GEA Group Aktiengesellschaft GEAGF CEO Stefan Klebert on Q4 2019 Results

Ladies and gentlemen, thank you for standing by. Welcome to the GEA Group full year 2019 conference call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question, press star 1 on your telephone. Please note that the call is being recorded today, Tuesday, March 17, 2020. Without any further delay, let me introduce your first speaker today, Oliver Luckenbach.

Good afternoon, ladies and gentlemen, and thanks for joining us today for our full year and Q4 2019 conference call. My name is Oliver Luckenbach and I'm the new head of Investor Relations at GEA. I joined two weeks ago and I am, together with my team, very much looking forward to having a very successful relationship with you. With me on the call today are Stefan Klebert, our CEO, and Markus Quetta, our CFO. Stefan will begin today's call with the highlights in 2019, and Markus will then cover the financials before Stefan takes over again for the outlook 2020 and our key priorities. Afterwards, we will open up the call for the Q&A session. I would like to start the call by drawing your attention to the cautionary language included in our safe harbor statement. With that, I hand it over to you, Stefan. The floor is yours.

Thank you, Stefan, and a warm welcome from my side. Let's continue on page eight with more details on order intake, sales, and book-to-bill ratio. Order intake in Q4 2019 increased by 9% to 1.34 billion, a new record volume for the fourth quarter. Growth came from business area Equipment where base and medium-sized orders were higher than in Q4 2018, and business area Solutions also developed nicely, driven by large orders. Sales declined by 2.4% while service sales continued to grow; new machine sales were down 4.6% year-over-year. The weakness in new machines came from both business areas. At Equipment, dairy farming had difficult market conditions in the US. At Solutions, new machines were almost flat; strong growth in beverage and utilities was compensated by negative impact in food, chemical, and some service sales. Service sales grew by 2.5%, with Solutions growing a bit stronger as price increases there were carried out a bit later during the year. Overall, order intake was very solid in Q4 2019, driven by the service business while new machine sales growth lagged. On page 9, service business in Q4 grew by 2.5% to a new record level, accounting for 32.7% of total sales, compared to 31.1% last year. Pricing contributed around 2.5% to sales growth. Our high-margin service business continued to grow. On page 10, EBITDA and EBIT and ROCE. As you are aware, from 2019 onwards, IFRS 16 has an effect on EBITDA and EBIT. Q4 EBITDA came to 150 million euro, down from 157 million last year. There were two effects: first, an IFRS 16 effect of 18 million which did not exist in Q4 2018; second, headwind from special effects of 16 million net expenses. These two effects netted to only 2 million. EBIT declined from 97 to 93 million euro, the decline less pronounced than at EBITDA level due to expiring purchase price amortization expenses. ROCE slightly improved quarter-over-quarter; year-over-year it is still down due to a decrease in last 12 months EBIT and an increase in capital employed from phasing in of IFRS 16. On page 11, the full year EBITDA bridge: starting point is 539 million euro from the old definition. We adjust for IFRS 16 impact and other items. Volume contributed positively with 27 million, new machines negatively with 43 million, while services with 53 million positive overcompensated. At Solutions, new machines contributed negatively by 17 million, but this includes 21 million of costs from the backlog review we conducted. Without this, margin development would have been positive. R&D and SG&A personal expenses increased, showing the need for our headcount reduction. FX was a tailwind from the US dollar. Excluding special items and FX, underlying EBITDA was 501 million, so operationally the gap year-over-year was only 15 million. On page 12, net working capital improved year-over-year by 65 million, ratio now at 14.0%, down 155 basis points. The improvement came mainly from reduced trade receivables and increased trade payables. Inventories remained flat. We are at the upper end of the targeted range but we are not done; further improvements will come. On page 13, cash flow: starting from EBITDA of 150 million, net working capital improvement in Q4 contributed 250 million cash from reduction in inventories and increase in payables. Cash out for restructuring was 30 million. Other items included pension outflows and IFRS 16 effects. Operating cash flow was 372 million, capex 59 million, leading to free cash flow of 308 million. After IFRS 16 repayments and interest, net cash flow was +287 million. Net financial debt of 263 million at end of Q3 reversed to a net cash position of 28 million at end of Q4. On page 14, financing and liquidity: GEA is solidly funded with a diversified financing structure. The solid cash generation led to lower utilization of bilateral credit lines. The decline in equity is explained by negative net income due to restructuring and goodwill impairment. The rating leverage stands at 2.9x according to Moody's, improved sequentially from 3.1x. We are committed to our investment grade rating and there is limited headroom for further leverage. Overall, GEA remains in a solid financial situation. Now back to Stefan.

Thank you very much, Stefan and Markus, for the prepared remarks. We will now start the Q&A. Operator, please open the line.

Thank you, ladies and gentlemen. We will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. To cancel, press the hash key. Again, star 1 to ask a question. Our first question is from the line of Klas Bergenj.

Thank you. Yes, I have a couple of questions. First, in your guidance of slight revenue decline, how much of this is protected by the backlog in solutions versus equipment? The lower end scenario of 430 million EBITDA if no new orders come in from March onwards feels difficult to achieve.

So 770 million is for invoicing in equipment and roughly a six-month duration? Yes, understood. My second question is on your savings of 25 million for 2020. If I back out, assuming revenues fall slightly, operational gearing seems around 3-4%. Is that correct? Also, have you assumed any price pressure in your guidance?

When we met in November, you mentioned most of the service business is still spare parts. Can you help us understand how much is service contracts? So we can model potential delays from travel restrictions.

Service is about 50% spare parts, but they need to be installed, so it's not just over-the-counter. Service contracts are around 20% of service revenue.

