GEAGF - GEA Group Aktiengesellschaft (GEAGF) CEO Stefan Klebert on Q2 2022 Results - Earnings Call Transcript
GEA Group Aktiengesellschaft. (GEAGF)
Q2 2022 Earnings Conference Call
August 10, 2022, 08:00 AM ET
Company Participants
Oliver Luckenbach - Head of IR
Stefan Klebert - Chief Executive Officer
Marcus Ketter - Chief Financial Officer
Conference Call Participants
Klas Bergelind - Citi
William Turner - Goldman Sachs
Akash Gupta - JPMorgan
Sven Weier - UBS
Lars Brorson - Barclays
Uma Samlin - Bank of America
Presentation
Operator
Good day and thank you for standing by. Welcome to the GEA Group Q2 2022 Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s call is being recorded. I would now like to turn the conference over to your speaker today, Oliver Luckenbach, Head of IR. Please go ahead.
Oliver Luckenbach
Yes, thank you very much operator, and good afternoon ladies and gentlemen. And thank you for joining us today for our second quarter 2022 earnings conference call. With me on the call are Stefan Klebert, our CEO, and Marcus Ketter our CFO.
Stefan will begin today's call with the highlights of the second quarter and Marcus will then cover the Business and Financial Review, followed again by Stefan for the outlook 2022. Afterwards, we will 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 it, I hand it over to you, Stefan.
Stefan Klebert
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 quick review of the second quarter of 2022. We guided for €1.3 billion to €1.4 billion order intake and slightly exceeded the upper end of that range with €1.403 billion, a growth of 8.5% or 6.7% in organic terms year-over-year.
Sales grew organically by 8.9% year-over-year, the strongest organic sales growth rate for about 10 years at GEA. What makes me proud on this number is the fact that it was achieved despite on-going shortages in our supply chain. I think it's a great result. This organic sales growth translated into an increase of EBITDA before restructuring expenses by €30 million to €167 million. However, despite the cost headwinds from raw material prices, wages and travel expenses, the margins slightly declined by only 0.1 percentage points to 13.2%.
Without the Ukraine war EBITDA before restructuring expenses would have been higher by a mid-to-high single digit million euro amount. Last but certainly not least, return on capital employed. We reached 29.7% on the last four quarter basis, an improvement of 8.3 percentage points year-over-year, and very close to the upper end of the guidance range of 24% to 30% for the current fiscal year.
So in total despite the challenges, we were able to generate a solid top and bottom line performance. And if the current external headwinds such as the war in the Ukraine did not exist, the quarter would have been even better. Thus, we confirm our guidance for the group for fiscal year 2022. However, we have some minor shifts on the divisional levels, which Marcus will elaborate on.
Let me now provide an update on our share buyback program which we started last year in August. We resumed the second tranche of the program on 6th July 2022. The tranche has a volume of €170 million which will be spent until the end of this year. The purpose of the buyback program has not changed. We intend to hold the shares as treasury shares and by doing so, we keep full flexibility. So far as per 30th of June 2022, we have spent about €130 million for €3.2 million or 1.7% of the outstanding shares in the first tranche as per 30th June 2022.
As per 9th August, the total volume of repurchase shares increased to €4.3 million or 2.4% of the outstanding shares. The second tranche has furthermore an ESG feature. At a share buyback program the executing protocol guarantees a discount to the volume weighted average price or reverb. We decided to donate part of that discount to “Viva con Agua” with whom we entered into a three years partnership. Viva con Agua is a Hamburg based charity, which promotes access to clean drinking water, sanitation, and hygiene. GEA is the first company in Germany embedding an ESG feature in a share buyback program. We have furthermore linked our main credit line to the achievement of ESG related targets which Marcus will explain later on.
Now I would like to address a topic which we were very frequently asked about in the most recent weeks. How would a possible power shortage impact our production? Fortunately, natural gas is mostly used for heating purposes at GEA in Europe. Only a minor part of our production currently uses natural gas, such as paint shops, acceptance tests, or the washing of parts.
Electricity based solutions are being established for the case that natural gas will not be available anymore. Thus, the direct discipline our ability to produce is very limited. What might happen to our suppliers or the entire supply chain including logistics, however, it's not in our hand. Reminder, our entire energy bill for the year 2021 was a route around €20 million and we expect this number approximately to double in the year 2022. Headwind which is digestible by our guidance.
With that I'll hand over to Marcus who will lead you through the financial details of the quarter.
Marcus Ketter
Thank you, Stefan. Also a warm welcome from my side, starting with the headline numbers of Q2 2022. The organic increase of our intake was 6.7% year-over-year, with large orders contributing positively to that growth rate. Two large orders were booked in Q2 2022 with a total volume of €52 million. In last year's Q2, we only booked one large order in the amount of €80 million.
As Stefan already mentioned, organic sales were satisfactory. On an organic basis sales grew by 8.9% year-over-year, driven by both new machines and services. The organic sales growth translated into higher EBITDA before restructuring expenses, which improved to €167 billion. The respective margin however, decreased slightly by 0.1 percentage points to 13.2% due to wage increases and higher travel expense.
Let me give you also some color here on our gross margin. Gross Margin reported for the second quarter was 32.7%. Last year's quarter was 33.7%, so that looks like 100% 100 plus points, percentage points basis points decrease. However, that's not the case. You need to see that there were approximately €20 million restructuring expenses in the gross margin related to the global manufacturing footprint a project. So neutralizing the one the 200, the €20 million in restructuring expenses, gross margin adjusted so to speak then without the research expenses was actually 34.2% in comparison to last year, which is an increase of about 60 basis points.
