GEA : Analyst Conference Call transcript

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G1AG.DE - Q4 2022 GEA Group AG Earnings Call

EVENT DATE/TIME: MARCH 07, 2023 / 1:00PM GMT

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MARCH 07, 2023 / 1:00PM, G1AG.DE - Q4 2022 GEA Group AG Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Johannes Giloth GEA Group Aktiengesellschaft - COO & Member of the Executive Board

Marcus A. Ketter GEA Group Aktiengesellschaft - CFO & Member of Executive Board

Oliver Luckenbach GEA Group Aktiengesellschaft - Head of IR

Stefan Klebert GEA Group Aktiengesellschaft - Chairman of the Executive Board, CEO & Labor Director

C O N F E R E N C E C A L L P A R T I C I P A N T S

Akash Gupta JPMorgan Chase & Co, Research Division - Research Analyst

Christoph Dolleschal HSBC, Research Division - Head of Equity Research for Germany

Klas Henrik Bergelind Citigroup Inc., Research Division - MD

Max R. Yates Morgan Stanley, Research Division - Equity Analyst

Sebastian Growe BNP Paribas Exane, Research Division - Analyst

Sebastian Kuenne RBC Capital Markets, Research Division - Analyst

Sven Weier UBS Investment Bank, Research Division - Executive Director and Analyst

Uma Jun Samlin BofA Securities, Research Division - Research Analyst

P R E S E N T A T I O N

Operator

Good day, and thank you for standing by. Welcome to the GEA Group AG Full Year 2022 Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to turn the conference over to your speaker today, Oliver Luckenbach, Head of IR. Please go ahead, sir.

Oliver Luckenbach - GEA Group Aktiengesellschaft - Head of IR

Thank you very much, Sharon. And good afternoon, ladies and gentlemen, and thank you for joining us today for our full year and fourth quarter 2022 earnings conference call. With me on the call are, Stefan Klebert, our CEO; Marcus Ketter, our CFO; and also Johannes Giloth, our COO.

Stefan will begin today's call with the highlights of fiscal year 2022. Marcus will then cover the business and financial review. And afterwards, Johannes will continue with an update on operational excellence before Stefan takes over again for the outlook 2023. Afterwards, we 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 over to Stefan.

Stefan Klebert - GEA Group Aktiengesellschaft - Chairman of the Executive Board, CEO & Labor Director

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 review of what we have achieved in 2022. Last year was once again a demanding one for us. We faced the major challenge of tackling multiple

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MARCH 07, 2023 / 1:00PM, G1AG.DE - Q4 2022 GEA Group AG Earnings Call

interconnected crisis, the horrible war in Ukraine, rising inflation and the ongoing supply chain uncertainties, all put our capabilities to the test. The restrictions and other negative effects related to COVID-19 could also still be felt. This makes our success in 2022, all the more remarkable.

Despite the adverse circumstances, we were actually able to slightly exceed the upgraded forecast following the strong third quarter and again bring the fiscal year to a very successful close. Our achievements in 2022 would have been inconceivable without the dedication of our employees. Therefore, I would like to extend my utmost respect and gratitude to all GEA teams worldwide for the exceptional performance they deliver on a daily basis.

The trend for all key performance indicators also remain clearly in positive territory in 2022. Order intake increased by 8.7% to EUR 5.68 billion. The order backlog amounted to EUR 3.19 billion and was thus 14.6% up on the prior-year figure at year-end, laying a good foundation for 2023.

Revenue rose by 9.8% to EUR 5.16 billion. Organic revenue growth amounted to 8.9%. The increase in revenue also translated to higher EBITDA before restructuring expenses, which rose by 14% year-over-year to EUR 712 million. The EBITDA margin increased to 13.8%. Return on capital employed also improved significantly to 31.8%. In short, GEA delivered again.

On the back of these strong results, we proposed a dividend of EUR 0.95, EUR 0.05 more than last year. And as you can see on Chart 5, GEA provided its reliability and resilience even in tough times. We exceeded the 2022 targets we set back in 2019 before the pandemic or the war in Ukraine. The EBITDA margin before restructuring expenses is particularly notable at 13.8%, thereby exceeding the original range of 11.5% to 13.5%. This margin overachievement was broad-based, 4 out of 5 division exceeded the original range and Farm Technology was very close to the upper end of its margin corridor.

Summing it up, we managed the period 2019 to 2022 very well. We walked our talk and set with a fantastic financial year '22 a very good base for our Mission '26. Our continued positive performance also bolstered the capital market trust in GEA. This is not last, these demonstrated by the title of Investors' Darling '22 awarded to GEA by Manager Magazin. We are very delighted with this achievement.

