GEA Group AG

XETRA:G1A

Earnings Call Transcript 2021-Q1

[Operator]

Good day and thank you for standing by. Welcome to the GEA Group Aktiengesellschaft first quarter 2021 conference call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Oliver Luckenbach. Please, go ahead.

[Oliver Luckenbach, Head of Investor Relations]

Yes. Thank you very much, operator, and good afternoon, ladies and gentlemen, and thank you for joining us today for our First Quarter '21 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 first quarter, and Marcus will then cover the business and financial review before Stefan takes over again for the outlook '21. Afterwards, we will open 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 that, I will hand it over to you, Stefan.

[Stefan Klebert, Chairman of the Executive Board & CEO]

Thank you, Oliver, and good afternoon, everybody. It's my pleasure to welcome you to our conference call today. We had a strong into 2021, taking into account the high comps from last year. As you know, last year's first quarter was almost unaffected by COVID-19 pandemic. This is the main reason why order intake is down by 6.9% year-over-year. While we booked 5 large orders worth a total of EUR 140 million in last year's first quarter, in this year we received a total of EUR 34 million. This gap in large orders alone explain the decline in order intake.On an organic basis, however, the decline amounts to just 2.5% year-over-year. On a sequential view, order intake further improved and reached the highest quarterly level since Q1 2020. This results from what we have stated in previous conference calls about the quality of the order pipeline. Orders have not dropped out of the pipeline. Customers just need more time to decide. And the pipeline remains very attractive. But let me get to this topic in more detail in the outlook section of the presentation.Sales were down by 2.6% year-over-year. The decline is owed to negative currency movement as well as to the disposals of assets, which we have concluded earlier. On an organic basis, sales were up by 2.2% and therefore, absolutely in line with our full year guidance of an organic growth rate between 0% and 5%. Coming now to EBITDA before restructuring expenses and the according margin. EBITDA increased by 15.4% to EUR 121 million, and the margin expanded by 1.8 percentage points to 11.4%, marking a new record level for first quarter. This great achievement was primarily driven by an increase in gross profit and an expansion of gross profit margin. Finally, return on capital employment -- employed increased by 7 percentage points to 19.3%, which is driven by the improvement of both EBIT before restructuring expenses as well as net working capital.Let me now summarize what we have furthermore achieved during the first quarter. Both rating agencies, Moody's and Fitch provided an update, while Moody's confirmed their Baa2 rating, the agency upgraded the outlook on GEA to stable from negative. Fitch upgraded their rating to BBB with a stable outlook. This is, in my view, the result of the sustainable improvement of our financial KPIs. We also got an upgrade from an ESG rating agency. We received the gold standard in the EcoVadis sustainability assessment in March, entering now among the top 2% of all mechanical engineering companies rated by EcoVadis globally. Achieving gold standard gives us even more encouragement to fully commit and further expand our sustainability strategy.GEA once and will make its contribution to the exemplary management of the environment. To this end, we established a new sustainability department in early April, headed by our Chief Sustainability Officer, Dr. Nadine Sterley, who directly reports to me. Moreover, the dedicated sustainability department will lead the work on developing our new climate strategy, which is well underway. By early summer, we will be able to provide you with an update about the specific new goals we will be setting for ourselves and how we intend to continue setting a good example within our industry in the future.Regarding our portfolio measures, the disposal of Bock was finally closed at the end of February. Does this mean that the entire job is done? No, there are still some small review process underway, and we will inform you as soon as a deal is signed. Finally, our Annual General Meeting, which was once again, given the circumstances, a virtual one, the event took place just a couple of days ago on April 30. Our dividend proposal of EUR 0.85 per share was approved and the dividend was paid to our shareholders.Let me now turn to a topic, which became increasingly important during the last month and will most likely remain highly important, at least in 2021 inflation. During the last month, several raw material prices, such as steel have risen significantly. Fortunately, with our new procurement processes in place, we can now keep much closer track on the current developments regarding raw material prices. What does this mean for GEA? On our fiscal year 2020 numbers, which you can find on Page 179 in our annual report, our material builds amounted EUR 2.1 billion, but not all of this is exposed to price inflation. Only 20% or about EUR 400 million are actually subject to raw material inflation. We assume that the portion might be exposed to circa 10% [Audio Gap] price pressure. This would mean a gross impact of about EUR 40 million before any countermeasures we have initiated. 50% of the EUR 40 million are already mitigated by frame contracts in place, alternative suppliers and direct negotiations. For example, most of the steel-related frame agreements were already renewed in October 2020 with 12 months run time. Contracts ending during Q1 '21 that were subject to negotiation were closed in mid-Q1 '21. So the remaining EUR 20 million are largely being addressed via various levers such as cost pass-throughs to our fragmented customer base.The availability of [ Hovex ] is another critical topic. In the past, it was -- given that certain products were always available. However, when looking at the car and semiconductor manufacturers, the current situation speaks a different language. At GEA, we generally do not experience any meaningful shortages at the moment. However, in some minor cases, we see that lead times are expanding. To be prepared for possible shortages, we are building some security inventories. For the time being, we therefore do not expect any meaningful negative impact on our business.Lastly, logistics, freight rates, especially [Audio Gap] in 2020 due to the pandemic. In the most recent past, freight costs for [indiscernible] transportation are also increasing, partly significantly. Our policy is that the freight costs must be paid by the customer. In most of the cases, we were able to pass price hikes on to the customer. In order to be prepared for future developments, we are currently renegotiating the freight rates on a weekly basis and increasingly change from air to sea freight, which are also implementing group-wide common freight policies. So we are harmonizing the policies further within GEA.Let me sum this slide up for you. The extreme price hikes are often only temporary in nature. Thus, the real burden is often much lower than what you pick up from the news. For the time being, we can mitigate most of the inflation, and we are already closely monitoring. With this, I would like to hand over to Marcus, who will take you through the financials of the quarter.

