Gea Group Ag Ord

Good day and thank you for standing by. Welcome to the GEO Group AG Q2 2023 Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Oliver, welcome back. Please go ahead.

Thank you, Heidi. Good afternoon, ladies and gentlemen. As you can imagine, that is not a normal conference call for us, given the sudden and unexpected death of Markus Ketter this week. please be aware of 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 over to Stefan.

Thank you, Oliver. As Oliver said, our chief financial officer, my dear colleague and good friend, Markus Ketter, suddenly and unexpectedly passed away on Sunday at the age of of only 55. You can imagine that we are all shocked and devastated by his loss. With Markus, Gea loses an outstanding CFO and a highly valued individual whose drive, professional excellence, and also distinctive sense of humor will be greatly missed. Personally, I'm also losing a dear and loyal friend. Our thoughts are with Markus' wife, his two children, and his entire family. Despite this tragic loss, we will now provide you with a detailed update on our Q2 numbers. As you all know, we had a strong start into 2023, and this positive development continued in quarter two. Order intake has been up by 2.4% organically, but declined in reported terms slightly by 1.6%, year over year to 1.38 billion euro. I hope this provides to you that the fact we are not giving quarterly order intake indications anymore was and is not a signal that our order intake will suffer. We even have an optimistic view, especially for our new technologies, for new food, for CO2 capturing, and for our sustainable products. I will talk about these topics in more detail soon. Sales have been growing nicely by 9.4% organically, leading to a strong improvement of our EBDA before restructuring expenses by 14.4% to €192 million. The respective EBDA margin was up by 1.1 percentage points, to 14.3%. Last but not least, we also increased our ROSI significantly by 4.1 percentage points to 33.8%. Sustainability is one of our seven strategic pillars in our mission 26 because we are convinced that GEA can and will play a major role in the decarbonization journey of our customers. We enable our customers with our technologies and solutions to achieve their climate targets and meet ever-increasing regulations around emissions, water consumption, and waste disposal by taking a more circular approach to processes. In order to empower customers to make smart decisions for a greener future, we launched our AddBetter label in June. is our eco-label promoting GEA sustainable solutions that are significantly more resource efficient than their predecessors. The efficiency improvements are calculated according to ISO standards and are validated by TÜV Rheinland, a global leader in independent testing, inspection, and certification services. This eco-label provides customers with the maximum transparency as they can access the data behind each at-bedder labels. When we launched AddBetter in June, our AddCool spray dryer, the marine separator, and the dairy robot were the first solutions to receive the label. All three of them consumed between 9% and 49% less energy than their predecessors. In the meantime, other technologies have been added to the AddBetter portfolio. These include also water-efficient technologies like our water-saving unit for the cooling of separators. By reusing the cooling water, this unit can save 99.9% water compared with the previous generation, totaling around 1.3 million liters of water per day. To give you a feeling of the magnitude, the annual water saving equals 1940 feet freight containers full of water. So we are talking about really significant water savings here. At our Q1 results in May, we have talked about our carbon capture technology, which in the meantime, we installed at Phoenix Cement in Beckham, Germany. Phoenix Cement has an annual production capacity of 500,000 tons of cement and is emitting 1,000 tons of CO2 per day. First, analysis have shown that our solution is performing well. and is able to capture 90 to 95% of the daily emissions. The clear aim of the pilot plant is to reduce the production-related CO2 emissions through carbon capture. In addition, our customer would like to go even a step further and develop with us a complete value chain for carbon capture, including transport, storage, and, if applicable, utilization. After the successful pilot, the scale-up is planned. Due to its mobile containerized design, the pilot plan can also be used in other cement plants worldwide. We are currently seeing a strong demand for this technology, especially in Europe and North America. CO2 is generated in many industrial processes, not only in the cement industry. And at the same time, it is also often essential for the production of many products, for example, in the brewery industry. No beer can be produced without CO2. The industry is dependent on the CO2 market unless they are investing in the technologies to capture the CO2, which is generated as a byproduct during the fermentation process. We do offer technologies to recover, purify and reuse