So the swing in total is 160 basis points, neutralizing the restructuring expense of €20 million in the gross margin. Due to the further improvement of capital employed and EBIT during the last four quarters, ROC considerably increased. The higher profitability translated into higher cash generation. And that's resulted in the increase of net liquidity by €61 million to €264 million. In addition to that, own shares were bought for €431 million and are held as treasury shares. So on and on a very successful quarter despite an environment which remains quite challenging.
Looking a bit deeper into the group performance. Order intake grew to €1.4 billion and all divisions contributed to that growth except for Heating and Refrigeration technologies due to recent divestments. Regarding order sizes, the strongest absolute growth contribution came from the base business. Sales grew organically for the sixth consecutive quarter and was once again driven by the service business. Organic services sales grew by strong 13.1% year-over-year, and new machines grew also by a very satisfactory 6.8%. The service sales share was 34.6% 0.8 percentage points higher than last year.
Gross Profit increased and this increase was driven by both businesses, new machines, but even more so by services. Increasing operating costs were compensated however, while absolute EBITDA increased, the respective margin declined by only 0.1 percentage points.
Now let me continue with the figures for Separation & Flow Technologies. Order intake grew organically by an outstanding 13.6% year-over-year with €420 million a new record was set. This growth was especially driven by strong demand in the customer industry dairy processing, also the customer industry chemical and marine reported good growth.
Regarding the pipeline demand for smaller projects is currently more active than for larger ones, especially in dairy processing. Activity and beverage is softening while the customer industry environment benefits from growing demand for biogas solutions. Activity in the oil and gas industry is increasing due to the relative high energy prices. Organic sales grew by 6.4% year-over-year driven by the organic services growth of 15.1%. New machine sales were mainly affected by supply chain shortages.
As a result of a significant difference in the growth pattern, the services sales share increased by strong 3.5 percentage points to 46.9%. This represents a new record level for single [ph] quarter. Taking and talking about records also, order backlog reached a new record level with €650 million, up 38% year-over-year. Thus, the order book is well suited and indicates further sales growth. EBITDA increased significantly by €13 million to €87 million and the EBITDA margin improved also significantly by 1.4 percentage points to 25.2%. This development was driven by the strong organic sales, service sales growth and good capacity utilization.
Gross profit was therefore significantly higher than last year and more than compensated for higher operating costs. Due to the most recent very satisfactory development we raised the EBTIDA guidance and separation and flow technologies from slightly to significantly growing in 2022.
Let's move on to Liquid & Powder Technologies. Order intake increased organically by 0.2% year-over-year, one of the two large orders in the quarter were booked at Liquid & Powder Technologies. This order was in dairy processing and amounted to €32 million. Regarding the pipeline, the environment remains good and we do currently not see any sequential slowdown, especially the pipeline for dairy processing, as well as for chemical look promising.
Organic sales increased by 9.3% year-over-year, especially the service business contributed strongly with an organic growth of 13.9% year-over-year, but also the new machines business grew solidly by 8.1% on an organic basis. The service sales share rose by 0.5 percentage points to 20.6%.
Going forward sales should continue to grow solidly as the backdrop remains at its record level of €1.5 billion euros. The assumption of solid sales growth going forward however, requires the supply chain bottlenecks are not worsening, of course. EBITDA before restructuring expenses increased by €3 million to €39 billion euros, the respective margin however, declined by 0.4 percentage points to 9.1%.
Gross Profit increased due to higher sales volume, but operating costs increased as well due to increased activities in the new food segments. Continuing with food and healthcare technologies. Order intake increased organically by 4.4% year-over-year. Growth was also driven by one large order exceeding €50 million and the customer industry pharma [ ph ] €222 million Q2 2022 order intake is now at the highest level since Q4 2018.
Our food related applications are expected to continue their positive performance in the short term. The current environment in pharma is still favorable and has not changed compared to prior quarters. Organic sales, however, grew by just 1.2% year-over-year, while services grew organically by 8.6% year-over-year, new machine says declined organically by 1.7% as execution here is still impacted by supply chain shortages.
As in the prior quarter, the shortages occurred, especially in electronics. As a result of the new machine sales decline and the services growth, the service sales share strongly increased by 2.4 percentage points to 30.7%. From an order backlog perspective, the situation remains very satisfactorily, banks have reached a new record level of €699 million. However, due to the lighter than anticipated new machine sales so far, we updated the sales guidance for food and healthcare technologies from significantly to slightly growing. This also has an impact on the guidance for EBITDA which is now expected to grow slightly instead of significantly.
Coming back to the quarterly development of EBITDA, gross profit increased slightly just offsetting cost price inflation but was not able to compensate for the increase in operating costs. Thus, EBITDA declined by €1 million to €20 million, and the margin declined by 1.1 percentage points to 8.1%.
Moving to Farm Technologies. Despite the strong order intake and prior year's Q2, as well as in the last quarter, order intake grew once again solidly by 8% organically. Growth, generally driven by strong demand for highly efficient automated milking equipment as well as service, conventional milking equipment grew also. The mid-price development remains on a favorable level for farmers. The main headwinds for customers remain increasing costs for feed, fuel and equipment.
The currently dry weather is also a drag for European farmers, as this has a direct impact on crop yields, thus on feed prices. Sales increased organically by a very strong 19.7% year-over-year. Both businesses service as well as new machines contributed almost equally strong to this development.
Organic services grew by 21% and organic new machine says by 18.8% year-over-year. The services ratio increased by 0.7 percentage points to 45.1%. Order backlog stands at €352 million a new record level and an indicator for further sales growth ahead. We therefore raised the fiscal year 2022 sales guidance for farm technologies from slightly to significantly increasing.
