation is likely to be slower at the beginning of the year and will accelerate towards the second half. So order -- so organic sales growth in Q1 is expected to be closer to the lower end of our range of 1% to 4%. Topic number 5, EBITDA margin before restructuring expenses. Our EBITDA margin guidance clearly indicates that we also want to make progress with regards to our profitability in 2025. Therefore, you can expect that we already want to show some progress in the first quarter of this year. And just to remind you, the EBITDA margin before restructuring expenses in Q1 last year was 14.5%. That's it from my side, and I will now pass over to my colleague, Rebecca.

Thanks, Oliver. Hello, everybody. Let me continue with topic number 6. So what to keep in mind for the cash flow. So just as a reminder, with regards to CapEx, we stated that we do expect CapEx of around EUR 235 million for the full year 2025. With regards to net working capital to sales, our new ambition level of our Mission 30 has started with the fiscal year 2025. So our new target corridor is 7% to 9%, instead of 8% to 10%. Due to the seasonality, there has always been a sequential uptick in net working capital in Q1 from the Q4 levels. We don't expect that it will be different in 2025. So Q1 net working capital ratio will most likely be higher than the 6% reported for the fourth quarter. What else to know, at the end of February, we had the repayment of our borrower's note loan of EUR 100 million. So we have no more financial debt left. Topic number 7, restructuring expenses. As there has been a lot of question on this topic on the day of the Q4 release and also after the publication, we would like to repeat the statements we made in order to make it really crystal clear to everyone. So first of all, with our Mission 26, we indicated that we will have EUR 130 million to EUR 150 million of restructuring expenses between fiscal year 2023 and fiscal year 2026. In fiscal year '23, we booked EUR 60.5 million. In fiscal year 2024, we booked EUR 61 million. So in total, more than EUR 120 million have already been booked. In the Q4 analyst call, our CFO has indicated that we will most likely slightly exceed the upper end of the range, but not significantly due to the unforeseen war in the Ukraine, which had resulted in a need to restructure our operations in Russia. We clearly promised that from 1st of January 2027 onwards, we will no longer adjust our EBITDA for restructuring charges. So that means the remaining restructuring charges will be booked in 2025 and 2026 with the higher share expected for year 2025. Number 8, share buyback program. I will give you an update as of last week Friday, 28th of March. We executed, in the meantime, EUR 376.8 million, so 94% of our EUR 400 million share buyback program. A number of shares, means we bought back 9.1 million shares, which is 5.27% of our shares outstanding. The average price paid is EUR 41.56, so well below yesterday's closing price of EUR 55.10. The program ends in April 2025 and keep in mind that the shares will be canceled. And then last, but not least, topic number 9, additional financial information. Just for some housekeeping, depreciation and amortization, we do expect for the year 2025, EUR 210 million. The financial result is expected with minus EUR 30 million. And for Q1, the weighted average number of shares used to calculate basic and diluted earnings per share is EUR 164.1 million. The tax rate for 2025 is expected to be 29% for the P&L. And the cash tax rate is, however, expected to remain on a similar level as in previous years, so 24% to 25%. And now we will open up the Q&A for any questions you may have. So Natia, can you please take care of it?

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

First one is on the demand environment. Probably now it's early days, but wondering if you already have a sense on how these announced tariffs would be hitting your clients, specifically, whether you think that has an influence on their decision-making. And also want to make sure I understood your qualifications on the order guide because obviously, we all understand that EUR 1.6 billion is a very high benchmark. But did you also say that even EUR 1.4 billion is a high benchmark for Q1? And I'll follow up with another one.