[Marcus A. Ketter, CFO & Member of Executive Board]

Thank you, Stefan. Also, a very warm welcome from my side. Coming here to the next slide. As Stefan has already highlighted the development of order intake, sales and EBITDA before restructuring expenses, I will focus on the additional KPIs of this chart. Mainly the higher profitability and a very strong year-over-year reduction [Audio Gap] net resulted in return on capital employed of 19.3%. This is a very good number for us. On a net liquidity, the sustainable reduction of net working capital was the main driver for the increase in net liquidity by EUR 418 million to even EUR 428 million now. The improved processes to manage net working capital have also shown positive effects in Q1 2021, as the sequential increase from Q4 was much lower than in the past. But let's get to this topic in detail further on. To sum it up, we had a strong start in 2021, with organic sales growth, further expansion of margins and improvement of capital efficiency.Coming to the next slide. Here, order intake declined organically by 2.5% year-over-year. However, all divisions, except for Liquid & Powder and Refrigeration Technologies, grew order intake organically. Liquid & Powder and Refrigeration Technologies are lagging the recovery, given the late cyclical nature of the business. Sales were up by 2.2% year-over-year on an organic basis. Our service sales continued its growth path with an organic improvement by 5% and accounting now for 35.2%. This is the highest level ever recorded in Q1. EBITDA before restructuring margin reached 11.4%, which is also a record level for first quarter. A slight increase in overhead costs, driven by bonus related personnel expenses as well as IT related costs was compensated by our gross profit. These effects were not related to one specific division, but rather [Audio Gap]. Before I discuss the developments at the divisional levels, let me recall a technical controlling topic concerning our zebra entities.In our earnings call, we stated that on January 1, 2021, we will split up those entities, which include businesses related to 2 or more divisions. This means that you can see a visible structural impact on order intake, sales and, to a much lesser extent, on EBITDA for the divisions. Therefore, we highlight this impact, which is not including in our organic development of order intake and sales shown for every division. On group level, there is no impact at all.Coming to Separation & Flow Technologies. Order intake reached a new record level with EUR 341 million and increased by 6.9% organically year-over-year. Almost all our core customer industries have experienced a solid demand development. Sales development was also very favorable with an increase by 5.9% organically year-over-year despite a lower backlog at the beginning of the quarter compared to last year. This increase was especially driven by solid development of our service business, which grew by 8.1% organically, driven by a higher backlog at the beginning of the quarter. EBITDA increased by EUR 2 million and EBITDA margin expanded further to 22.2%. This development was driven by better gross profit in the new machine business as well as a higher share of the service business. To sum it up, a very good start of operational flow technologies into the new year. The book-to-bill ratio reached a level of 1.23, a level unseen since Q1 2018, and the backlog is at an all-time high.Going to Liquid & Powder Technologies. Order intake declined organically by 22.6% year-over-year. The decline in large order volume of EUR 106 million alone was the most significant driver for that. Therefore, those customer industries, which usually have large orders, dairy processing, beverage and to a lesser extent, chemical. experienced not surprisingly a decline. There was only one large order of EUR 34 million this quarter, which was allocated in the customer industry food, specifically in the category instant coffee. In last year's quarter, we had in total 5 large orders with a volume of EUR 140 million. [Audio Gap] stated at the large order pipe, especially for dairy processing, is getting better. This statement is still valid, and we see that negotiations with customers are picking up. Therefore, we are confident that we will see some further large orders coming in the course of this year. Sales increased organically slightly by 0.7% year-over-year. Not surprisingly, the COVID-19-related travel restrictions are still a drag on order execution, but we are getting increasingly used to the situation and find work around. Our service business was clearly the driver [ of ] organic sales development with an increase of 5.6%. The decline in the service sales ratio results from the structural [Audio Gap]. EBITDA before restructuring expenses increased significantly to EUR 23 million. The margin expanded to 6.8%. This development was due to a remarkable improvement in gross profit. As in prior quarters, better order execution in combination with better backlog quality were strong contributors. To sum it up, Liquid & Powder Technologies is clearly heading in the right direction. Four quarter's trading EBITDA margin is now at 8.3%, already within the guided range for 2022 of 8% to 9%. Order backlog, also considering large orders, is also improving sequentially, which should translate into better sales going forward.Let me now talk about Food & Healthcare Technologies. Order intake increased by 4.3% organically year-over-year. The increase came especially from the business unit Pharma, where we received 2 orders in the bracket between EUR 5 million to EUR 50 million growth. It is worth noting that these projects were not vaccine related. We received 2 orders for continuous manufacturing solutions of solid dosage products from 2 top 10 pharmaceuticals companies. Sales only slightly declined on an organic basis by 0.6% year-over-year despite the backlog at the beginning of the quarter being below prior year's level. Like in Liquid & Powder Technologies, the execution of projects is, to a certain extent, still impacted by COVID-19 travel instructions, although new working methods like remote factory acceptance tests have been successfully implemented. EBITDA before restructuring increased by EUR 5 million, and the margin expanded from 7.8% to 9.6%, which represents a new record level. A solid increase in gross profit as well as margin driven by better execution, backlog quality and a flat overhead cost ratio drove this significant improvement. To sum it up, strong order intake in Q1 2021, sequentially up since Q1 '20, in addition to a strong EBITDA margin expansion.Moving to Farm Technologies. You might remember that Farm Technologies was the best performer in terms