EBITDA increased by €5 million to €21 million and the respective margin increased by 0.4 percentage points to 11.3%. The issues we experienced in Q1 in the profitability in the hygiene business from a delayed response to rapidly increasing input prices have been resolved.
Finally, let us turn to Heating & Refrigeration technologies. Reported order intake declined by 7.2% year-over-year due to divestments. The organic water intake figure, however, increased by 7.8% year-over-year, driven by solid growth for medium sized projects in the area compression technology. The general environment is unchanged and remains favorable. The process for decarbonisation is a driver of our heat pump business as well as every solution to reduce the energy intensity of Heating & Refrigeration solutions.
Organic sales increased by 8.8% year-over-year, and was driven by new machines growing by strong 12.8%. This is the strongest growth rate for more than two years. Organic services grew by 3.6% year-over-year, as new machines significantly outgrow services, the services share declined by five percentage points. EBITDA before restructuring expenses declined by e2 million to €13 [ph] million, and the margin declined by 0.1 percentage points to 10.6% resulting from the machine business in Russia. The declining gross profit driven by the divestments and the machine Russian business could not be compensated by the reduced operating costs.
Closing the divisional chapter now. The strongest contribution for EBITDA came from separation and flow and fun technologies. On a reported basis, only Heating & Refrigeration technologies had lower sales in the quarter due to divestments. All divisions except for Heating & Refrigeration technologies increased the gross profit, mostly due to higher volumes.
Operating costs increased and were predominantly driven by higher travel expenses and wages. In total, EBITDA before restructuring increased €167 million from €154 million. Excluding the translation FX effect of €7 million as we have defined it in our full year guidance, our EBITDA would have still improved by €6 million to €160 million.
As always, after the divisional chapter, now one of my favorite topics, net working capital. Net Working Capital was flat year-over-year, despite an increase in inventory of €214 million due to supply chain challenges. The net working capital to search ratio however, improved by 0.4 percentage points to 7.9%, due to the accelerated sales momentum. A further improvement of trade payables and net contract assets almost compensated an increase in inventories and trade receivables. The high inventory level is mostly related to the supply chain shortages, resulting in two different developments. First the shortages lead to higher levels of finished goods as well as work in progress.
Secondly, to reduce the impact of shortages on our ability to execute orders, we are building up the safety stock and thus raw material levels have increased. The increase in trade receivables mostly took place in the division separation and flow and farm technologies. Both divisions experienced a significant increase in sales recently, thus, the increase in trade receivables is owed to an expansion in business activity.
To sum it up, yes, we are seeing an increase in net working capital. However, this should be just temporarily. As soon as the supply chain challenges fate or inventory levels will decline as well. The net working capital has of course an impact on our free cash flow. Operating cash flow was €51 million and below last year's figure of €108 million. The account is explained by the higher net working capital I just discussed. The net working capital related cash outflow in Q2; it's with €90 million significantly higher than the €21 million in last year's Q2.
The remaining components of operating cash flow such as Texas restructuring and other changed in total just little year-over-year. CapEx related outflow is €18 million higher than last year resulting in €41 million. The increase is mainly due to investments into our new plant and cushioning opponents and higher replacement CapEx.
In total, free cash flow is with €11 million below last year's figure of €94 million. Our free cash flow conversion ratio before restructuring trended downwards during the last quarter, as per end of Q2 2022, 68% of EBITDA has been converted into free cash flow on a last four quarters trailing basis.
The negative trends during the last quarter is solely explained by the increasing output for net working capital, which I just showed. Net cash including lease liabilities decreased from €412 million at the end of the first quarter to €264 million. Besides the negative net cash flow of €6 million, the dividend payment in the amount of €160 million also reduced our cash position.
Let me now talk about our financial headroom. On the left, you'll see our available cash credit lines, as well as their respective utilization and majority structure as per end of June 2022. Apart from minor changes in the volume and the utilization of the €66 million, Evergreen credit lines, nothing has materially changed compared to the prior quarter. However, there are two noteworthy positive updates on the €650 million syndicated credit line.
First the credit line was prolonged to 2027. Secondly, the margin of that credit line is now linked to ESG criteria. The agreed sustainability indicators are based among other sectors on the targets for reducing greenhouse gas emissions from the company's own activities that means come one and two as well as the proportion of female managers in the top three management levels.
Continuing now on the right side of the slide. Compared to the last year’s Q2, the financial headroom declined by €300 million. The reason is on the one hand explained by the cancellation of an unused credit line with the European Investment Bank of €100 million and on the other hand, a syndicated credit facility of €200 million, which was solely set up due to the uncertainty from the global pandemic. The syndicated credit line was not prolonged and expired in August 2021.
But the positive trend of our net liquidity including lease liabilities has continued improving significantly by €61 million to €264 million, year-over-year. With that, I hand back to Stefan with the outlook.
Stefan Klebert
Thank you very much Marcus. So that all being said, we confirm our guidance for the full year 2022. We expect organic sales to grow by more than 5% year-over-year and EBITDA marching and EBITDA before restructuring expenses between €630 million and €690 million and the return on capital employed in the range of 24% to 30%. As you know the risk from the direct exposure to Russia and Ukraine appears manageable from today's perspective and does not have an impact on our government guidance range even if we expect the collapsing business in Russia to have a low double digit impact on our full year 2022 EBITDA.