Yes. Thank you very much, Sven. Let me start with the second question with order intake. What I said -- what we said is that the EUR 1.6 billion was quite a high number given the 7 large orders we booked in the fourth quarter of last year. We said that our pipeline continues to look quite promising. But as we also discussed in the past, it's always hard then to finally pick the quarter when the order will finally be signed. Alluding to the first quarter of last year, we were just mentioning that it was also a decent quarter, not a very high quarter, outstanding quarter, but also a decent quarter. So that is actually the message we want to give here at this stage. Yes, very obvious question regarding tariffs, especially today. Looking at the development in the stock markets now the second day in a row. So let's say, from -- let's say, from a -- let's put the numbers into a place here, what we also said recently. So the U.S. in general, accounts for around about 18% of our total sales, around about 99% of the procurement for the U.S. is done in the United States. However, as we also communicated in the past, there are also some imports, and that is also -- that's around about 30% of sales. What we have in our contract in general, we will now look into this in more detail, is that we have the ability to pass on tariffs to our customers, that is the status quo. However, for sure, in this entire topic because it just came up yesterday, we need to look a little bit more into the details, but I'm quite sure that we will give you here further update then with the announcement of our Q1 figures.

But on the tariff side, I mean, I also meant that what does it do to the investment behavior of your clients? I mean, do you think this just confuses them more and they wait for making decisions? Or do you feel you are a bit more insulated on their decision-making from that?

Yes. So there's maybe now a personal opinion I share here because as you can imagine, we do not have these insights. I think everybody is a little bit puzzled what is going on with the tariffs in the United States. I think it was expected to a certain extent that there might be some tariffs, but I think the entire world was surprised that more or less every country is faced now here with very high tariffs. So that is something we need to digest. But we have also shared in the past and for sure, we'll also look into this now in more detail again that from our point of view, there are not a lot of, let's say, real competitors in the United States to GEA. So we have a certain outstanding position here. But that is, as you can imagine, every management will now push the organization again to come up with maybe some more detailed numbers here, some more detailed insights. But as you know, in general, we have leading market positions. So it's not a nice development, but it's also no disaster from our point of view.

Just a follow-up on what you said previously because I'm not sure I understood that because on the one hand, you say 90% of local sales are procured locally, but then you say 30% of sales are imported. So what's the difference there? Sorry, if I...

Yes, maybe I jump just in here, Sven. So from the 18% of the sales we generate in the U.S., roughly 1/3 is generated with products which are imported from outside of the U.S., mainly actually from Europe to the United States. So 1/3. This 1/3 could be impacted then by tariffs. What the 90% is referring to is really the procurement. So if we source things for projects, et cetera, in the states, then actually 90% of that is locally sourced.

[Operator Instructions] Just give us a moment. Now we have again Sven Weier on the line.

Okay. Sorry. Yes. Just a very quick one because it was on the EBITDA margin comments you made. Could you just kindly repeat that, Q1 EBITDA margin?

Yes. So first of all, we said that the guidance we have given for the full year, so the corridor I talked about at the beginning and you know of 15.6% to 16.0% clearly indicates that we also want to make progress here with the profitability in the entire fiscal year 2025. But therefore, normally because it's a little bit more back-end loaded, but not -- usually also at the beginning of the year, we want to show a good start, and that is actually also what you can expect for the Q1 of this year. And so expect improvement over prior year. And the prior year number, which I gave you, was the 14.5% we achieved in Q1 2024. So we also want to show here some profitability improvement already in the first quarter.

And the question comes from the line of Sebastian Growe from BNP Paribas Exane.

Just one question. I had the same impulse and idea as Sven had around the EBITDA margin. So apparently, you were quite helpful around specifying a bit in more detail what we could expect from the quarter 1 when it comes to the revenue recognition with the lower end of the provided range being seen as more likely by you. Apparently, we have a 20 to 60 bps increase in the margin target for the year. So could you also be equally specific or at least sort of directionally specific as to how to think about quarter 1? Because again, there were many things in flux, I think you had this property sale, you had then also the issues in SFT with the logistics provider change, et cetera. So I think you could just help us a bit how to think around the margin quality then, that would be helpful.