of organic order intake growth in the last quarter. The division was able to defend this title and to even accelerate the organic growth rate to almost 30% year-over-year. The demand trends from China, Russia and North America continued in the first quarter. Conventional as well as automated milking equipment is both in high demand. The most recent positive developments of the milk price, especially driven by strong demand out of Asia had a positive impact on investment decisions of dairy farmers. On the other hand, feed prices are now rising too. So far, this has not a significant negative impact on the milk feed price ratios. Sales increased organically by 6.6% year-over-year, driven by the higher backlog at the beginning of the quarter compared to last year. EBITDA before restructuring increased by EUR 2 million and margin expanded to 10.3%, driven by higher gross profit and lower overhead costs. To sum it up, the order intake reached almost EUR 200 million and a new record level for a single quarter. Also, backlog is currently at a record level, indicating further sales growth going forward. Even more satisfying is the fact that the 4 quarter's trading margin now stands at 11.3%, almost within the range of 11.5% to 12.5%, which we have guided for 2022. Farm Technologies is very well on track.Finally, let us now turn to Refrigeration Technologies. Order intake decreased organically by 5.8% year-over-year, but reached now the highest level since Q1 2020. Nevertheless, we still experience that customers are postponing their final investment decisions. The business of RT is late cyclical compared to the other divisions. The pipeline looks healthy and recovery might be visible within a certain delay compared to other divisions. Sales declined organically by 9.9% year-over-year, which is mostly due to the lower backlog at the beginning of the quarter compared to the level last year. Furthermore, the project business is also impacted by COVID-19-related to travel restrictions. EBITDA before restructuring declined by EUR 5 million and the margin contracted to 8.2% from 10.2% last year, suffering from a lower sales level, negative currency effects and the disposal of our subsidiary Bock. To sum it up, the late cyclical nature of the business is visible in the year-over-year decline of order intake. However, the pipeline looks healthy. It is furthermore worth noting that the order backlog increased sequentially, slightly despite the disposal of Bock at the end of February.With the next chart, we are closing the divisional chapter now and take a look at the overview of all divisions. The strongest driver for EBITDA was clearly Liquid & Powder Technologies. All divisions, except for Refrigeration Technologies experienced an increase in EBITDA. On the right side of the chart, we have added back to the translational FX effect of EUR 5 million. Excluding this FX effect, as we have defined it in our full year guidance, our EBITDA would have been -- would have even improved by EUR 21 million to EUR 126 million.Let's now continue with net working capital on Slide #17. On a year-over-year view, we improved our net working capital by EUR 344 million and the ratio improved by 6.4 percentage points to 8.2%. All divisions contributed to that positive trend. The strongest improvements were at Liquid & Powder, Food & Healthcare and Separation & Flow Technologies. Analyzing our net working capital, the strongest improvements were achieved in trade receivables, followed by inventories and net contract assets. Trade payables increased slightly. I've stated earlier that we have changed the entire processes associated with managing net working capital and that these improvements are sustainable. Q1 2021 shows now that the success of these measures as the seasonal increase of net working capital from a Q4 to Q1 was just EUR 9 million or only 0.3 percentage points. It is also worth noting that we did not have the tailwind from larger down payments. Thus, this development is another proof of our efficient net working capital management.This leads us to another important topic, cash generation. Operating cash flow came to EUR 46 million, which is exactly twice as high as in last year's Q1. A high EBITDA in combination with a much lower cash out for an increase in net working capital, more than compensated higher cash outs for restructuring. Free cash flow improved to EUR 40 million from EUR 9 million last year. CapEx was almost on [indiscernible] level at the EUR 12 million in the category, others, next to CapEx represents the proceeds from the disposal of assets at Refrigeration & Farm Technologies. This all results in a net cash flow of plus EUR 18 million compared to a negative EUR 12 million last year. To sum it up, due to our solid net cash flow for first quarter, our net cash position improved from year-end '20 by EUR 26 million to EUR 428 million. This strengthens our financial position further, which I will discuss on my next slide.Let's take a look on our financial headroom. [Audio Gap] On the left, you see available credit lines as well as their respective utilization and maturity structure. Of the EUR 381 million credit facilities expiring this year, EUR 300 million have solely been set up due to the uncertainty arising from the pandemic. These EUR 300 million consists of EUR 100 million credit line with the European Investment Bank, which will expire at the end of July of this year. The EUR 200 million syndicated credit line will expire at the beginning of August '21. We will decide on the extension of these credit lines in due time. The other EUR 81 million constitute evergreen credit lines. Regarding the syndicated credit line of EUR 650 million expiring in August '22, we will initiate extension measures to secure the financial headroom of GEA within the next month. We expect that our current solid investment-grade rating will enable us to prolong credit facilities at favorable conditions.Continuing now on the right side of the slide. The only KPI, which slightly weakened compared to last year's Q1 is the equity position. Last year's total dividend payments exceeded our net income for the period due to restructuring expenses. Our other KPIs have improved partly significantly compared to last year's Q1, especially the positive trend of our net liquidity has continued, and the number stands now north of EUR 400 million. As Stefan has mentioned earlier, we received positive news from Moody's and Fitch. Both updated their ratings. Moody's confirmed their rating, but rates the outlook to stable. And Fitch recently upgraded the rating to a BBB with a stable outlook. This is a result of our efforts to improve all financial KPIs of GEA.With that, I will now turn it over to Stefan.