Contrary the negative effect from the indirect exposure such as a potential natural gas shortage can currently not be reliably assessed. However, as I've mentioned earlier, only 10% of our natural gas consumption is used for production. And we are preparing that effected processes can be run on both natural gas and electricity.
In the prior quarter, we said that the net inflationary impact on purchasing ranges between €120 million and €140 million. We confirm this figure, as the picture has in this regard not materially changed. This figure is equal to around 3% of our sales, which we have already passed on, or intend to pass on to our customers. This concludes my presentation.
The next important we are now coming to the question.
Oliver Luckenbach
Yes. Thank you very much, Stefan. And with it, I hand it back to the operator for the Q&A session.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And your first question today comes from the line of Klas Bergelind from Citi. Please go ahead, your line is open.
Klas Bergelind
Thank you. Hi, it’s Klas Bergelind from Citi. So the first one is on order intake. So understand the pricing was around 6% on orders again. So that means that total orders were only slightly year-over-year looking at volume. We obviously face a tough order comp from novice on last year into the third, it's likely that orders will be down quite a bit x pricing. Can we talk about, number one, if you can still achieve the 6% [indiscernible] on in the third quarter on pricing. And to what extent Brad's larger orders can push you about 1.4, flat quarter-on-quarter, or do you think orders will start to trend a bit lower from here maybe towards the 1.3? That's my first one.
Stefan Klebert
Yes, thank you very much Klas. Hi, hello. I mean, it is sometimes not so easy to such capital goods company like ours on a quarterly basis only. And if we look at the first half year, we see organic growth of 13.5% organically in order intake. And I also want to remind that we have the last year increase of 14% organically. And definitely last year, we had no pricing impact at all.
So if you if you take a single look on the Q2, it might look that we are going a little bit flattish when you take out prices. However, I can say that also our pipeline is still very, very interesting. And we also expect, let's say, larger orders in the remainder of the year, especially from LPT, of course. So it might appear a little bit like you say for the Q2, but if you look at the half year numbers, especially over the last year, and if you take into account that we are in, in not a fast growing market, let's say that our markets are normally growing by 2% to 4% a year or so, I think we are delivering very, very, very good numbers. And we are very optimistic that we definitely also will see a significant growth rate and net growth at the end of the year.
Klas Bergelind
Yes, I totally get that the point of comparison in the first quarter is quite tough, right? But are you willing to pin down sort of an order range in the third quarter or you you're leaving it at that?
Stefan Klebert
I mean, we invite you up you are more or less used to that we are giving order intake guidance in every analyst call. So I expected this question and I would say we expect also into Q3 order intake between €1.3 billion and €1.4 billion again, which will be a very solid number as I said before, yes, so but expected in that…
Klas Bergelind
No, that's that's reasonable. My second one is on the cost side. It seems like you have the 121 40 [ph] million well in the bag given how pricing is running on orders and what you can see in the P&L at the moment, but what about wage inflation which is outside. You’re saying that is now starting to weigh on margins will be slightly what kind of level do you see into the second half and into the next year, given that wages is creeping up? Now, at least in Germany, where you have 30%, I think we could print.
Stefan Klebert
Yes, I mean, first of all, I want to mention that we are really working hard on prices since very early beginning of the inflation, there was no single, let's say, management meeting where we not addressed this issue. We are frequently following up that issue. And I think you can see also in the Q2 numbers, that we are very successful in bringing prices up so far. And that is the basis, let's say, of all the cost inflation's we have.
I mean, the wage inflation, will most likely increase, especially next year. I mean, for the time being, the wage increases are not so significant yet. And that's also the reason why we will continue to work on prices, also at the second half of the year, because it's very clear that we have to be prepared in the backlog when for the execution next year, because it's it is very, very clear, very likely that we also will see a higher increase in wages and salary next year than we saw in the year 2022.
Klas Bergelind
And it's around the 5% mark, compared to maybe 2.5% that you've been…
Stefan Klebert
This is difficult to say. But it might be in that area. I mean, it is different U.S. Of course, it's a very hot market labor market where we see the need for larger improvement. Let's see what in Germany, we have, of course, a big part of our stuff in Germany, what comes out in the negotiations of the rural councils and trade unions. So but it will definitely -- we expect clearly higher rates for the year 2023 compared to the year 2022. And that's the reason why we will continue in working on prices.
Klas Bergelind
And it's good, very quick final one is on demand. They seem to be strong across all divisions, but beverage and Chem are down in LPT. Is this you being more selective on orders? Or have you start to see any demand weakness in LPT? Obviously, select is what I mean. That is obviously the backlog is strong. And you're focusing on profitability. I mean, if it could come?
Stefan Klebert
Yes, also very good question. I mean, we have a clear -- guidance and the guidance is, profit is more important than volume. Because if you look at our backlog, I mean, it's, it's really we we have, we have a lot to do. And it's very clear that we also, in case of doubt, don't take our order if we if we feel or think that the margin is not sufficient. So we are very, very clear pushing on margin. And, and so far, we already successfully here.
Klas Bergelind
Thank you.
Stefan Klebert
Thank you Klas.
Operator
Thank you. We will now take our next question. Please standby. And your next question comes from the line of William Turner, Goldman Sachs. Please go ahead. Your line is open.
William Turner
Hi, everyone. I have a handful of questions. The first one is on demand. And in particular relating to your customers in Europe, obviously, food and beverage producers, they use a lot of energy in their production processes. I was wondering, have you heard any kind of commentary on how they're thinking about their investment plans over the next six to 12 months given this much higher cost that they're going to be facing? And also do you think it's going to have any impact on your ability to put through prices? That's my first question.