the CO2. The result of our purification process is 99.998% pure food grade CO2, which can be used for carbonating the beer or any other beverages. Our technologies enable the customer a circular economy with a clear benefit to be CO2 self-sufficient and hence independent from the CO2 market. It can even turn out to be an additional revenue stream if more CO2 has been recovered than needed for the beer production. Payback periods are short, ranging between 1.5 and 4 years, making the CO2 recovery an attractive investment. In addition, customers can optimize their energy costs for the CO2 recovery systems by reusing the waste heat arising from the CO2 recovery process. CO2 recovery from alcoholic fermentation is not a new technology. We have systems installed in 35 countries and four continents, but in the last years, this technology has gained a lot of traction, and we are convinced the demand for this technology will further rise. I will continue now with the business and financial review. We were able to continue with a positive development from Q1 23 by further improving the majority of our key performance indicators. Once again, we have managed to grow our order intake organically year over year despite a strong prior year quarter. Due to negative FX impacts, reported order intake declined by 1.6% to 1.38 billion euro. Three large orders with a total value of 81 million euro were received in this quarter in comparison to two large orders totaling 52 million euro in quarter 2022. Quarter two, 23, was another quarter of strong organic sales growth. Sales was up notably by 9.4% year over year on an organic basis, driven by both strong service and new machine sales growth. EBDA before restructuring margin reached 14.3%, a significant 1.1 points increase, and was driven by an improved gross margin and slightly lower operating costs. ROSI improved further due to the strong increase in EBIT before restructuring expenses, overcompensating the higher capital employed. All divisions contributed to this positive development, except for food and healthcare technologies. Our net liquidity declined from €264 million to €65 million, mainly because of the second tranche of our share payback program, which we finished at the end of the fiscal year 2022. Between the second quarter 22 and year end 22, we bought back own shares for in total 170 million euro. As you all know, these shares are held as treasury shares. So all in all, another successful quarter. Looking a bit deeper into the crew performance, order intake declined in reporting terms by 1.6 to 1.38 billion euro due to FX effect but grew by 2.4% on an organic basis. Liquid and powder, as well as food and health care technologies, grew their order intake organically and overcompensated the declines in the other three divisions. From a customer industry perspective, beverage was again strong, but major growth contributor has been chemical in this quarter. As I just said, this quarter has seen three large orders, but also orders between 5 and 15 million have seen an increase year-over-year. Given the strong order backlog at the end of Q1, sales grew strongly by 9.4% in organic terms. Service sales grew organically by an outstanding 12.7% year-over-year, driven by healthy growth across all divisions. All new machine sales have been strong, growing by 7.7% year-over-year. While the new machine business at liquid and powder as well as food and healthcare technologies has been flat year over year, the other three divisions have been growing their new machine business by double-digit percentage points organically. The service sales share was 35.5%. That means 0.9 percentage points higher than last year. The strong organic sales growth combined with an increase in the gross margin and lower operating expenses resulted in an EBDA of €192 million and €24 million improvement versus Q2 2022. When looking at the EBDA margin, we achieved a significant year-over-year improvement of 1.1 percentage points. Now let me continue with the figures for the division, separation and flow technologies, which had a very strong quarter in terms of sales and profitability. Order intake declined organically by 5.3% year-over-year. This decline is purely the result of an extraordinary high order intake level in the prior year quarter of €420 million. Since Q3 2022, this division has been growing its order intake organically each quarter and on average by 11.8%. This is a fantastic growth, I would say. In this quarter, the growth in the customer industries, dairy processing, new food, and in industries such as oil and gas, energy and renewable resources was unable to compensate of the decline in the other customer industries. The order pipeline overall is on a stable level compared to prior year. The order backlog of €663 million is almost on the same level as the record backlog at the end of Q1 2023, which lays a good foundation for further sales growth in the coming quarters. Organic sales grew considerably by 14.7% year-over-year, driven by double-digit organic growth rates of both service and new machines. The service sales share decreased on a very