[Stefan Klebert, Chairman of the Executive Board & CEO]

Thank you, Marcus. Let me now come to our outlook for the FY '21 and some other topics. Since we shared this chart with you about 2 months ago, the picture has barely changed. In some industries, the assumptions by Oxford Economics for the value-added output development were slightly upgraded, most notably in the customer industry pharma and for industrial production in general. The global economy is in recovery mode. I believe this cannot be denied. Labor markets are improving, and the shortage of supplies in some areas show that the strength of the recovery was possibly underestimated. We think that if the reopening of the economies will gain momentum, we are likely to see some recovery of large order placements during '21. The orders never dropped. It is in our view, only a question of when they will be awarded.Our guidance for the fiscal year 2021 is unchanged. We are well on track to reach our targets after our strong results achieved in the first quarter. The 2.2% organic growth in the first quarter is perfectly within our guided range of 0% to 5%. And you should bear in mind that this was the quarter with the most challenging base effect. For EBITDA before restructuring expenses, we confirm our guided range of EUR 530 million to EUR 580 million. And for return on capital employed, a range of 16% to 20%. Please bear in mind that the guidance for EBITDA and for ROCE is based on constant exchange rates.Finally, let me now update you on our key priorities for '21. First, our continued focus on operations -- operational efficiencies. We will further improve our efficiency by systematically pushing ahead with the measures we have initiated. I addressed the current inflationary environment. This is likely to accelerate some of our efforts to harmonize processes and to reduce costs. Optimizing our manufacturing footprint also ranks high on our list of priorities. In addition to our new production facility being built in Koszalin, Poland, where we will lay the first cornerstone next month, we will push ahead with the buildup of additional centers of competence. Koszalin will be a role model of a new modern and ecologic sustainable factory, which will set completely new standards within our manufacturing footprint and also for sustainability. Another milestone for this year will be the start of the role system. Currently, we are preparing the first template and the rollout will start with next [Audio Gap]. We will inform you our Q2 reporting about the first experiences of this rollout.This brings me to the next topic, sustainability. As mentioned earlier, we will further professionalize our efforts by releasing a new climate strategy and by setting ambitious targets in the not-too-far future. Our commitment, both internally and externally is clear. GEA is a company that understands and takes its social responsibility seriously. And finally, Mission 26. We are working on our Capital Markets Day in September to outline the medium-term potential of GEA.A few words on our road map for '21. Next is our Q2 reporting on August 13 followed by our Capital Markets Day on September 28 and 29. I hope that we will be able to meet all of you in person at a nice location. The decision whether this event will be held physical or virtual will depend on how the pandemic develops during the next weeks and months. However, from today's point of view, we hope and believe that we will be able to meet you in person.With that, I hand it back to Oliver for the Q&A.

[Oliver Luckenbach, Head of Investor Relations]

Yes. Thank you very much, Stefan and Marcus. And with that, back to you, operator. And please open the lines for the Q&A.

[Operator]

[Operator Instructions] And your first question comes from the line of Arsalan Obaidullah at Deutsche Bank.

[Arsalan Obaidullah, Research Analyst]

So my first one, I think you touched upon the fact that freight costs would be passed onto customers. Could you give an idea of what you expect that should be in terms of quantum for the year? And also, then sort of how that ties back to your sort of growth target for the year as well, please?

[Stefan Klebert, Chairman of the Executive Board & CEO]

I mean, as I said, in GEA, that freight costs are paid by customers. So when we are selling machinery and equipment, it's usual that customers are paying for freight, whatever that means. So we don't expect any material impact to GEA here.

[Arsalan Obaidullah, Research Analyst]

Okay. And in terms of – so my next question, in terms of your sort of -- you haven't sort of explicitly restated your 2022 margin targets. So can we assume those are sort of unchanged in particular note, for example, in the SFT division, you're already sort of more or less at the bottom end of that range. Do you sort of now looking at some of the other divisions? Are you still sort of comfortable in sort of getting to those ranges? Do you see some of them being potentially more challenging as the outlook is? Or are you still kind of comfortable and reiterate those?

[Stefan Klebert, Chairman of the Executive Board & CEO]

I mean, as I said, we are very happy [Audio Gap] strong Q1. We think we are good underway. But I mean it's 9 more months to come, let's say, and therefore, we feel very comfortable with the guidance we gave, and that's the reason why we confirmed.

[Operator]

And your next question comes from the line of Klas Bergelind at Citi.

[Klas Henrik Bergelind, Director]

It's Klas from Citi. So a couple of questions, please, and I will take them one at a time. First, on the backlog, it's down 4.3% year-over-year. Your growth guide is 0% to 5%. And I totally can see the positive growth here in the first quarter on revenues. This backlog is obviously measured at quarter end. So it's a bit tricky for us to compare to the FX and effects from disposal that you have on orders and revenues because they are measured through the quarter. Marcus, could you please tell me what the underlying backlog did ex-FX and disposals at quarter-end, so the organic effect, I will start here?