Let me now give you an update on the first achievement of our Mission '26 levers, starting with sustainability. Our continued efforts in the field of sustainability were also recognized externally, as you can see on Chart 8. In November '22, GEA received an ESG risk rating of 18.3% from Sustainalytics and was assessed to be at low risk. In addition, the Sustainalytics also recognized our company as an ESG industry top-rated company at the beginning of '23. In December '22, GEA became a constituent of the Dow Jones Sustainability Europe Index. And in January '23, GEA was upgraded from AA to AAA in the MSCI ESG rating assessment. We are very delighted by these achievements, which, at the same time, motivate us to further improve our ESG efforts, including additional disclosures on climate-related aspects.

A further sustainability highlights can be seen on Slide 9, the manure enricher for dairy farmers. This manure management system converts slurry from livestock farming into an environmental-friendlynitrogen-enriched fertilizer. By using plasma technology, the manure is enriched with nitrogen from the air. At the same time, the PH is lowered within adding chemicals, reducing 95% of ammonia and 99% of methane emission from manure storage and spreading.

The end product provides farmers with cost-effective, sustainable fertilizer, increasing the average yield of the crop by 40%. An additional benefit of that, the process eliminates the typical odor of manure. Built into a 20-foot container, the system operates automatically, can be monitored remotely and can be easily integrated into the farms existing infrastructure. Overall, the solution promote circular economy and reduces air pollution by 50% in farms total greenhouse gas emission by up to 30%.

Let me now come to our second lever, innovation and digitization on Chart 10. Also here, we made good progress by the share of sales from products less than 5 year old for which we are targeting 30% by '26, increased from 10% to 14% in '22. We launched several new products, such as AddCool, our solution makes our spray dryers more climate-friendly. Spray dryers are used to transform fluids into powder, for example, milk into milk powder. This is a highly energy-intensive process. AddCool incorporates a heat pump specifically designed for operation in spray dryers and made by GEA. This reduces the need for fossil fuels and allows operators to lower their carbon footprint and energy consumption by up to 50%.

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MARCH 07, 2023 / 1:00PM, G1AG.DE - Q4 2022 GEA Group AG Earnings Call

Second, an automatic feeding robot for farmers, helping them to reduce their labor costs over time; and third, the so-called NexGen Press for the pharma industry. This next generation of modular tablet press makes machine selection easier, facilitates fast product changeovers and delivers price performance leadership.

Let's get me to new food on Chart 11, driven by the very large order from Novozymes in '21, the new food sales share was around 2% in '22. At the Anuga FoodTec in April '22, we presented our mobile test center for new food, which provides our customers with an excellent opportunity to test their innovative new food product ideas in reality. Because typically, customers in that industry are in an early stage of scaling and are starting with pilot plans or even with paid trials in our test center after the larger jobs get projected.

Another highlight is a large order we received recently, which encompasses the engineering of the first cell-based meat production facility in the United States. Here, you can see a few more highlights about this order. It is really large scale with a capacity to produce 10,000 metric tons of cultivated meat. This demonstrates how GEA helps to transform Applied Sciences into a large-scale industrial application. Among others, we supply liquid processing, filtration and bioreactors. As you can imagine, we are glad to have received this order. It underlines our leadership in the new field -- new food field, which we have also recently underlined by releasing our new food report.

This brings me to our third excellent levers, starting with sales excellence on Chart 13. We grew our organic new machine sales by 7.4% in '22, ahead of the expected CAGR of 4% to 5% for the period '22 to '26. In addition, we defined more than 600 country-specific initiatives across all divisions to further drive sales. And furthermore, we redefined the route to market for selected business units to leverage the existing direct sales and service organization.

On the service excellence side, as you can see on Chart 14, we even managed to increase organic sales by 11.9%, well ahead of the communicated CAGR of 5% to 6% for the period '22 to '26. This strong growth led not only to an improvement of the service share from 34.2% in '21 to 34.9% in '22, but also helped our gross margin.

This gets me to operational excellence on Chart 15. Yes, I do not want to get into details because Johannes will elaborate on that topic in a few minutes. Just so much, Johannes did a great job with his team and the divisions in mitigating supply chain shortages and market headwinds in the very challenging environment last year.

Coming to the last lever, acquisitions on Slide 16. We are still very actively screening all relevant M&A opportunities that would further strengthen our product portfolio, our regional preference and our margins. Unfortunately, good companies come at a price. And so far, we were not able to find the right target at the right price, but we continue to screen the market further.

That concludes my first part of the presentation, and I hand over to Marcus.

Marcus A. Ketter - GEA Group Aktiengesellschaft - CFO & Member of Executive Board

Thank you, Stefan, and also a warm welcome from my side. As Stefan has already told you, fiscal year 2022 was again a very strong year for GEA despite all the headwinds we were facing. But also the single quarter of Q4 has been very solid. Order intake increased organically by 4.6% year-over-year. Seven large orders with a total value of EUR 147 million were received in the quarter in comparison to 3 large orders totaling EUR 74 million in Q4 2021.