high level by 1 percentage point to 45.9% in the quarter. EBITDA increased strongly. by 12 to 99 million euros, and the EBITDA margin improved by 0.8 percentage points to 26.1%. Higher sales, declining operating costs, and a better margin in the service business resulted in a notably increase in profitability. Let's move on to liquid and powder technologies. Auto intake increased organically by 15.8% year-over-year. While the customer industry's beverage and chemicals showed a strong positive development in this quarter, food, new food and dairy processing were below priority levels. Liquid and powder technologies has won three large orders totaling 81 million euro this quarter versus one large order of 32 million in Q2 2022. These large orders were received from the customer industry chemicals for distillation and gas cleaning. Rotec pipeline looks overall good with beverage in a more dynamic performance than food and dairy processing. Order backlog remains virtually unchanged from Q1 23 at a record level of 1.6 billion euro. Sales increased organically by 3.7% year over year. While the service sales grew organically by 17.6% year over year, the organic new machine sales remained unchanged. As in the first quarter of 2023, the high order backlog at the beginning of the year has not yet been processed as many large orders are still in the engineering phase. This explains the muted new machine sales generation in this quarter and will lead to an acceleration of sales growth later this year. Due to the strong service sales growth, the service sales share increased by 2.8 percentage points to 23.4% in the quarter. EBITDA before restructuring expenses rose by €1 million year-over-year to €40 million, and the EBITDA margin increased by 0.1 percentage points to 9.2%. Gross profit rose due to higher service volume and better gross margin, while operating costs remained stable. Continuing with food and healthcare technologies, order intake was up by 2.6% organically year over year on an already high level of order intake in prior year's quarter. As you might remember, Q2 2022 contained one large order of €20 million. Even though no large order was booked in this quarter, the order intake increased from €282 million in Q2 2022 to €287 million. When looking at the order pipeline, we are expecting an overall stable business environment. Organic sales growth was 3.6% year over year. This was driven by a strong organic sales growth of 11.8%, which overcompensated the flattish new machine sales. As a result, the service sales share increased by 2.3 percentage points to 33.0% in the quarter. EBDA decreased by €4 million year-over-year and the respective margin dropped from 8.1% in Q2 2022 to 6.1% in Q2 2023. Cost-profit declined year-over-year due to lower margins in the new machine business. The profitability of the new machine business has been impacted by the execution of some older projects with long lead times, whose selling prices had not yet accounted for the cost inflation. Operating costs, however, remain stable. Moving to farm technologies. As you might remember, we have stated in our last conference call that we might see a temporary phase of lower order intake growth on the back of contracting raw milk prices and higher interest rates. Pew2 has now seen a normalization of the order intake after several quarters, of strong growth. The organic order intake decline of 4.5% year-over-year was mainly driven by manure and conventional milking systems because of tougher financing conditions in combination with falling milk prices. Demand for automated milking systems, which do account in the meantime for roughly one quarter of the business, has remained relatively stable. Sales increased organically by 9.9% year-over-year. This strong development was driven by an organic new machine sales growth of 11.3% year-over-year and a healthy service sales growth of 8.2% year-over-year. The service sales ratio declined on a very high level by 0.9 percentage points to 44.2%. EBITDA increased strongly by 9 million euro and the according margin improved from 14.2%, from 11.3% in Q2 2022. Cross-profit has been significantly above prior year's level, driven by strong organic sales growth and better margins, which overcompensated the increase in operating costs. Finally, let us turn to heating and refrigeration technologies, the division with the strongest organic sales growth in this quarter. After eight quarters of strong organic order intake growth, 14.9% on average, order intake decreased organically by 9.1% in Q2. The year-over-year decline results from an extraordinary high order intake in the prior year quarter and postponements of larger orders into Q3. The positive development in heat pumps and sustainable engineering solutions, we call it SENS, continued. Organic sales increased strongly by 21.9% year-over-year and was driven by new machine sales growth accelerating from 22.1% in Q1 2023 to 28.7% year-over-year in this quarter. Also, service sales showed a healthy organic growth rate of 11.5%. Its sales share, however, declined by 3.2 percentage points to 35.4% due to the strong new