Stefan Klebert
Okay, maybe maybe I’ll take that question. It is it is right. Our customers are normally energy intensive companies, the production of food and beverage or is an energy intensive business. That's the reason by the way, why we are focusing in the R&D departments very much on development of sustainable products. We are really, this is one of our four main pillars in the R&D strategy to come up with solutions and I could now talk about half an hour an hour about a new product we recently released to really save energy dramatically and we are pushing that and helping our customers. However, it is also very clear our customers are passing on the higher cost to the end markets.
I mean, this is what you can see in what you can hear with food and beverages price are coming up are increasing significantly. What we see is that the customer behavior is changing that sometimes they change their behavior, they don't buy a premium brand butter, they might buy a low cost butter, or they might made by not not that not not not a premium yogurt, more low cost yogurt. But at the end, it doesn't matter for us because it all needs equipment and machinery. But this is what our customers are reporting that they see customer behavior changing to lower cost brands, because they need to save money somehow. But our customers are passing it on to the end market. And therefore we also do not see any significant impact on the investment behavior from our customers.
William Turner
Okay, that's, that's very interesting. And then, in terms of your suppliers, I've probably understand if you do a lot of your operations, a lot assembly. But then I can imagine you outsource the more energy intensive production parts. But for example, any heavy metallic work requires significant foundries [ph] and high energy consumption. How healthy do you see your supplier base? Have you gotten any concerns about the ability for some of your some of the European suppliers being able to deliver in over the next 12 months?
Stefan Klebert
I mean, we don't see any, any impact here. I mean, we have a very, very broad supply base, we have a lot of choices normally. We also not so much impacted by, let's say logistic chains outside of Europe for many, many suppliers. So also this is not for us any material risk.
William Turner
Okay, I agree. And then my final question is more of a clarification. So I shouldn't say have you removed your Russian orders from your order backlog? And if not, how much are they if they are still in the order backlog?
Stefan Klebert
Yes, partly, partly, we did that we removed everything, which has nothing to do with humanarity needs, let's say. So also, all the sanctions from the U.S. government from G7 states and from the European Union are explicitly mentioning that companies should not stop to deliver things which are necessary to support basic humanitarian needs, which is actually food or pharmaceutical. So what we still deliver is everything which goes to this direction or this cluster, but all the other businesses is what we completely stopped and also removed from our backlog.
William Turner
Okay, thank you.
Operator
Thank you. We'll now go to our next question. Please stand by. Your next question comes from the line Akash Gupta from JPMorgan. Please go ahead. Your line is open.
Akash Gupta
Yes. Hi. Good afternoon, everybody, and thanks for your time. My first one is on the service growth. Maybe, maybe if you can elaborate. What is driving this higher service growth? Is this due to price given price increases in service will likely flowing faster to P&L than your equipment or project business? Or is this more of a pent up demand after the pandemic impact we had in last couple of years?
Stefan Klebert
Okay, Hi. Thanks for the question. I mean, you might remember that our service excellence is one of our pillars from the Mission 26. And this is where we could talk now also hours about what we are doing here exactly. But there is a big a big bunch of activities going on in the service departments. It starts with having more transparency about installed base, it continues with customized pricings and very differentiated pricing activities. It continues with more active sales in service that we also sell fixed price repairs, for instance, via our service, blue collar falls and so on. So it's not it's not coming as a surprise, let's say it's really based on a lot of, of clear actions and activities which are conducted in that stream of the Mission 26.
Akash Gupta
Basically, we should expect a service penetration that you have in your revenues to continue to grow from the levels you have seen in second quarter of this year?
Stefan Klebert
Yes, clearly, but I mean, the percentage of service always depends, of course, on the growth of, of new equipment, if we might be successful at say selling 100 or 120 million new equipment project that might change the perspective on the percentage of sale of service. But as metaphor in absolute terms, we will continue to grow into service area clearly.
Akash Gupta
Yes, that makes sense. And then secondly, on the energy cost, can you tell us how much of your energy cost is covered through framework agreement, where you may not have seen steep increases in cost and how much of your purchases are coming from spot market where we have seen maybe five to 10 times price increases in past 12 to 18 months? How much of your purchases are coming from spot market where we have seen maybe five to 10 times price increases in past 12 to 18 months?
Stefan Klebert
Yes, I mean, first of all, I want to remind everybody that energy cost is not such a big issue for GEA. I mean, I just mentioned we spent last year 20 million, all all energy all together. And we might spend this year, the double of double of that, for the remainder of the year. We have almost for everything now frame contracts, so we can be very sure, and we can, it's very foreseeable. And for next year, for the first half of the next year is about one third is what we what we had in the in the gas price.
Akash Gupta
Thank you. And my final one is on guidance. I mean, you're this 630 million to 690 million guidance is on constant exchange rates. But if you do mark-to-market with Euro, dollar at one point slightly above one, and can you tell us how much of FX translation benefit we might see on top of the guidance range?
Marcus Ketter
Akash, hello. So I know the first half of the year, we have approximately a tailwind into the translation effect of €10 million. And let's see actually how the exchange rate is going to evolve in the next five or next six months for the second half of the year. That's a definitely a positive tailwind from transformational effects here.
Akash Gupta
Thank you.
Operator
Thank you. We will now go to our next question. Please standby. Your next question was the line of Sven Weier from UBS. Please go ahead. Your line is open.