And the 25 million savings from procurement versus headcount reduction – can you break that down?

For 2020, we expect a full-year effect of 600 FTEs from the headcount reduction. The 25 million includes both procurement savings and the tail end of the 800 FTE program. Procurement savings are around 25 million as part of that.

One last question: your footprint in Europe – where are you most exposed? We see shutdowns in France, Italy, etc. Can you rank your blue-collar exposure by country?

Thank you.

Next question is from the line of Lucy Carrier.

Good afternoon. I have a couple of questions. First, on the dividend and AGM: any risk of delay due to COVID-19? Also, can you confirm all your factories in Italy and across Europe are running despite confinement measures?

And maybe moving away from coronavirus, can you comment on the latest trends in your key markets before the outbreak? Any delays in customer decisions?

Thank you.

Thank you. Our next question is from the line of Ville Sita.

Hello, good afternoon. A couple of questions. First, can you give us any indication of the underlying assumption for European or global growth in your guidance? Is it just the impact of supply chain disruption?

We said revenues will be slightly lower than last year. We expect a slowdown due to coronavirus, but our end markets are intact. Over the next years, assuming COVID settles, we see at least 3% growth as per our market guidance. We have not specified the breakdown.

And on current trading, did I understand correctly that you haven't seen any impact on February order intake from COVID?

Can you confirm that your debt covenants are based only on financial debt and not on EBITDA or IFRS 16?

Yes, they are based on financial debt and pension liabilities only.

And regarding authorized capital measures from last year's AGM, do you think it's a good idea to increase those?

Thank you.

Next question is from the line of Sebastian Groh.

Good afternoon. Thanks for taking my questions. First, on the bridge from 2019 to 2020: you mentioned 40 million non-recurring items, so the starting point is more like 520? Can you give us a sense of your assumptions on service revenue decline and wage inflation?

Starting from EBITDA of 479, we had 41 million of special items. In 2020, we do not expect that amount of one-time effects. We have 26 million in procurement savings and from 600 FTEs around 25 million savings. On the other side, we had positive FX of 20 million last year, which we need to deduct. We expect salary increases of around 26 million. Then we have a corona effect estimated in different scenarios plus a risk buffer. That leads to a midpoint of 455 million. If we achieve all price increases, we can go to the upper end around 480; if corona worsens and service is affected, we could be at the lower end of 430. No specific assumption on service revenue decline is baked in.

On the service element, can you stress test it? Are you planning service revenues down this year or flat?

We expected steady prices plus inflation adjustments. Corona might hold us back from price increases this year. Wage inflation is around 26 million total.

On Pavana, the margin freefall suggests further layoffs may be needed. Are there further provisions coming?

We are working on efficiency at Pavana. The 800-headcount program includes some there. We will have restructuring charges of around 50-60 million this year. Nothing extraordinary at Pavana; it's a workable company, just needs margin focus.

Thank you.

Next question is from the line of Sebastian Zuber.

Good afternoon. Many questions answered, but one: with schools closed in Germany, how does your blue-collar workforce come to work? Any impact on productivity?

And regarding the new organizational structure, will we get additional data like backlog by division at the capital markets day?

Thank you.

Next question is from the line of Akash Gupta.

Good morning. Two questions. First, on project business: are there risks of penalties or liquidated damages if you have delays due to COVID?

Second, on IT and capex investments this year: do you have flexibility to delay if needed?

We don't see the need to delay. We already bought necessary licenses last year; this year is more about implementation. We have no liquidity shortage and no material revenue deviation yet. We are monitoring closely but currently executing on our IT strategy.

Thank you.

Again, if you wish to ask a question, press star 1. Next question is from the line of Lars Larsen.

Thank you. Hi Stefan and Markus. A few questions. First, on service: can you quantify the impact of travel restrictions? For example, service visits in Italy vs last year?

On your COVID sensitivity table in the annual report, you categorise it as moderate risk with a 22-70 million impact. Wouldn't it be higher now? Also, what was your pre-COVID guidance?

Pre-COVID, we would have expected revenue up and higher EBITDA and ROCE guidance. Regarding the risk matrix, we see the impact in the range we guided; we do not see it exceeding 120 million. Hence the 430-480 range. We are monitoring.

On working capital: you did well in Q4. Are you seeing stress in smaller end markets like oil and gas and shipping?

So far, no stress seen, but there may be a lag. We are monitoring closely.

Thank you.

The last question is from the line of Felix Bismarck.

Two more questions. First, are you proceeding with the divestments you announced? Second, have you baked in any recovery in Q3 or Q4, or is the negative impact assumed for the full year?

We are still going forward with investments, but monitoring private equity interest. So far, pursuing as planned. For recovery, we have not baked in any; the range accounts for different scenarios with the upper end including potential recovery.

Do you have a similar range for revenue growth?

No, we said slightly lower, which is around 0% to -5% decline. We don't have a specific range for recovery.

Thank you.

There are no further questions.

If there are no further questions, let me make some final remarks. I think 2019 was a strong year for GEA where we changed many things. We established a completely new organization, changed a lot of people in the management team, and are now in a setup that allows us to steer and control the company much better. Above all, whether there is corona or not, people need to eat and drink, and that is our business. We produce machinery and processes for customers producing food, beverages, and pharmaceuticals. The long-term trend for our industry is brilliant. We will use the time to do our homework: manage the corona crisis, protect our people, and limit the negative impact. Medium to long term, this is an excellent market. Thank you for participating. If you have further questions, please contact the IR team. Talk to you soon. Bye bye.

This concludes our conference for today. Thank you all for participating. You may all disconnect.