Yes. So at this point in time, at the end of the day, that is the announcement of the message we want to give here that we are really having a lot of confidence that we will already improve our margin in the first quarter. And we had a kind of wash, as you mentioned, in SFT in the first quarter of last year. On the one side, we had this gain from the sale of a real estate in the United States, U.S. that was around very low double digits. And at the same time, this was eaten up, so to speak, from the delay in Service Business that was delayed from the first quarter to the second partly to the third quarter. So it's a zero sum game here at the end of the day. And other than that, so far, there are no, let's say, funnies, so to speak, aware to us at this point in time. So from that perspective, you can, as I said, expect also a very decent quarter in terms of margin improvement.

Fair enough. And then the last question, I acknowledge that it's really, really early days with the tariffs and what it could do in order to sort of safety cushion in terms of inventories, et cetera. But I don't know if it's too early to ask the question, but nonetheless, I will. Would you be prepared for being sort of playing it more safely, if you want, so from the working capital and with that inventory perspective going forward in order to kind of get rid of potential supply chain disruptions, which all else equal, might well happen after the latest happenings and events?

It's really a very good question. There's no doubt about it. But it's really a little bit too early. So you can be assured that especially GEA as soon as we have heard it yesterday morning, we are looking into this. But in order to be able to give you also a good answer to that question, and we need to check the facts with our colleagues, especially in the United States. And then to see what might this change in the general supply chain and so on and so forth. It's really too early at this point in time, as I said, but surely, we will answer that question then in 4 weeks' time.

And the question comes from line of Adrian Pehl from ODDO BHF.

It's Adrian here. Actually, I have still a few open. I'm trying to rephrase a little bit the question on the underlying demand that has somehow been asked. The point is, when I got you correct, Q4 was obviously quite strong in order intake, and Q1 is seeing somewhat slower levels than [ previously ]. So I was wondering, well, first of all, is that kind of a normal seasonal pattern that you see? Or is it just a steeper decline of the order activity? And having said this for the rest of the year, I mean, obviously, some clients, I don't know if they really anticipated their contract signings in Q4, although we have been speaking about that this was a bit delayed last year. But I guess they would have expected tariffs to come somehow. So I'm really wondering how strong is the replacement need or new project need for them actually in light of the expectations that higher tariffs are coming. So do they just sit and wait there? Or what's your feeling around it? And having said this, you're guiding us still for the second half to be better. And maybe you could say a few words on the visibility, in particular, also when you were referring to Dairy Farming, which looks quite soft actually at the moment and also in your guidance? And then I have some housekeeping follow-ups.

Yes. Let me start, and then Rebecca will also give you some insights. So if you look at the -- over the last couple of quarters, then you will always see that we have seen a very strong, let's say, base business, orders up to EUR 1 million up to EUR 5 billion, depending on the quarter. That was relatively stable. And then even quarter is an outstanding quarter in terms of order intake. Then it very often depends on the number of large orders we are having. If it's only 1, 2 or 3 large orders, then it's a more normal quarter. But if there are 7 large order as we have seen in Q4, then it's at EUR 1.6 billion. But there's nothing wrong, let's say, with the underlying business, which is very stable since a couple of quarters already. You know how far or how strong we push also our Service Business that is also very solid, a very reliable business. There are also no indications available to us as of that it's slowing also. So the ground business, the base business of GEA is fantastic. It's doing -- showing a very good performance.