Sven Weier
Yes. Good afternoon. Thanks for taking the questions. It's actually a few follow ups here. First one is just coming back on the order guidance for Q3 which is quite solid, I think. But still wondering a bit on the beverage side of things where you said it was a bit weakish in Q2, it's probably stays a bit weakish, which I think contrast quite a bit with what you know, some of your peers are seeing. So is that really going back to you being very picky on projects? Or is it just the strings in the on the beverage side? What we see at the moment is in other segments that that you actually serve or what's behind that? That's the first one thank you.
Stefan Klebert
Yes, thank you, thank you [indiscernible] for the question. I mean, I know who you might mean with the order intake, it was in the beverage industry, however, I mean, it's, it's when we look at the large projects for us and the workload, it's also that we are very much active in the design departments with dairy projects and that is something where we have at the moment a lot of very interesting audits, let's say in the air, that is also including new food projects, which are is there where the balls are in the air, and therefore you are right. We are some somehow price cautious. We lost some typical beverage projects already this year because of price because we said we don't do that. But the reason is that as I said that these are also to a large extent, similar teams, where we want to focus on the margin.
Sven Weier
Okay, understood. Thank you. The second question is just also coming back on the Q2 operating leverage or let's say lack of operating leverage from the EBITDA margin side, despite the fact that the service organic has, you know, increased to 15% year on year from nine in Q1. So it's that delta and the growth rate that we saw between Q2 and Q1 really entirely due to pricing.
Stefan Klebert
Now, I would say it is it is it is mainly impacted by supply chain issues in FHT, we have, we have not seen this kind of performance, which we would have lost like to see here, because in many aspects here, we have supply chain issues, that means that we also have machinery and equipment, which is almost ready, but not yet ready, because small parts are missing. And that might also be let's say your opportunity for the remainder of the year. But this is one of the big effects what we see in FHT, more than another division.
Sven Weier
Because that was also just what I was going to ask when we think about the second half organic against the first half. I think at the start of the year, you kind of said that the second half organic would be higher than the first half then of course, we had a few things happening, unfortunately, in between, but your backlog is very high. There's a lot of stuff that is maybe almost finished, as you just said. So is it maybe still fair to think that the second half gross should exceed the first half especially on new equipment I believe?
Stefan Klebert
Yes, yes, that's our perspective and what we would what we are optimistic on. I mean, as I said, we are very much depending, of course, on the supply chain shortages. We have some areas where we, where we are even in, in short time, short time work at the moment because of missing parts. And in we cannot execute the backlog like we like they would like to do everything we see a looks that it might, the sky might clear up a little bit in the next half year. So we don't think that it will worsen. We rather think it will become slightly better, especially what has things which has to do with electronic parts. So yes, that's how we hopefully look at it.
Sven Weier
And I mean, if those things come through, then we should expect more of the traditional operating leverage than I would expect, given that a lot of stuff is almost finished, and just needs to be.
Stefan Klebert
Yes.
Sven Weier
It's good to you. Thank you. I think that's it from my side. Thank you.
Stefan Klebert
Good. Thank you very much, Sven.
Sven Weier
Thank you Stefan.
Operator
Thank you. We will now take our next question. Please stand by. Your next question comes from Lars Brorson from Barclays. Please go ahead. Your line is open.
Lars Brorson
Thank you. Hi, Stefan. Marcus, maybe I could just follow up on that. I had a couple of, but if I can follow up on the FHT question from Sven just now. I just want to make sure, Stefan that the message here is that the issues you're facing in FHT are purely down to the supply chain constraints. i.e. should we say transitory issue is nothing more structural. I mean, obviously, this is a business where we have historically seen, albeit prime management been run into issues with [indiscernible] in part that you have caused roll down back in 2019. I appreciate you've obviously downgraded the guidance divisionally for the year, but slightly rising from the 100 million last year, to my mind still look like a 200 basis point second half margin improvement versus first half, looks ambitious, but sounds like you're quite confident that so just double checking on that please.
Stefan Klebert
Yes, I mean, I mean, you might be right. The performance within the division FHC is different that we have very good running organizations. We have something where we where we also need to improve operational things, but the biggest issue is definitely at the moment the supply chain issue that we are not able, let's say to really execute the backlog because order intake you also see is quite good. And that's the biggest issue here in FHC.
Lars Brorson
Understood, can I just clarify the raw material cost inflation so the €180 million this year gross obviously net of your supply chain savings or before your supply chain savings? I was a bit confused as to what exactly is included. Can you help me -- and just to clarify the energy cost comes on top of that and presumably transportation and logistics. And I was also a little bit confused with your comment on energy cost. I had that down, as per your commentary on the Q4 call back in March that energy costs was about €10 million last year, going to €15 million to €20 million. That's clearly not the case. So just making sure you understood exactly what the energy component is, and what else is included within your raw mat of €180 million, please?
Stefan Klebert
Yes, the energy costs, I mean, there was, to my knowledge, no other information than that it is about €20 million or was about €20 million, and they get €21 million. And this year, we expect to double that. And with that I hand over to Marcus to handle the other question.
Marcus Ketter
The net figure you're talking about the grocery with a net figure of €120 million €140 million includes also the rise in energy and logistics, that that's all the material and supplies actually, a cost increases.
Lars Brorson
So forgive me, Marcus, I'm confused. You say there's no change to your raw mat guide. But we've just heard you say energy costs, instead of being I guess something less than 40 million is now pegged at 40 million for the year. So is 180 million in gross raw mat and energy and logistics cost is the right number to think about please.
Marcus Ketter
If you're thinking on a gross perspective, yes, we think of a net perspective. And as we said last time, we want to give a net figure. So if you deduct actually, what we want said that there would also be savings on the purchasing side, then you'd arrive at around 120 million to 140 million in net cost increases, which also includes the rise in energy prices, logistics and raw material.