[Marcus A. Ketter, CFO & Member of Executive Board]

Okay. I can do that. So the FX effect is actually EUR 31 million and negative EUR 31 million. We have debt, as you mentioned, in order backlog of minus 4.3%. Out of that is FX effect minus 1.2 percentage points. So these are the numbers.

[Klas Henrik Bergelind, Director]

Excellent. Then my follow-up is on in for out. So obviously, orders are now improving nicely in the shorter cycle divisions, SFT and ST. And I understand that the growth in ST was a bit boosted by subsidies and also some preordering ahead of price hikes of steel in North America. But in SFT, which is big division, good for margin and mix through the year, do you see this improvement more sustainable, Stefan? And if you could help us of how much of the growth step up will come from improved execution of the overall backlog, i.e. as restrictions are easing?

[Stefan Klebert, Chairman of the Executive Board & CEO]

Yes. Thank you, Klas. So we -- as you said, in SFT, we have a very good also first quarter seen with a very good order intake. And we are very optimistic that this continues. So this is, as you said, important division for us in terms of margin stabilization for the whole group. And yes, as I said, we are very optimistic. If we look at the pipeline, which is normally a shorter one than compared with LPT, it looks very promising, and it looks good and strong.

[Klas Henrik Bergelind, Director]

Very good. My -- and then on the backlog conversion, a lot of backlog that is -- can turn much quicker as restrictions are easing. Any help that we can get from that? How much of a percentage growth kick that can be in the second half? Maybe you don't want to guide like that, but I'll give it a try.

[Marcus A. Ketter, CFO & Member of Executive Board]

No. We can't tell yet how it works. Not that we don't, but I mean it's difficult to judge how the accelerations are going to go. But SFT is quite well underway. We are very optimistic about it.

[Klas Henrik Bergelind, Director]

Yes. Okay. My very final one is on price cost. And that was great color. A lot of people in the market has been asking for it. So thank you very much for that. On services, you typically pass on increased cost inflation quite quickly. And there is a nice growth step up. Was this mainly driven by price hikes? Or did we also see an underlying improvement in service demand? And if you could comment on the baked in cost inflation in your project business, you alluded to EUR 20 million, Stefan. How long are the contracts? Can you renegotiate throughout the year if we see a further increase in inflation?

[Stefan Klebert, Chairman of the Executive Board & CEO]

Yes, let me start with the contract for the raw materials of steel. The majority of this contract is closed until autumn, yes. So we are -- we have fixed prices until autumn. To be honest, we believe that the increase of all these prices or inflation we see in steel, wood, plastic and so on, this is not driven by demand. This is driven by, let's say, by a declining or declined supply. So when we pick up, we are very optimistic that the supply will also increase, and therefore, we will also see falling prices again. So we feel very comfortable with the frame condition contract. We can, let's say, bridge the peak time of the material. That's of course an assumption at the moment clearly, but this is how we see it and we don't -- as I said before, we don't expect any material impact from today's point of view by material inflation on the GEA profitability.

[Klas Henrik Bergelind, Director]

Perfect. And then on services, how much of the 5% was price?

[Stefan Klebert, Chairman of the Executive Board & CEO]

Well, that's difficult to say. I think we don't have a clear detailed analysis about that. But it's a mixture, of course, yes. I mean, we increased prices in service, but we also see that demand is coming back here. And by the way, we also expect that in the next months when the pandemic fortunately will disappear again, that we will also see increasing demand for service, a lot of maintenance or repairs might have been postponed. Service technicians will be allowed again to travel and to enter customer sites. So we are also optimistic if you look to the future that this will drive demand further.

[Operator]

And your next question comes from the line of Max Yates at Crédit Suisse.

[Max Yates, Research Analyst]

Just -- I wanted to ask about the temporary or discretionary cost savings this quarter. I think those have been running at sort of low to mid-teens per quarter from Q2. So I just wanted to understand how much of a contribution that was this quarter to the EBITDA?

[Marcus A. Ketter, CFO & Member of Executive Board]

We have -- when you look at -- we have different buckets of cost savings, of course, there. For example, procurement and -- the major ones are procurement and [indiscernible] savings. So that was EUR 2.5 million in Q1. And then, of course, we had COVID-19-related savings, mainly travel and, of course, marketing expenses, that was another EUR 10 million in the first quarter. And these are the major cost savings we see.

[Max Yates, Research Analyst]

Okay. And just when I think about sort of the remaining quarters of the year, is there any sort of feeling for how you're going to manage that discretionary spend. Any guidance on if temporary cost savings were running at EUR 13 million per quarter last year, how much of that may be coming back into the business? And the reason I ask this is because if I look at your last 4 quarters of EBITDA, you're at about EUR 548 million. So you can get sort of well within the guidance range with no year-on-year EBITDA improvement versus Q2 to Q4 last year. So I'm just trying to understand whether -- when you balance out the sort of no more bad debt provisions, the additional cost savings, temporary costs coming back, do you think you can make progress year-over-year on EBITDA or as we move through the year?