And I think what is important to add here is, I mean, as you asked about also the visibility, I think, therefore, we have to distinguish what we are talking about order intake and are we talking about sales. So order intake. I think this was already explained now by Oliver. In terms of sales generation, what is our visibility here. I mean, we guide for 1% to 4% organic sales growth. And I mean this is also based on what we are seeing in the pipeline. It is based on the order backlog. But for sure, I mean, if you look at the order backlog, which was at the end of last year at EUR 3.1 billion, EUR 2.6 billion out of that for, let's say, sales execution within 2025 and the remainder actually for 2026. So the order backlog actually had in terms of its composition, a higher share of larger orders. And that's why we were referring to that, therefore, the phasing of the sales generation will be slower in the first half and will accelerate towards the second half because of the composition of the order backlog of this higher share of larger orders. With regards to your specific question on farm technologies, and I think that's an important one. With regards to farm technologies, we are guiding for sales. And again, this is sales and not order intake as we don't guide on order intake. Sales, we guide for a decline of 6% to 12% in 2025. And why do we guide for this decline because of the order backlog at the end of 2024. The order backlog in farm technologies was at the end of 2024, down by almost 40%. And therefore, it's obviously a tougher environment than for the sales generation because, if you look at the 2024 development for farm technologies, they were already suffering in terms of order intake, but sales generation was still pretty strong. And that's why because they were basically eating up, if you want to call it that way, the order backlog. So that's the explanation for farm technologies for the sales generation. And for the order intake side on farm technologies, that's exactly what Oliver early stated. And it was also the message which we gave at our Q4 results that there has been a bit of a mix picture in a sense that milk prices in Europe and the U.S. are actually good. In China, it's tougher. In Japan, it's tougher. But in general, we do see that the business actually will improve during the course of 2025.

Can you remind us in China and Japan, how much is that on average, just very roughly?

Honestly, I don't have the data yet. Wait, just checking.

Yes. Then housekeeping one, as you were repaying the final debt, so to say. But the financial result was characterized by, let's call it, high other expenses partially related to your pension program as far as I understood. Could you share some details on how we think of it? Should we think of it in Q1?

Yes. I mean, the higher interest results, which we guide for 2025, so the minus EUR 30 million, and it was already also higher than -- sorry, in 2024 is basically the result or has strongly correlation with the strong performance of our share price in 2024 because part what is also in the interest result is actually part of the long-term incentive of the Executive Board, which has to do, which is linked to the share price development. And second, also the share buyback program and don't ask me about the details, but it's from an accounting perspective, we have to make some -- I think it's like interest stuff, which we have to book in our interest results with regards to the share buyback program because we are owning or we have -- we are owning currently the shares. And therefore, they have to make some -- this has an impact on the interest results. And then the higher share price performance actually was leading to this higher result.

Right. And so this is obviously then also a topic for Q1, I guess, so it should be higher than the run rate over the rest of the year or...

We don't have the specific indications yet. It's way too early.

Just back to farm tech, Adrian here. So Asia in total is in the low, very low double digits in terms of sales. So Asia in total, for sure, China plays an important part here, but just to give you an indication here.

Great. And then 2 final ones very quickly. Forgive me if I missed it, but did you say something on phasing of CapEx of the EUR 235 million throughout the year and with respect to Q1?

So with regards to CapEx, I mean, looking at the experience from last year, maybe, I mean, in 2024, if you look at the CapEx phasing was more back-end loaded. So my best guess is that it also will be more back-end loaded. But that's my personal best guess now.

Okay. And then very lastly on -- as you were mentioning, Oliver, the Service Business, how should we think of that actually sequentially? I mean, year-over-year, it should be up, I guess, since it continues to grow. But is there something you can share with us on a sequential basis and the overall share of Service Business, has that been growing?

No, let's say, there are no -- I would not expect a huge developments from a quarter-to-quarter. It's more steady growth, at least that is what we have seen over the last couple of not only quarters, but even years. I think we closed last year with 38% share in total. So for the full year, but in Q4, it was already 39%. So it's growing. And I would not expect any huge deviations here from quarter-to-quarter. It's more -- some kind of a steady growth we are seeing. At least, we have no other indications, so far.

And the question comes from the line of Max Yates from Morgan Stanley.

Just my first question is just around price rises. So have you on your new orders or your services put through any price rises year-to-date? That's the first question.

