GEA : Transcript Q2 GEA Conference Call

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EDITED TRANSCRIPT

G1AG.DE - Half Year 2023 GEA Group AG Earnings Call

EVENT DATE/TIME: AUGUST 10, 2023 / 12:00PM GMT

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AUGUST 10, 2023 / 12:00PM, G1AG.DE - Half Year 2023 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

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

Klas Henrik Bergelind Citigroup Inc., Research Division - MD

Lars Vom-Cleff Deutsche Bank AG, Research Division - Bank Research Analyst

Sebastian Kuenne RBC Capital Markets, Research Division - Analyst

Sven Weier UBS Investment Bank, Research Division - Executive Director and 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 Q2 2023 Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Oliver Luckenbach. Please go ahead.

Oliver Luckenbach - GEA Group Aktiengesellschaft - Head of IR

Thank you, Heidi. Good afternoon, ladies and gentlemen. As you can imagine, it is not a normal conference call for us given the sudden and unexpected death of Marcus 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.

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

Thank you, Oliver. As Oliver said, our Chief Financial Officer, my dear colleague and good friend, Marcus Ketter, suddenly and unexpectedly passed away on Sunday at the age of only 55. You can imagine that we are all shocked and devastated by his loss. With Marcus, GEA loses an outstanding CFO and a highly valued individual who strived 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 Marcus' wife, his 2 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 2. Order intake has been up by 2.4% organically, a decline in reported terms slightly by 1.6% year-over-year to EUR 1.38 billion.

I hope this proves 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.

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AUGUST 10, 2023 / 12:00PM, G1AG.DE - Half Year 2023 GEA Group AG Earnings Call

Sales has been growing nicely by 9.4% organically, leading to a strong improvement of our EBITDA before restructuring expenses by 14.4% to EUR 192 million. The respective EBITDA margin was up by 1.1 percentage points to 14.3%. Last but not least, we also increased our ROCE significantly by 4.1 percentage points to 33.8%.

Sustainability is one of our 7 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 Add Better label in June. Add Better is our ecolabel promoting GEA's sustainable solutions that are significantly more resource efficient than their predecessors. The efficiency improvements are calculated according to ISO standards and are validated by TUV Rheinland, a global leader in independent testing, inspection and certification services. This ecolabel provides customers with a maximum transparency as they can access the data behind each Add Better label.

When we launched Add Better in June, our AddCool spray dryer, the marine separator and the dairy robot were the first solutions to receive the label. All 3 of them consume between 9% and 49% less energy than their predecessors.

In the meantime, other technologies have been added to the Add Better 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 [year] (corrected by company after the call).

To give you a feeling of the magnitude, the annual water saving equals 19 40 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 Beckum, 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 emission. 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 of 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 reduction 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 into 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. A result of our purification process is 99.998% fewer 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 system 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 4 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.

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AUGUST 10, 2023 / 12:00PM, G1AG.DE - Half Year 2023 GEA Group AG Earnings Call

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 impact, reported order intake declined by 1.6% to EUR 1.38 billion. Three large orders with a total value of EUR 81 million were received in this quarter in comparison to 2 large orders totaling EUR 52 million in quarter 2 '22.

Quarter 2 '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.

EBITDA 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.

ROCE 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 & Healthcare Technologies.

Our net liquidity declined from EUR 264 million to EUR 65 million mainly because of the second tranche of our share buyback program, which we finished at the end of the fiscal year '22.

Between the second quarter '22 and the year-end '22, we bought back own shares for, in total, EUR 170 million. As you all know, these shares are held as treasury shares. So all in all, another successful quarter.

Looking a bit deeper into the group performance. Order intake declined in reporting terms by 1.6% to EUR 1.38 billion due to FX effects, but grew by 2.4% on an organic basis. Liquid & Powder as well as Food & Healthcare Technologies grew their order intake organically and overcompensated the declines in the other 3 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 3 large orders, but also orders between EUR 5 million and EUR 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.

Also new machine sales have been strong, growing by 7.7% year-over-year. While the new machine business at Liquid & Powder as well as Food

• Healthcare Technologies has been flat, year-over-year the other 3 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 EBITDA of EUR 192 million, an EUR 24 million improvement versus quarter 2 '22. When looking at the EBITDA 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 & 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 EUR 420 million. Since Q3 '22, this division has been growing its order intake organically each quarter 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 for the decline in the other customer industries.

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AUGUST 10, 2023 / 12:00PM, G1AG.DE - Half Year 2023 GEA Group AG Earnings Call

The order pipeline overall is on a stable level compared to prior year. The order backlog of EUR 663 million is almost on the same level as the record backlog at the end of Q1 '23, 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 machine. The service sales share decreased on a very high level by 1 percentage points to 45.9% in the quarter.

EBITDA increased strongly by EUR 12 million to EUR 99 million and the EBITDA margin improved by 0.8 percentage points to 26.1 percent. Higher sales, declining operating costs and the better margin in the Service Business resulted in a notably increase in profitability.

Let's move on to Liquid & Powder Technologies. Order intake increased organically by 15.8% year-over-year. While the customer industries, beverage and chemical, showed a strong positive development in this quarter, food, new food and dairy processing were below prior year's level.

Liquid & Powder Technologies has won 3 large orders totaling EUR 81 million this quarter versus one large order of EUR 32 million in Q2 '22. These large orders were received from the customer industry chemical for distillation and gas cleaning.

Project 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 EUR 1.6 billion.

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 '23, the higher 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 EUR 1 million year-over-year to EUR 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 remain stable.

Continuing with Food & 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 '22 contained one large order of EUR 20 million.

Even though no large order was booked in this quarter, the order intake increased from EUR 282 million in Q2 '22 to EUR 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.

EBITDA decreased by EUR 4 million year-over-year and the respective margin dropped from 8.1% in Q2 '22 to 6.1% in Q2 '23.

Gross 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 other projects with long lead times, whose selling prices had not yet accounted for the cost inflation. Operating costs, however, remains 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. Q2 has now seen a normalization of the order intake after several quarters of strong growth.

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