[Marcus A. Ketter, CFO & Member of Executive Board]

Yes, I think we can make some further progress. Of course, when you look at headcount, 800, then it's a full year effect. That's the only thing which is coming back. On the counter side of that, that is -- we will have personnel expense increases, of course, wage inflation, which we didn't have last year, and that's going to usually -- our companies that's starting April 1. So that's going to be a counter effect there. And then the question is how long the COVID-19 situation will hold? Well, we will keep on going with the travel restrictions and less marketing. So I assume for the second quarter, that will be the case. But for the third quarter, it could be that travel is coming back and also marketing expenses are rising. So that's a counter effect there, too. All in all, we think that, especially procurement will be very helpful in getting savings in. We expect to see at least EUR 10 million in procurement savings. And probably going forward, some more savings here in the second quarter, but perhaps around that, what we had in Q1 for travel and for marketing expenses.

[Stefan Klebert, Chairman of the Executive Board & CEO]

Yes. And maybe one more comment to the -- of course, every company has savings in the COVID situation in travel expenses and marketing costs. And of course, some of these costs will come back. But if there is one really positive thing out of the COVID crisis, I think, is that we all learned that we do not have to do every travel effort anymore, which we were used to do in the past. So we will also clearly cut our travel budgets here significantly down, and we will make sure that we are not spending never again this amount of travel costs, which we spent in 2019 and the years before. And of course, even if we might see slightly increasing travel costs in Q3, maybe in Q4, we are very optimistic that simply by growing the top line and creating additional volume, we can overcompensate this swing backs from the costs, which might kick in here again.

[Max Yates, Research Analyst]

Okay. And just a very quick final one. You referenced on the disposals that you were maybe not done on the disposals. And I appreciate you probably don't want to say exactly what you're considering. But could you give us a feel of the size of the disposals that you're looking at and discussing similar to the ones that we've seen announced so far? Or are these potentially kind of bigger scale?

[Stefan Klebert, Chairman of the Executive Board & CEO]

Okay. We announced, I think it was more than 1 year ago, at the Capital Market Day that we -- our intention is to dispose EUR 200 million to EUR 300 million turnover. We did phase out about EUR 130 million, EUR 140 million. So you can expect that there might come EUR 100 million to EUR 150 million that's the idea. And as soon as this is closed, we will assign, we will, of course, inform you. But this is then [Audio Gap] said, then we are done for the time being, I would say then we have a portfolio we are feeling well. And then, of course, we are looking also ahead, and we will see what kind of potential acquisitions might be possible in the future. But like I always say, we don't see ourselves under pressure to do acquisitions, but we are watching out, and we are looking at companies. That's also a clear part of our strategy.

[Operator]

And your next question comes from the line of Sven Weier at UBS.

[Sven Weier, Executive Director and Analyst]

First one is a follow-up on the order intake level. And obviously, you had very strong base orders in Q1. I mean given, Stefan, what you just said on the service business that this has not really fully recovered yet, so there's more to come. I was just wondering how sustainable you think is the strong level of base orders. Did it include any kind of double ordering like we've seen in other industries or some kind of pent up? It didn't sound like it, but I just wanted you to confirm that.

[Stefan Klebert, Chairman of the Executive Board & CEO]

No. So we don't see -- let's say, this -- we don't expect that this is an impact or that makes it different. We expect that there is a continuous strong order intake and also that in service there is no, let's say, special effect, which was created during the crisis and which we don't see anymore. So we -- as I said, we are very optimistic. If we look at Q2 and Q3, so to say maybe a bit more precise, we expect that Q2, we see order intake, which might be 15% to 20% above previous Q2. So I think that's a very strong number which you can expect. And we would say that Q3 might be even better than Q2. So we are very optimistic in everything we see at the moment, and that looks very good.

[Sven Weier, Executive Director and Analyst]

Yes. Thanks for the clear Q2 guidance there because that was what have been my next question because what you've said is basically, there is still no big tickets, obviously, in Q1. So far, the pipeline is really good. So that would basically lead me to believe that Q1 should have been the lowest order intake this year actually. If your base order intake is sustainable on that level, you have a few big tickets coming. It sounds like your Q2 guidance could be still cautious then because up 15% to 20% would be basically more or less flattish sequentially, I guess.

[Stefan Klebert, Chairman of the Executive Board & CEO]

Yes, it always depends on how you make the calculation from which side you look at. It's -- I mean, you know it -- especially the large project. We have a lot of large projects in our pipeline. And you know that large project, that means EUR 40 million, EUR 60 million, one single order intake. And it's very difficult to predict whether we see 1 or 2 or 3 of them in Q2, where we see only 1 and 2 others in Q3. The large projects are very, very difficult. And therefore, I'm a little bit cautious, let's say, in clearly defining in which quarter we will see the order intakes. But if we look at the next month and at the pipeline, as I said, we feel very comfortable. And especially, like I said, if you compare with the previous year, 15% to 20% improvement in order intake, I think that's a good and solid number.

[Sven Weier, Executive Director and Analyst]

Yes, absolutely. And maybe if I may follow up on the dairy project pipeline. I mean, is that kind of a common denominator? What's driving the pipeline? Is it all geared into demand growth in China? Or do you see more diversification in the interest there?

[Stefan Klebert, Chairman of the Executive Board & CEO]

Are you talking about dairy processing or dairy farming?

[Sven Weier, Executive Director and Analyst]

Dairy processing, yes, please.

[Stefan Klebert, Chairman of the Executive Board & CEO]

Dairy processing, okay. I mean, in dairy processing, we have -- as I said, we have a lot of projects going on. And we also see that the baseload here is picking up. I mean, food is quite attractive, especially when it also comes to alternative food, which also might have something to do with this division or with this business unit. We are very optimistic also here. And as I said, the pipeline which we have for the large projects, many of these projects are directly associated with dairy processing.

