GEA Group AG

XETRA:G1A

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the GEA Group AG Q1 2022 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 speaker today, Rebecca Weigl. Please go ahead.

[Rebecca Weigl, executive]

Good afternoon, ladies and gentlemen, and thank you very much for joining us today for our Q1 earnings conference call. With me on the call are our CEO, Stefan Klebert; and our CFO, Marcus Ketter. Stefan will begin today's call with the highlights of the Q1 2022 results. Marcus will then cover the business and financial review, followed by Stefan's outlook for 2022. Afterwards, we 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 that, I hand over to you, Stefan.

[Stefan Klebert, executive]

Yes. Thank you, Rebecca, and good afternoon, everybody. It's my pleasure to welcome you to our conference call today. I hope you and your families are still doing well despite the still uncertain environment with a war raging in Eastern Europe and high inflation.

Let me start with a quick review of the first quarter of 2022. We had a great start into the year, especially when looking at order intake. Here, we grew organically by more than 20% year-over-year. With EUR 1.54 billion, this marks a new record figure for a single quarter. Also, sales grew significantly compared to last year's Q1 organic sales grew by 6.6%, well in line with our guidance of more than 5%. This growth rate was achieved despite some supply chain shortages, but let me cover this topic in a minute.

The sales growth translated also into a better EBITDA margin. We reached 12.3%, up from 11.4% last year or EUR 138 million despite some inflationary headwind on the supply side, which we had to digest. Finally, return on capital employed. We reached 29.3% on a last 4 quarter basis, an improvement of almost 10 percentage points year-over-year. So in total, a great quarter, however, not without challenges.

Let me discuss the achievements and challenges of Q1 on the next slide. Starting with the achievements first, following by the challenges. The order intake of EUR 1.54 billion is the highest level for a single quarter ever. Sales grew organically by 6.6%, and this was achieved despite some supply chain shortages. And EBITDA margin reached 12.3%. This is also a new record level despite inflationary pressure on the supply side.

Capital efficiency also increased further. ROCE stood at 29.3%, a further improvement from Q4, where we reached a record low for our net working capital. I just mentioned the 2 most challenging topics already, shortages and inflation. Availability of material was more volatile throughout the quarter, and prices have not eased. Clearly, the opposite happened, especially in the last month of the quarter. The war in the Ukraine highly accelerated the entire situation with the supply chain. Nevertheless, Q1 '22 was once again a quite successful quarter for GEA despite the challenges I just described.

Today is more than ever important to be innovative and to offer our customers solutions to make their processes more efficient, less energy-intensive and to enable them to reduce their carbon footprint. Our technology is a solution for our customers to mitigate a part of their input cost inflation. Food producers face significant lost commodity and energy inflation, and food production is a very energy-intensive business.

When we developed our group R&D strategy in 2020, we defined sustainability as one of our 4 focus areas. This was long before the war started and now proved to be an even more important focus. I would like to explain in 2 examples how we are improving, helping our customers to increase process efficiency. Both examples were recently developed and are now hitting the market.

Let me start with our AddCool solution. AddCool makes our spray dryers more climate-friendly. Spray dryers are used to transform fluids into powder, for example, milk into milk powder. This is a highly energy-intensive process. Our AddCool solution incorporates a heat pump specifically designed for operation in spray dryers. And the heat pump, by the way, is of course, developed and manufactured by our HRT division. This reduces the need for fossil fuels and allows operators to lower their carbon footprint and energy consumption by up to 50%.

A great aspect is that the customer does not necessarily need to replace an entire installed base. Retrofitting is easily possible, which is not only less capital-intensive for customers, but can also be done within a much shorter time than replacing an entire facility with a complete new one. We have just presented this solution at the Anuga FoodTec trade fair in Cologne last week.

To put these savings into perspective and make them more tangible, let's take the size of an average spray dryer, which we have sold during the last 20 years. If we retrofit one of those, the energy savings are about 1,500 KW hours per hour of operation. This means, in other words, that the spray dryer saves energy, so much energy per year, that we alternatively could supply a small village with about 3,500 households with the savings only.