Q4 2022 was another quarter of strong organic sales growth. Sales was up by 9.7% year-over-year on an organic basis, driven by both strong service and new machine sales growth. EBITDA before restructuring margin reached 14.7% and was driven by an improved gross margin in the service and new machine business. Operating costs increased due to higher expenses for selling and administration. Our fee [ROCE] (added by company after the call) improved further due to the strong improvement in EBIT before structuring expenses overcompensating the increasing capital employed.

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MARCH 07, 2023 / 1:00PM, G1AG.DE - Q4 2022 GEA Group AG Earnings Call

Our net liquidity declined from EUR 500 million to EUR 346 million, mainly because of our share buyback program, which we finished at year-end. In fiscal year 2022, we bought back own shares for a total EUR 206 million. These shares are held as treasury shares. So all in all, a very successful quarter.

Looking a bit deeper into the group performance. Order intake grew to EUR 1.36 billion, a 4.6% year-over-year increase on an organic basis. All 5 divisions grew their order intake organically with 1 division Farm technologies, even growing at a double-digit percentage year-over-year. So from that perspective, it shouldn't come as a surprise that from a customer industry perspective, dairy farming has been a strong growth contributor but also beverage, pharma, chemicals as well as other industries like marine and oil and gas. As I said a minute ago, this quarter has seen several large orders, but also orders ranging from EUR 5 million to EUR 15 million (corrected by company after the call), have seen a significant increase year-over-year.

Sales continued its growth trend over the prior quarters and exceeded for the first time since the disposal of heat exchangers on a quarterly basis, to EUR 1.4 billion mark. Service sales grew organically by an outstanding 11% year-over-year, driven by healthy organic service sales growth of all divisions. Also, new machine sales have been strong, growing by 9% year-over-year. Again, all divisions contributed to this significant organic improvement, the service sales share was 34.4%, slightly higher than last year. The higher sales combined with an increase in gross margin overcompensated higher operating expenses, resulting in an EBITDA of EUR 208 million and EUR 28 million improvement versus Q4 2021.

When looking at the EBITDA margin, we are talking about a healthy year-over-year improvement of 0.6 percentage points.

Now let me continue with the figures of the division Separation & Flow Technologies, which had again a very strong year. Order intake grew organically by 7.6% year-over-year. Demand was strong in the customer industries, dairy processing, beverage as well as marine. From sales perspective, especially the orders below EUR 1 million and larger orders between EUR 5 million and EUR 15 million (corrected by company after the call) were the growth driver behind the year-over-year improvement. The order pipeline looks overall positive due to continued good demand in nearly all regions and customer industries. Dairy processing, pharma and chemical looked particularly strong, but also new food and dedicated projects for sustainability are becoming more active.

Organic sales grew by a stellar 10.8% year-over-year, with service growing by 16.3% and new machines growing by 6.3%. The service sales share, while being already on a high level, increased further to a record level of 47.3% in the quarter. EBITDA increased strongly by EUR 14 million to EUR 97 million and the EBITDA margin improved by 0.8 percentage points to 26.4%. This development was once again driven by better service and new machine gross margins and better capacity utilization. Gross profit was significantly higher and overcompensated increased operating costs.

Let's move on to Liquid & Powder Technologies. Order intake increased organically by 2.6% year-over-year. This development was driven by several large orders of, in total, EUR 147 million versus 3 large orders totaling EUR 74 million in Q4 2021. These large orders were received from the following customer industries: 3 in dairy processing, 2 in chemical and beverage respectively.

As we also received questions about the healthiness of the order pipeline, let me address this topic proactively. We do see an ongoing good demand in all markets, in chemicals for battery materials. In beverage, along with a recovery of the brewery sector and in dairy with an ongoing robust activity level. New food showed some small but important pilot projects last year, where we are expecting subsequent larger orders this year.

Sales increased organically by 6.7%, mostly driven by strong organic new machine sales growth of 8.4% year-over-year. Because of the strong new machine sales, the service sales share declined by 1.3 points year-over-year to 21.4% in the quarter. The order backlog is some EUR 150 million higher compensated to last year, which supports well our sales generation in 2023. EBITDA before restructuring expenses increased by EUR 3 million year-over-year to EUR 50 million, but the EBITDA margin declined from 11.0% in Q4 '21 to 10.8%. While gross profit rose due to the higher sales volume, operating costs were impacted from the buildup of the new food organization.

Continuing with Food & Healthcare Technologies, order intake was slightly up by 0.2% organically year-over-year. While the pharma business was growing strongly in the quarter due to a number of large orders in Western Europe, some of the food-related businesses saw the opposite with large orders in prior year quarter. Organic sales growth was 8.1% year-over-year, driven by both strong new machine and service sales growth. The

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