Higher profitability despite the FX tailwinds

GEA reported another strong quarter and fully confirmed the FY guidance. FX rates were a significant detractor as the figures had to compare with the high prior year levels. Nevertheless, our estimates were beaten at many levels (order intake: -7.1%; sales: +3.7%; adjusted EBITDA: +18.4% – consensus: order Intake: -3.1%; sales: -3.3%; adjusted EBITDA: +1.3%).

A very special Q2 report

Mr Marcus Ketter, CFO, unexpectedly passed away on Sunday 6 August 2023. We express our deepest condolences to his family and wish them strength to go through these difficult times. Our thoughts are with you. With the loss of Mr Ketter, the management loses a highly valued member and a strong supporter of GEA’s journey in recent years.

Guidance increase on the back of a strong order book

GEA’s consensus-beating Q1 figures (sales: +3.0%; adjusted EBITDA: +5.7%) confirmed our recently adopted more optimistic stance on profitability in that the higher share of the service business had the expected positive effect. Order intake continued to improve compared with an already-high prior year basis.

The strong momentum continues into 2023

After a year of overachievements, GEA gave quite a positive outlook for 2023 with some upside potential. The basis for the 2023 achievements is the strong order book leading to a book-to-bill ratio of 1.10x. GEA reported a decent set of figures, moderately beating our estimates (sales: +0.6%; adjusted EBITDA: +1.8%), except for EPS (+10.1%). The same is true for consensus (sales: +0.6%, adjusted EBITDA: +1.7%; EPS: +17.5%). The company beat its own targets.

More conviction baked into the guidance

Regaining investor confidence is a top priority for the management and, in our view, the latter is getting closer to this objective. Additionally, the measures being implemented will support profitability. The management also shed positive light on 2023. The Q3 figures were above the consensus expectations (revenues: +3.5%; adjusted EBITDA: +9.3%)

Q1 22: another well managed quarter and consensus-beating order intake

GEA reported Q1 22 results close to expectations, with a 9% beat on the order intake. The NWC/sales is getting back to higher, yet normalised, levels as inventories increase in line with the inflation of raw materials. The additional cost headwinds are expected to be fully covered by the price mix, in FY22 at least. Overall, this highlights the radical improvement of the company’s internal management over the last few quarters, which keeps on delivering results while showing good forecasting ski

Takeaways from the CMD

GEA exposed a promising mid-term outlook with a double focus on organic sales growth and operational improvements. The 2021 and 2022 outlooks have been confirmed, hence reassuring about the ability of the new management to turn around the company while delivering on its promises. That said, GEA will count on the New Food business, sales efficiency, and service growth to fuel a healthy FCF generation despite higher R&D and capital expenditures. Shareholders should be pleased to see the dividend t

Will Q4 impact turnover further?

GEA released a mixed bag of results, with sales declining further (9M 20: -3.8% yoy vs H1 20: -2% yoy), EBITDA improving (+17.8% yoy), and net income slightly growing (+2.6% yoy). EBITDA benefited from higher-than-expected overheads and raw material costs, though net income was negatively impacted by impairment losses from the sale of GEA Bock. Consequently, GEA is more confident about its FY20 EBITDA target, raising it from at least €455m to at least €500m.

Not immune to crisis, but well equipped

GEA posted -2% yoy H1 20 revenue, driven by its Food & Healthcare tech (-5.3% yoy) and Farm tech (-5.7% yoy) segments. Limiting this contraction, Separation & Flow tech (GEA’s second largest segment) grew by 2.8% yoy. Furthermore, GEA presented lower COGS (-5.1% yoy) and selling expenses (-7.3% yoy), translating into a +35% yoy net income. For the outlook, the company expects revenue to contract slightly yoy, EBITDA (before restructuring charges) to be €430-480m, and ROCE 12-14%.

€248m impairment charge took its toll on reported earnings

Management announced in late January that it has to write-off the purchase price of Italian Pavan. This happened in Q4 last year which has translated into negative EBIT, PBT and net earnings. In spite of this, it proposes an unchanged dividend of €0.85.

Another due diligence process went wrong

GEA acquired Pavan S.p.A., an Italian producer of production lines for the manufacture of fresh and dried pasta, for a total consideration of €254m in late 2017. As the company has not delivered what management had expected, it is now writing off the entire €248m amount of goodwill.

Considerably better 9M numbers than we had expected

GEA has shown very volatile profit numbers in the last few quarters. From a strong recovery of pre-tax earnings in Q1 19 (+119%) to a collapse in Q2 (-58%). The Q3 number was about unchanged, whereas we had a considerably more cautious view. We hope that this becomes a more normal feature of the new management team.

Book-to-bill ratio deteriorated sharply in Q2

Clients are reluctant to invest in new machines and plants and this is reflected in GEA’s accounts. Whereas the book-to-bill ratio was at a reasonable 1.12x in Q1, it fell to 0.92x in the last quarter. In fact, this is the lowest quarterly number since 2006 and the 1.01x after six months the lowest since 2009, i.e. since the last financial crisis. This is not a good signal for the quarters to come.

Accounting change resulted in Q1 net profit increase

The share price has halved during the last three years as net earnings fell by some 70% from 2015 to 2018 although revenue was up. Management has tried to deal with this by regularly changing the divisional structure, but that has not paid off. Changes in the reporting segments are often an indication that management has a lack of ideas. Hopefully, the new management team will do a better job.

Management dismissal and new divisional changes

GEA has released some numbers for 2018 and the order inflow and revenue numbers were slightly lower than we had anticipated. However, EBIT fell by 32% to €260m which is considerably below our projected €325m. Finally, EPS collapsed by more than 50% to €0.63 compared to our €1.31. In spite of this, the dividend is, as we had expected, maintained at €0.85.

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