Another great innovation, which is now hitting the market is our new electric oven generation. Ovens in the business unit bakery were normally using natural gas to generate the desired heat. In general, this is an efficient technology, but everybody is seeking a reduction of natural gas consumption now given the most recent price hikes. Beside the price, it still generates carbon dioxide emissions, and handling natural gas always bears at least some risks. We developed a new generation of ovens, which can either be partly operated with gas and electricity or solely operated with electricity.

It sounds very easy. However, a lot of know-how and tests were needed to maintain the quality of the bakery products on the same level like heated with natural gas. In general, this enables our customers to achieve energy savings by up to 20%. Regarding emissions, if the energy source of our customers is entirely renewable, then they are now able to eliminate their dioxide emissions in this process step. These 2 examples show how we enable our customers to improve their process efficiency and to reduce their costs.

With that, I hand over to Marcus, who will take you through the financials of the quarter.

[Marcus Ketter, executive]

Thank you, Stefan. Also, a warm welcome from my side. Starting with the headline numbers of Q1 2022. The organic increase of order intake was 20.4% year-over-year with large orders contributing strongly. The 3 large orders, which we booked in Q1 '22 came to a combined EUR 92 million and were all placed in the customer industry dairy processing.

In last year's Q1, we only booked 1 large order in the amount of EUR 34 million in the customer industry, food. Sales developed also quite nicely. On an organic basis, sales grew by 6.6% year-over-year, driven by both new machines and service sales. It is worth noting that this was achieved despite some supply chain shortages. The organic sales growth translated into a healthy profit growth. EBITDA before restructuring expenses improved by EUR 17 million to EUR 138 million.

The respective margin increased by 0.9 percentage points to 12.3%. This improvement was achieved despite significant headwind from inflation. Due to the further reduction of net working capital, ROCE considerably improved. Furthermore, our net liquidity increased by EUR 142 million to EUR 412 million. In addition, own shares were bought for EUR 131 million and held as treasury shares. So all in all, a very successful quarter in a quite challenging environment.

Looking a bit deeper into the group performance. Order intake grew to almost EUR 1.54 billion and marks a new record figure. All divisions contributed to that growth, except for Heating & Refrigeration Technologies, declining due to recent divestments. All order sizes grew year-over-year, with the strongest growth contribution coming from medium-sized orders between EUR 5 million and EUR 15 million. Sales grew organically for the fifth consecutive quarter. Service sales grew by a strong 8.9% organically year-over-year, and new machines grew by 5.4%.

The service sales share was 36.2%, one percentage points higher than last year. Gross profit was supported by service and new machines profitability. This, in combination with disproportionately slower growth of operating costs, resulted in an increase of the EBITDA margin by 0.9 percentage points to 12.3% or EUR 138 million.

Now let me continue with the figures for Separation & Flow Technologies, which had again a very strong quarter for all key performance indicators. Order intake grew organically by an outstanding 16.3% year-over-year. Demand was strong across all customer industries, but especially Dairy Processing stood out. From a size perspective, in absence of any orders larger than EUR 15 million last and this year, all other order size brackets saw a strong year-over-year growth. Regarding the pipeline apart from Beverage, the situation generally still looks healthy.

At dairy, we see good demand. However, as some bigger projects have been awarded in Q1 already, the backlog is already high. Organic sales grew by a strong 14.9% year-over-year, with service growing by 14.8% and new machines growing by 14.9%. Due to the slightly stronger growth in the new machine business compared to service, the service sales share declined slightly by 0.2 percentage points to 45.8%.

Order backlog currently stands at a record level of EUR 572 million, and therefore indicates further growth ahead. EBITDA increased significantly by EUR 19 million to EUR 81 million and the EBITDA margin improved by 2.7 percentage points to 24.9%. This development was driven by the healthy organic sales growth and better capacity utilization. Gross profit was significantly higher than last year, and operating costs increased just slightly year-over-year.