Lars Brorson
That's helpful. And finally, can I just confirm the CapEx guidance is obviously unchanged, but you've only spent about I think 73 million in the first half as suggest quite a meaningful ramp in the second. What exactly explains that sort of second half waiting, please around the CapEx on change CapEx guidance?
Marcus Ketter
Yes, it's probably the CapEx number we got it was probably the ceiling, the high end, probably we can expect a bit less than, than that there is no real reason why it should accelerate that much. Now, the second half of the year, as always, visions regions actually have a high interest of of CapEx. And we kept that guidance up for now. But if you take a look at the run rate, then actually, I would say that's the absolute maximum income, probably lower.
Lars Brorson
Can I squeeze the final one and just some pricing? I was quite impressed with your 3% to 4% pricing on the sales line for the quarter, it looks like you're tracking sort of mid-single digit for the year, better than I thought after the first quarter. I wonder, Stefan whether you can get a color around what you're doing a pricing on the project side, versus the products and services side? I think there was a question earlier, but it says to a bit of granularity maybe around the pricing dynamics in the business please.
Stefan Klebert
Yes, I mean, when it comes to the large project, we have, of course, a higher material number, let's say in percentage wise than compared to our components. And we have then always, quotations from sub suppliers, and we always order and have let's say, price, price. The back to back, let's say like that. So whenever we close a contract for the 60 million, 80 million or whatever, we know who is delivering to us, what which supplier, and we fix all the price with that supplier.
So we have no no risk here. That that's important to understand that the big part of the calculation when it comes to labor, which we need, because this project might run for two years or so, then of course there is the inflation for the labor cost calculated, which is also adapted to the current expectations. And last but not least, if we have any things which are not really foreseeable, we have some index clauses that we also allow to change and to come with change orders whenever there is a need for that. So for the large project, we also feel very safe here in what we do from the pricing point of view.
Lars Brorson
Helpful. Thank you both.
Operator
Thank you. We'll take our next question. Please stand by. Your next question comes from the line of the Sebastian Grover [ph] from BNP Paribas. Please go ahead, your line is open.
Unidentified Analyst
Good afternoon everybody, Hi Stefan, hi Marcus. I have four questions if I may. The first one is on the farm technology segment. The orders obviously remain on a high level yet GEA and are down for the second quarter in a row. So can you remind us of what is driving the very strong demand for automated merging equipment, especially from a regional perspective? And what's your take from the in terms of demand?
And then on margins in the segment, and we said you saw exceptionally strong top line growth from the second quarter, yet there's barely any operating leverage. So when should we really expect the higher selling expenses to normalize or simply put operating leverage to finally kick in? And we'll have two other questions. But let's start there please.
Stefan Klebert
Okay Sebastian for the aggression I mean. The aggression of what drives the growth in farm technology is very clear. It’s it's that there's a very clear trend to automatic milking because this is efficiency. And this is also safety of operations. We have also a lot of labor shortages. And especially you can imagine that it is not so easy to find stuff for a farmer who is reliable to be every, every morning at five o'clock in the farm, and milking cows. This is this is something which worked out very good 20 years ago, but it's more and more coming becoming a problem because farmers are not finding reliable people and stuff to do that job.
And that drives a huge, huge demand for automatic milking. And this is where we are benefiting here from because they are actually it's more or less oligopolies. There are very few suppliers for automatic milking. And we are I would say, definitely, very well positioned here with the whole product range, starting with single milking automatic milking boxes up to large rotary systems where we can really offer auto farms up to 10,000 cows or so excellent and reliable solution.
So this is where we are very well positioned. And I mean, world population is growing the need for dairy, therefore, it's also growing worldwide. And therefore, we also very optimistic that we can continue to grow here. There might be always sometimes a cycle a little bit. But in the medium to long term perspective farm technology is a growth story.
And maybe one thing to add, we just, we've just started to, to introduce our automatic feeding system to the market, this is a completely new product, it's really helping to become much more sustainable, because this is a fully electrically electric drink powered system, which which is working men less and is taking over the role of feeding the cows, when on a on a battery basis without any any labor, which is needed to do though.
Unidentified Analyst
Okay, and Stefan if I may take a comment on the cycle that you mentioned before. So that takes us really, as you expect the moderate slowdown from here. And if you could shed some more light on the regional drivers currently. So my understanding is that China has been a very, very powerful driver in this regard. So any comment would be much appreciated?
Stefan Klebert
Yes, I know, you shouldn't not use should not take it as a letter as a warning that we are ahead of a downswing also, that that's not the case. And also with the regions, it depends, of course, very often on large projects in that regions. I mean, APAC is interesting, and it's also there is also a high demand for this kind of product. But as I said, we also see mainly all over the world see of interest in groceries. I mean, APAC might be number one, followed by North America. But as I said, it's the driver is the need for automation.
Unidentified Analyst
Sorry, Marcus, I think I dropped you.
Marcus Ketter
No no, you didn't into let's face the question to us, of course, there wasn't. So talking about operating leverage share for the EBITDA we had 287 [ph] million in the second quarter and farm technologies in the prior quarter Q1 was 147. There was of course, a big step up in the in the EBITDA margin. The reason for that is twofold. One, of course, there is a certain operating leverage effect there, which you can also see in comparison to Q2 2021. We're at 147 million sales and operating EBITDA margin of 10.9%.
However, there is of course, also an increase in selling expenses there, which mitigates certainty which mitigates the operating leverage effect here. And that's why we end up at 11.3. In comparison to Q1, again, it's more higher sales. But also, as you remember, we had a hit actually in the U.S. because of the hygiene of production was approximately 6 million EBITDA, which was missing due to the effect that raw material prices was much faster, increasing, then we actually increased our sales prices there.