Yes. So in general, as you know, there's, let's say, central. We are giving targets to our different divisions and the divisions then break it down to the individual units and legal entities. But let's say, price increases are done on a, let's say, very local, very local basis in general as a rule of thumb, and that is what we have also mentioned in our full year call or showed this chart also that we intend to -- whatever we see, at least in terms of own, let's say, wage increases, we want to pass it on. And wherever possible, it's always depending on the specific application under the specific market, has to do with the competition in the local market. But in the past couple of years, if you follow the development of our gross margin, you have seen a very steady improvement of our gross margin, showing or indicating that we are on the right track here with our price increases. So also for this year, that's a clear expectation from the top management to the divisions, to the regions, to each and every legal entity to further increase also gross margin, in other words, to improve prices, yes.

Okay. Just a quick couple of follow-ups. So you mentioned 30% of what you sell in the U.S. is imported from outside, mostly Europe. How does it work on existing contracts where you've taken an order that you may deliver it at the point in which tariffs are in place. Are there measures in the contract to take -- pass that on to the customer? Is it kind of, does the customer just have to pay it as they accept the product and it crosses the border? How does that actually work in practice and who bears the responsibility?

Yes, fair question, Max. So I'm aware of the fact that we added additional language to our contracts already in the last couple of weeks to prepare for potential tariffs. Is that 100% coverage? I can't guarantee you that. But I know that we already worked on that, so on adding pass-through clauses to our contracts. In addition, it depends then on the, how is it called, [ Incoterms ], which you have agreed with the customer. And there, I mean, our U.S. team now or our teams now have to check exactly on the current contracts, which Incoterms have been agreed with the customer, whether the pass-through clauses were already integrated in the contract. So that's actually a review process, which is currently happening.

Okay. Just third one is around FX. Obviously -- sorry, and that was a little bit late on the call. So apologies if you've mentioned this...

No problem. Go ahead.

So FX has moved, obviously, most likely against you, given the dollar. But could you give us an update of what you think the sort of sales and impact -- sales and EBIT impact is or EBITDA impact is for this year based on current FX rates?

So as you know, also here, especially if you have seen it, regarding U.S. dollar, euro, a couple of weeks, months ago, it was -- we were close to parity. Now the last figure I've seen, it's now 110. I'm not -- haven't checked the last 10 minutes. So normally, we would not expect a significant impact in Q1 if then maybe rather on the positive side. And for the full year, we really now have to see how the U.S. dollar is developing. But at least for Q1, I wouldn't expect any major impact here.

Okay. Understood. And then just in terms of thinking about the competitive landscape because obviously, if tariffs come in place, you're importing some of what you sell in the U.S., who do you describe as your kind of biggest competitor particularly in the stuff that you import into the U.S.? Is it a local competitor that produces locally? Or are you more competing against larger international players who maybe have a sort of similar manufacture up to your own? I guess what I'm trying to understand is if you put up prices by 20%, are you going to be at a competitive disadvantage against your main competitor in the U.S.?

Very fair question, honestly, Max. I mean, if I think about our competitors, I think many actually have quite, let's say, similar production footprint than we have, so quite Europe focused. I mean, there are players in the U.S., like JBT and also SPX FLOW in the United States. But honestly, I'm not an expert on how -- what they exactly produce in the U.S., whether this is exactly then the equipment, which we would export from Europe to the U.S. So I can't answer that question really to a perfect degree.

But that's -- as I've mentioned earlier, I'm not sure if you already joined that meeting then or not, but that is exactly what we are doing right now to get a much better understanding here. In general, our view is, but again, we need to double check this, that there are no very major competitors in the U.S., which can deliver the same kind of, let's say, quality, resilience of products and so on and so forth. But again, this is the first answer we can give here. And that is the reason why the team, especially in the U.S. is currently working on this, as Rebecca said.