[Sven Weier, Executive Director and Analyst]

Understood. And maybe the final question, if I may, was just on your mentioning on the freight cost, and you said you wanted to shift from air to sea transport. I mean given that you said earlier that the logistic costs are basically carried by the customers. I mean, is this such a big deal in the first place, the shift that you make? Or is it really impacting a lot of your procurement?

[Stefan Klebert, Chairman of the Executive Board & CEO]

Yes. I mean, this is when we are talking about shifting air freight to sea load, that also, let's say, impacts some internal deliveries we do or some emergency delivery, things like that, where we feel and see that there is a cost saving potential, which we could use internally.

[Operator]

And your next question comes from the line of Akash Gupta at JPMorgan.

[Akash Gupta, Research Analyst]

I have just only one left. You mentioned some COVID travel restriction having some impact in Q1. I'm wondering if you can quantify that impact? And is it fair to say that that should be a tailwind, particularly in second half of the year if travel restrictions go away by then?

[Stefan Klebert, Chairman of the Executive Board & CEO]

Yes. I mean it's very clear that pandemic is still there that -- and of course, the first quarter was a very tough one [Audio Gap] internal increase also, not only in Europe, we also had at the beginning of [Audio Gap] impacts in the U.S., also India. So of course, it has an impact. And as I said before, we expect once the pandemic is gone and more and more people are vaccinated, we expect the kind of tailwind that's what we expect for the coming months, yes.

[Operator]

And your next question comes from the line of Lucie Carrier at Morgan Stanley.

[Lucie Anne Lise Carrier, Executive Director]

I think I had a follow-up on the service side of the business, which has rebounded really strongly. Do you have any visibility on whether that rebound is really what I would call a restart in production for a lot of customers? And generally speaking, when you think about the service that you provide to your customer, is there a differential in profitability in that type of service versus what I would call maybe the regular service kind of related to kind of production itself? And in itself, do you have visibility on level of production at your customer in terms of your future for the service pipeline?

[Stefan Klebert, Chairman of the Executive Board & CEO]

Yes. I mean, as I said before, the service is picking up. We saw a slight increase here. And we especially see also now coming back demand in the field service. The majority of our service is always spare parts, but we also see now once the travel restrictions are gone, that we can improve here our services and doing more field services that a lot of customers are also open and willing again to let our people in their production, which was -- or still is in many companies, a corporate policy that other people, which don't belong to the company are only allowed to enter the factory [Audio Gap] repair. So yes, we expect that this also will improve further.

[Lucie Anne Lise Carrier, Executive Director]

Okay. My second question was around the kind of the mix you have in pharmaceutical because I remember that for the past couple of quarters now, you have reported good momentum, but every time you have said that there was not related to kind of vaccine production. Just out of curiosity, I was just wondering if you had kind of the product line or product offering that could serve actually the vaccine industry or whether this is something you don't have and may want to have or how are you positioned in this area? Because apparently, it hasn't been -- or like it hasn't been a benefit for you so far.

[Stefan Klebert, Chairman of the Executive Board & CEO]

Yes. I mean, we had a good order intake situation in pharma and pharma is good underway. We have actually, let's say, 2 lines in our pharma business unit. One is the solid doses where we talk about tablets and so on, where we also had a high demand, which has nothing to do with vaccinations, of course. And then we have the liquid doses where we are not in the filling business, and that was especially -- or is the bottleneck in vaccination production. So the question, why can all the producers not speed up their production? Has normally nothing or very little to do with the production of the liquid itself. It is more a question how to bring the liquid in the bottle and pack it, and this is a business where we are not in. But we are also actively involved in some of the COVID vaccination productions with our products. And this is also what is included in pharma, but it's not that we are, let's say, you -- it would be wrong to say that we are building complete COVID vaccination production lines and then [Audio Gap] the demand. That's not the case. But I mean, what will become also very clear that Europe is very much depending in the pharmaceutical industry from a lot of other countries. And therefore, we see also a lot of European companies also investing here heavily in pharmaceutical equipment.

[Lucie Anne Lise Carrier, Executive Director]

Understood. And just my last question was more of a mechanical one. I just wanted to double check with you which type of impact/benefit we should expect from FX on adjusted EBITDA for 2021, please? Because the guidance is ex FX, obviously. If there was an update from last quarter?

[Marcus A. Ketter, CFO & Member of Executive Board]

We could expect first quarter translation effect was EUR 5 million. So we could perhaps expect a translational effect of between EUR 15 million and EUR 20 million because the U.S. dollar, for example, exchange rate also increased during the year of '20. And if we say at '21, so the effect then will be a little bit lower in the coming quarters. But nevertheless, first quarter, EUR 5 million, EUR 15 million plus could be the case for this year.

[Operator]

And your final and last question comes from the line of Sebastian Growe at Commerzbank.

[Sebastian Growe, Team Head of Industrials]

The first one is around FHT. You mentioned earlier that obviously almost all divisions are either already in the target margin corridor for 2022 or at least very close to that. So the only exception being FHT. So my question is whether you see that the segment is still fully on track to get to the 10.5%, 12% range, given that you had a pretty good order momentum since the third quarter of 2020? Or are there any other levers that we should have on mind that might go beyond volume, i.e., can you talk about pricing quality at FHT? And then I would have 2 other questions.