machine sales. EBITDA rose by 3 million to 16 million euro, and the according margin improved from 10.6% in Q2 2022 to 11.4% this quarter. Cross-profit was up year over year due to higher sales and better gross margin, which overcompensated the increase in operating costs. SFT and FT now. Closing the divisional chapter now with the overview on the EBDA contribution, except for food and healthcare technologies, all divisions contributed to the profit improvement. However, it clearly stands out that separation and flow technology as well as farm technologies have been the major drivers accounting for more than 80% of the year-over-year EBDA improvements. In total, EBITDA before restructuring increased to €192 million from €106.7 million. Translational FX has lowered our EBITDA by €6 million. Excluding this FX effect, as we have defined it in our full year guidance, our EBITDA would have improved by €31 million to €198 million. Coming now to another important topic, networking capital. Networking capital increased by 73 million euro year over year to 458 million euro due to higher inventories and trade receivables as well as lower trade payables partly offset by an increase in advance payments. The increase in inventories and trade receivables need to be seen in connection with the record order backlog of 3.45 billion euro and the strong sales generation. On a quarter-on-quarter perspective, networking capital went up further from 6.9% of sales in Q1 23 to 8.5% in Q2, which is, however, still on a low level. While inventories have remained virtually unchanged, quarter-on-quarter higher trade receivables combined with lower advance payments have triggered the uptick. Due to this quarter-on-quarter uptick, the networking capital issue went up until the guided corridor of 8% to 10% of sales. We are, however, confident that net burning capital will come down over the next quarter and will be slightly below the guided corridor of 8% to 10% by year end. Operating cash flow was 31%. 31 million euro, which is below prior year quarterly figure of 51 million euro. The decline is explained by higher cash outflows for taxes and others. The position others includes mainly cash outflows for value-added tax and prepaid expenses. The step-up in capex-related outflow of 15 million euros year-over-year to 56 million euro is in line with our full year 23 guidance of around 240 million euro. As a result, free cash flow is negative at 33 million euro and below prior year quarterly number of 11 million euro. Consequently, our free cash flow conversion rate before restructuring, which is calculated over the last four quarters, has been below the target corridor of 55 to 65%, as only 34% of EBITDA was converted into free cash flow. Main reason for the lower cash generation has been CapEx of €222 million and the net working capital outflow of €81 million over the course of the last four quarters. Free cash flow generation will significantly improve over the course of the second half and hence The free cash flow conversion ratio will see an increase from the current level, but we do not longer expect to reach the target corridor of 55 to 65 at the end. Net cash, including lease liabilities, declined from 247 million euro at the end of the first quarter to 65 million euro driven by the negative net cash flow of 52 million euro and the dividend payment of 164 million euro. Let me now talk about our financial headroom. On the left, you see our debt instruments as well as their respective utilization and maturity structure as per end of June 23. As per June 30, merely €2 million out of the €62 million uncommitted that bilateral credit lines were drawn, and €100 million of a fixed-rate borrower's note loan, which will be due on February 26 in 2025. The first liquidity position is supported with an undrawn committed syndicated credit line of €650 million, whose maturity has just been extended to August 28. This debt instrument currently serves only as an additional liquidity backup facility for us, To sum it up, we have only 100 million euro of financial debt. Continuing now on the right side of the slide, equity improved because of the higher net profit resulting in equity ratio of 39.6% after 38.7% at the end of Q2 2022. The decline in net liquidity is mainly due to the second tranche of our share payback program mentioned earlier. Let me now come to our outlook for the fiscal year 23. As a result of the positive development in this quarter, we confirm our guidance, which we have upgraded in May. Organic sales is expected to grow organically by more than 8% after 8.9% last year. For EBITDA before restructuring expenses, we forecast to reach the upper part of the range of 730 million to 790 million euros with a comparable margin of about 14%. And ROSI should exceed 32%. Please bear in mind that the guidance for EBITDA and ROSI is based on constant exchange rate. Finally, our roadmap for 23. The next important date will be the release of our Q2 results in November 8, followed by our full year 23 results in March next year. This concludes my presentation, and I hand back to Oliver for the Q&A session.