Okay. Two very quick final one. Just on the balance sheet, obviously, you're in a very strong net cash position. Can you just remind us how you think about your balance sheet position? Are you kind of proactively looking for M&A? Is there a sort of leverage position at which you would consider kind of further share buybacks? Or is the kind of net cash position somewhere or a level that is kind of desirable in the current environment? Can you just sort of remind us exactly how you think about the balance sheet here?

Yes, sure. And that was also a topic at the Capital Markets Day. So there's also a clear view we're having on this. So using of our cash flows. So first of all, it's on CapEx. On the one side, you know that we will -- last year, we spent a little bit more than 4% of sales on CapEx. This will go down to 2.5% to 3% over the next couple of years. Then we clearly indicated that we want to increase our dividend a little bit stronger compared to the past. So really striving for the 50% payout ratio in terms of net profit. Then priority number 3 is M&A. We are still looking at this worldwide. If there's an interesting target available, then we would like to also to not only grow organically, but also via acquisitions. And last not least, there's a share buyback. As Rebecca mentioned at the beginning, we are in the last days, hours of our current share buyback. So it will conclude in a couple of days, I would say. And then we will look into the share buyback again. And -- but there are the clear priorities we have set here. And as you know, we have done now 2 share buybacks in the total volume of EUR 700 million. So that's nothing we exclude anymore. We didn't do it for a couple of years in between. But now we have done 2. And also this is something we will look into more detail in the coming future.

Understood. Just very final clarification. Sorry, and this was because I was late. I -- what did you say about the financial result, the EUR 30 million guidance? Does that change?

No, it hasn't changed.

And now we're going to take our last question for today. And the question comes from the line of Uma Samlin from Bank of America.

So the first one is I'm just following up with Max's question on the orders that you have from the U.S. in terms of tariffs. You mentioned that you have put the tariff clause in the past few weeks. But what about the orders before? Because I guess a lot of the -- especially for the project -- more project-based businesses that is usually longer duration. Now how do you deal with the increase in tariffs that -- like how should we think about that going forward for the orders in your backlog in the U.S.? That's my first one. The second one is on your phasing of your sales. You mentioned that will be more back-end loaded. How should we think about the phasing? And how should we think about sort of the mix in terms of OEM sales in Q1?

Yes. Let me maybe start with your second question. We have given for the full year organic sales growth guidance of 1% to 4%. In my opening remarks, I mentioned that we will start at the lower end of this range into 2025 due to the reasons Rebecca also explained and has to do with the order backlog. It is the same number compared to end of 2023, but the mix is different because we have much more large orders in there compared to last year. So that is the reason why from today's point of view, we would expect organic sales growth development to be a little bit more back-end loaded and not front-end loaded.

And with regards to tariffs, I mean, I can only repeat what I stated earlier that, I mean, yes, we added this language. I can't exactly tell you when we exactly started to actually include that into the contract. That's nothing I'm aware of that I know exactly the timing of it. Regarding the backlog or the orders which are on the backlog now for longer and which definitely will not fall under this period of, let's say, adding this additional language to the contract. There, we need to check the incoterms, as I said, agreed with the customer. So who is paying the duties. And in general, what we have is contract exceptions mentioned, for example, for additional price hikes, et cetera. And this is something which the U.S. team is currently doing. So they are reviewing now the existing contracts exactly to actually answer your question.

Dear speakers, there are no further questions for today. I would now like to hand the conference over to your speaker, Oliver Luckenbach, for any closing remarks.

Yes. Thank you very much, Natia. And yes, first of all, thank you very much for participating in our today's pre-close call. And also thank you very much for the questions, also to take home here and there, as we have mentioned during the call. And with the end of this call, just to remind you, we start our quiet period and are already very much looking forward for sure to talking to you all again on the 8th of May, the day of the release of our Q1 numbers. And with that, all the best from the entire Investor Relations team here. So stay healthy, and have a good time. Bye-bye.

Enjoy the sunny weekend.

Yes, hopefully.

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