So that you need to take into account a conical presence from Q2 to Q1 of this year. And then as I explained to Q2 of last year, there is OpEx leverage here, but also increasing selling expenses down. So that's year-over-year it goes up from 10.9 to 11.3. But I think the good message is, as we said, the Q1 costs, FT is going to be back on track, and we're going to be able to increase prices, they'd be not going to see this effect of higher of the increasing raw material prices and sales prices again, which we did not.
Unidentified Analyst
Okay. Let's move on quickly a group EBITDA margin and on the Q2 headwinds. Stefan, I heard you say in the introduction remarks, that's excluding the Ukraine war the Q2 EBITDA might have been higher by mid-to-high single digit euro million amount. Should be understood as a net headwind from the build up of semi finished goods that FHT primarily or what falls into this bucket if you will get the number?
Stefan Klebert
Now, it's just because of missing sales. Because we could not, we could not sell like we like, like we didn't in the year before that simply impact I mean, business collapsed. It's not even half of what the or we used to sell. And this is a marketing which is missing out of that business.
Unidentified Analyst
Okay. And so then if you should single out the FHT headwind that you refer to the build-up of semi-finished goods and the issues around supply chain. So can you get within potentially underlying margin would have been without those shortages?
Stefan Klebert
I can't give you any, any any rely number here, I apologize.
Unidentified Analyst
Okay, last question. And just briefly on the more conceptual understanding around this bound trading, that was asked before about when it comes to the lower distribution and consumer spending, and you said that this wouldn't have an impact on you, because you would go sell enough volume and find a quote this way. This is really true, because I would still believe that the big foods and beverage companies would obviously are much better on their branded products rather than on the morning [ph] stuff. So as we think about that, in terms of their ability to spend it the mix for them is turning more negatively.
Stefan Klebert
That’s fair. Let me grab that to the question. Also the nonlinear stuff gets manufactured on our equipment. What you're referring then to, do they still have enough appetite for CapEx, but as I said, they need to have the volume actually, they are also for known him stuff and all processed food is actually it is our business. And therefore we would not expect that they would be saving CapEx on the process food machines, but perhaps somewhere else on buildings, etcetera. If any, let's see how the mass is going to go. If you have seen some big Swiss company, who announced actually that for all their products, they're going to raise prices by by 5%. So let's see if their margin and their absolute earnings of these big food companies were really good down at the end.
Unidentified Analyst
Yes. Alright. Thank you so much both.
Operator
Thank you. We will now take our final question. Please stand by. Your final question today comes from the line of Uma Samlin from Bank of America. Please go ahead. Your line is open.
Uma Samlin
Hi, good afternoon. Stefan and Marcus, thank you for taking my question. I was wondering if you could follow up a bit on the pricing the backlog. I guess in starting of this year, the real life price increase seems to have accelerated I was wondering do you have a estimate on how much price increases that you have in the backlog? Should we expect more price increases translates into sales growth in H2 this year?
Stefan Klebert
I mean, I mean it's not so easy to answer the question because you know that we have a we have a lot of different businesses in GEA. And the question how do we work on prices is different however, what the what we can say they is that we that we have clear the measurements clear, clear actions in place in all the business units, in all the divisions to really come up with the prices. So there is it's, it's everything we see and we can have a look at is proving that we are on the right track here.
Uma Samlin
Okay, and I guess you also mentioned that the 120 million, 214 million calls headwinds labs, that should be theoretically be compensated by around 3% price increases. So is that reasonable to assume that, if we could have a much stronger pricing, for instance, the H2 this year that should be more than helpful for the margins in the second half?
Stefan Klebert
Yes, yes, we are trying we are trying, of course to also use the opportunities which we have in that environment of high inflation. Sometimes we might be successful, sometimes not. But I think the most important thing is that we can pass on the really strong headwinds we see from the material and labor costs.
Uma Samlin
Yes, fair enough. I guess my last question is on the buybacks. So since you announced the buybacks in August last year, I guess you'd get the first if I understand correctly, the first tranche of the buybacks until February this year, and then there was a gap between February and July. I assume that's because of the uncertainties in the market. So what triggered the decision for you to speed up the buyback now? Does that mean that you have a bit more visibility into the second half?
Stefan Klebert
No actually, it's a it's a trigger that we announced that we do the buyback of €300 billion until the end of the year. So that was more coincidence that the market actually came down and that we were starting the buyback at that point in time where the market was beginning of July. There, we stick to the announcement that we are going to spend €300 million till the end of the year. And therefore, we need to get going again with the share buyback program.
Uma Samlin
All right, that's all for me. Thank you very much.
Operator
Thank you. I will now hand the call back to Stefan Klebert, CEO for closing remarks.
Stefan Klebert
Thank you very much. So thank you for participating in our call and my closing remarks would be the following. I think it's very important that you hopefully notice that GEA is on track, we are performing despite all the headwinds. We are really, we delivered a very good second quarter, despite all this headwinds, which we see in the world. And, and we are also in a good shape and expect another solid development in Q3. And last but not least, we clearly confirmed our guidance for the year 2022. And we can also say that we include here also achieving our EBITDA margin target of 13.5%.
With that, yes, we are at the end of the presentation and thank you all for..
Operator
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect speakers please stand by.
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GEA Group Aktiengesellschaft (GEAGF) CEO Stefan Klebert on Q2 2022 Results - Earnings Call Transcript