[Stefan Klebert, Chairman of the Executive Board & CEO]

Okay. FHT, is a kind of mixed business. We do -- also pharmaceutical business is a part of FHT. We see that we are also here very good on track that we are increasing our margins. And that's what we see here. And we are also very optimistic to do further improvements here. That's out of question, yes.

[Sebastian Growe, Team Head of Industrials]

And that is mainly volume related. So operating leverage? Or is there anything really that we should pay attention to that the recent composition of the order backlog when it comes to the diverse nature of the various end markets you're serving, would rather bode well for the mix going forward. Is that the right interpretation?

[Stefan Klebert, Chairman of the Executive Board & CEO]

I mean, that's a mix for many, many things. I mean in FHT, we have potential in sales, in organic growth. And we also see good potential in improving our margins. Because this is also quite inhomogeneous, let's say, within FHT, and we can also improve it here significantly.

[Sebastian Growe, Team Head of Industrials]

Okay. So the other question I would have is on LPT. And given that you're already close to the midpoint of that 8% to 9% range despite the fact that, on my numbers, I would see the business about 15% or so below prior our peak levels. You talked around the pipeline and particularly, you stressed that dairy processing looks pretty good. So the question that I would have here is, are you feeling comfortable to return to those prior highs of around, call it, EUR 2 billion, eventually in terms of revenue over the next 1 to 2 years in that very business? And how should we think about the mix impact from and have a higher share of dairy processing, in particular?

[Stefan Klebert, Chairman of the Executive Board & CEO]

Yes. I mean, when it comes to the -- LPT is our largest business at the moment with roughly EUR 1.7 billion turnover a year. This is a senseful size, which we see here, we also see further opportunities to grow. That's very clear. And we also see further opportunities to improve our margins. But what is very clear -- I always -- yes, I mean it's not about boosting top line and sacrificing margin. It's very clear that we have clear margin targets and profitability leads top line. That's very clear. And we feel very, very optimistic with all the changes we made in this division. I think it's a very impressive turnaround. If you look at [Audio Gap] structure here, where we had the business area equipment and solutions and [Audio Gap] what is today LPT, which generated a lot of turnover, but 0 profitability. It's a completely different issue nowadays. And as I said, priority is very clear, stabilizing the organization, improving margins, focusing on modularization of our projects, things like that. And of course, then we also are able to grow, but it's not our main strategic direction to grow, grow, grow in that division.

[Sebastian Growe, Team Head of Industrials]

I appreciate that, but I would assume that given the restructuring you have undertaken, started obviously in dairy, I would assume. But now this very, very volume increase could meet an ever more trimmed cost base. So by nature, that's sort of a positive impact. But on a higher level, can you just comment on the 3 big building blocks, so to speak, when it comes to pricing quality within LPT? So there is about 30% plus. You have beverage at close to 30% share. You have chemicals at around 20%. So to just get a better sense of how beneficial really this pickup in dairy might be?

[Stefan Klebert, Chairman of the Executive Board & CEO]

Yes. I mean we don't disclose numbers on that granularity on that level, but it's very clear that -- and that's really for the whole LPT division. We don't want to sacrifice margins. We clearly have very clear expectations. We also have established a lot of checkboards, let's say, to make sure that we are taking in only projects which we can digest and where we see the right margins. So at the end, we have clear expectations where we want to go. These are communicated with our midterm targets. We are very well on track here with the division LPT. Yes, that's what I can say.

[Sebastian Growe, Team Head of Industrials]

I'll leave it there. Just one for Marcus and really a quick one on working capital. Just on the comments from changing transportation from air to sea. Would that impact eventually working capital in any sort of negative way? And can you just give us a sort of idea with, obviously, the much better backlog now, how working capital might trend? Or do you really feel confident also with the lower end of the 8% to 10% range for working capital for the rest of the year?

[Marcus A. Ketter, CFO & Member of Executive Board]

Yes. No, the freight expenses will not drive our net working capital there. I don't see that we have longer delivery times actually, and thus actually get later or get later paid. So there is more question of profitability here and a question of cost. Really hard actually to keep it at the lower end, quite frankly, with a range of 8% to 10% in the first quarter. We are quite successful with that. And I can tell you that our goal is actually to keep it there. But of course, I mean, everyone else, I mean, raw material prices are increasing. And there might be some fluctuations between the quarter, which is simply seasonality there. And that's why we said it's between 8% and 10%. But I can confirm we're working very hard actually to keep it at the lower end of that range going forward.

[Operator]

We have no further questions at the moment.

[Stefan Klebert, Chairman of the Executive Board & CEO]

Okay. So let me thank you for your participation and for your good questions. Maybe I give you a kind of a summary of what you heard. First of all, I think it's important to understand and to see that GEA had a really strong start into the year '21. And this also confirms very clearly our upward trend, which you could also see when [Audio Gap]. Secondly, as of today, we can mitigate most of the input costs of inflation, and we are closely and actively monitoring the situation to take further actions, if needed. And thirdly, and also very important, we confirm our outlook for '21, which is significantly above, let's say, the previous year. And we will be back in September at the Capital Market Day with our Mission 26, where we will inform you all what comes beyond our midterm targets, which we defined as EBITDA margin, 12.5% to 13.5% in the year '22. So thank you, stay healthy and all the best.

[Operator]

That does conclude the conference for today. Thank you all for participating. You may now disconnect.