GEA unveils further measures to increase earnings and focuses on growth in all divisions

Date: 28 September 2019
GEA unveils further measures to increase earnings and focuses on growth in all divisions

Technology group GEA will today present new medium-term targets for the entire Group and its five future divisions at the Capital Markets Day. The Group plans that consolidated revenues will grow by an average of 2.0–3.0 percent per year until 2022. The EBITDA margin before restructuring expenses, based on the median value of the current projection at around 9.8 percent for FY 2019, is expected to increase to a target range of 11.5–13.5 percent by then. Key drivers of this growth are synergies in procurement, which are expected to take effect as early as 2020, and the optimization of the global production network. The reduction of around 800 full-time employees worldwide by the end of 2020, including around 220 positions already cut in Business Area Solutions, will also provide an improvement in operating efficiency. In addition, GEA intends to sell selected business operations in the Farm Technologies and Refrigeration Technologies divisions. With these measures the Group continues to focus on its strategic core markets, the food and pharmaceuticals industries, and to exit low-margin activities with less synergy potential. The strategic measures will be underpinned by investments in state-of-the-art IT systems and the rollout of a global ERP system.

Stefan Klebert, CEO of GEA Group Aktiengesellschaft: “In our businesses, we operate in attractive and stable markets. People need food, beverages, and pharmaceutical products regardless of the economic circumstances. We supply the sophisticated machines as well as the according maintenance services and hold top market positions resulting from our technological leadership. The megatrends are on our side. Our growth prospects are intact, but we are not satisfied with our current profitability level. However, it is in our own hands to increase our margins. We are laying the foundations for this with our new organizational structure: clear responsibility and greater transparency. Now, we are making procurement and production more efficient, building a future-proof IT infrastructure, and streamlining our portfolio.”

New medium-term financial targets up to 2022

Besides the above-mentioned targets for increasing revenue and EBITDA margin before restructuring expenses, GEA’s new, medium-term targets are aiming for capital expenditure (capex) in the range of 2.5 to 3.5 percent of revenues for the period 2020 to 2022. The increased capital expenditure will be invested in particular into improving the production network and implementing a Group-wide ERP system. By contrast, net working capital intensity will be reduced significantly from 18.6 percent at the end of the second quarter of 2019 to between 12.0 and 14.0 percent by 2022.

Divisional organizational structure: progressive implementation from October 1, 2019

Over 90 percent of all management positions in the three highest levels of the hierarchy have now been filled. By the start of 2020, GEA will have switched over completely to the new organization. In the new organization, the Group will be managed in five divisions, each with up to six business units. Unlike before, each of these units and all operating entities will be overseen by managers with direct P&L responsibility. Furthermore, the areas of procurement and production will be managed as overarching functions given the considerable synergy potential.

Optimization of procurement and production with a new Chief Operating Officer

As already announced, GEA is creating a new executive mandate for the areas of procurement, production, and logistics. The new COO with responsibility for this area in the future was appointed by the Supervisory Board this week, and an announcement in this regard will be made soon.

“Our procurement volume, which comprises around EUR 2.8 billion, is over half the size of our revenues and therefore we want to bundle our purchasing activities in a single mandate so that we can manage it more consequently. What is more, our production operations are heavily concentrated on Western Europe. Here we also see potential savings, which we want to leverage going forward,” says Stefan Klebert.

GEA wants to lower its procurement expenses by around EUR 50 million per year from 2022. Savings of around EUR 26 million are already expected in 2020, followed by approximately EUR 34 million in 2021. To achieve this, three previously independent procurement units will be consolidated in one central unit. In addition, procurement processes will be standardized and enhanced and the share of deliveries from Eastern Europe will be increased.

Another priority will be to optimize the global production network. Today, high-cost countries account for 73 percent of total production hours. This figure will progressively be reduced to around 67 percent by 2023 and to approximately 63 percent by 2025, generating anticipated annual savings of around EUR 30 million by 2023 and additional EUR 15 million each year by 2025. Parts of GEA’s productive capacity are to be moved from Western to Eastern Europe. Production will be consolidated at existing production facilities in the Asia-Pacific region in order to improve capacity utilization. At the same time, production facilities around the world will be expanded into multifunctional sites where different products can be manufactured in response to demand. In addition to cutting costs, these measures will help to improve capacity utilization and flexibility in production.

Intention to sell parts of Farm Technologies and Refrigeration Technologies

It remains our aim to sell selected business operations of the Farm Technologies and Refrigeration Technologies divisions. The affected operations generate comparatively low margins. The two areas currently generate combined annual revenues of just under EUR 200 million and employ around 700 full-time employees.

Extended restructuring measures to be implemented by the end of 2020

The immediate restructuring measures presented in May 2019, which included a reduction of around 220 FTEs in the Business Area Solutions, have largely been implemented on schedule. This rationalization measure, which led to restructuring expenses of around EUR 30 million, will generate long-term sustainable cost savings of around EUR 14 million by year-end.

Furthermore, additional job reductions will be implemented by the end of 2020. The headcount will be reduced by a total of 800 full-time employees worldwide, including the above-mentioned positions in the Business Area Solutions. The goal is to sustainably increase the Group’s efficiency by improving revenue per employee, which has declined in recent years. GEA estimates that this measure will generate additional annual savings of EUR 35-45 million. Restructuring expenses of EUR 50-60 million are expected to be incurred in this context.

Global ERP program

GEA is also standardizing its ERP systems throughout the Group to reduce complexity, create synergies, and increase transparency for reporting and management of all business units. The global ERP system will be implemented in stages by the end of 2025. A new, experienced IT senior management team will be in charge of these measures.

Solid finances, stable dividend, maintenance of investment grade rating

GEA has a healthy financial structure aided by a strong balance sheet with an adequate equity ratio.

“In spite of the Group’s reorganization and measures to increase earnings, one of our top priorities is paying our shareholders a stable dividend even though this means that our dividend payout ratio will once again be relatively high. Our long-term goal is to continue to distribute 40 to 50 percent of our net profit to our shareholders. Furthermore, it is our goal to maintain our investment grade rating,” explains Marcus A. Ketter, CFO of GEA Group Aktiengesellschaft. 

Earnings forecast for 2019 confirmed

Based on its business performance to date and expectations for the remainder of the year, GEA is reiterating its business outlook for the current financial year. In 2019, the Executive Board continues to expect revenues to be moderately lower than the previous year’s level, with EBITDA before restructuring expenses of EUR 450-490 million and ROCE of 8.5–10.5 percent.

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