Let's move on to Liquid & Powder Technologies. Order intake increased organically by an outstanding 33.5% year-over-year. This development was driven by 2 customer industries: first, Dairy Processing, where we booked all large orders of this quarter totaling EUR 92 million; second, Chemicals, which is the key driver behind the strong growth in the EUR 5 million to EUR 15 million size bracket. Regarding the pipeline, we do see a continued favorable hot list for projects for the entire year. While food is a bit muted, new food shows an ongoing dynamic development.

In Dairy Processing and Chemicals, there are still some attractive projects in the pipeline despite the already-high order intake in Q1. Furthermore, LPT experienced a very high interest at the trade far, Anuga FoodTec. Sales increased by 8.4% year-over-year on an organic basis. Both service and new machines contributed to this solid figure. Following the high order backlog created during the last 2 quarters, service grew organically by 9.3% and new machine sales by 8.2% year-over-year.

The service sales share rose slightly by 0.1 percentage points to 21.4%. Going forward, sales should further increase as backlog has now reached another new record level with EUR 1.5 billion. This, however, assumes that the supply chain bottlenecks are not worsening. EBITDA before restructuring expenses increased by EUR 5 million to EUR 28 million, and the margin improved from 6.8% to 7.3%. While operating costs were slightly above prior year's level, gross profit improved due to higher sales volume.

Continuing with Food & Healthcare Technologies. Order intake increased organically by 9.7% year-over-year. Growth was driven by strong demand for medium-sized projects and food-related applications. Going forward, we expect that our food-related applications will continue their positive performance in the short term. Increasing our pharma order intake remains challenging in 2022, but only given the high order intake already in 2021. Organic sales, however, were 5.6% down year-over-year. While service sales grew organically by 6.4% year-over-year, new machine sales declined organically by 10.2%, which was impacted by supply chain shortages.

These shortages especially occurred in electronics and affected sales execution. As a result of the new machine sales decline and the service sales growth, the service sales share strongly increased by 3.7 percentage points to 31.8%. From an order backlog perspective, the situation is very satisfactory. It reached a new record level of EUR 663 million. Due to the weak organic sales development, gross profit declined slightly, leading to a year-over-year reduction of EBITDA by EUR 1 million to EUR 20 million. Nevertheless, we managed to keep the margins stable at 9.6%.

Moving to Farm Technologies. Despite the strong order intake in prior year's Q1, order intake grew strongly by 14.2% organically. Some farmers are likely to have pulled their orders forward, anticipating further price hikes. Growth was generally driven by strong demand for highly efficient automated milking equipment. However, conventional milking equipment experienced a slowing demand also due to farmers reacting on price increases.

The milk price development remains favorable for farmers. However, farmers are also facing inflation for supplies in the form of higher prices for feed and fuel as well as higher equipment prices. It might be, therefore, likely that order intake growth will normalize in the short term. Sales increased organically by 9.3% year-over-year. Due to the very strong order intake growth during the last quarters, new machines grew stronger than service sales. New machine sales grew organically by 10.9% and service sales by still 7.7% year-over-year. Thus, the service sales ratio arithmetically declined by 0.6 percentage points to 50.3%.

However, service sales in euro increased from EUR 67 million to EUR 74 million year-over-year. EBITDA decreased by EUR 3 million, also due to an unexpected rapid rise of input materials in the hygiene segment recently. Accordingly, the margin declined to 6.8% from 10.3%.

Finally, let us turn to Heating & Refrigeration Technologies. Reported order intake declined by 3.9% year-over-year due to divestments. The organic order intake figure, however, increased by a strong 14.2% year-over-year. The general environment remains good and is especially driven by demand for heat pumps. Organic sales increased by 3.9% year-over-year and was driven by new machines growing by 5.6%. Service sales grew organically by 1.4% year-over-year, and its share increased by 1.6 percentage points to 41.9%.

The increase of the service sales share is also driven by the divestments mentioned earlier. EBITDA before restructuring expenses increased by EUR 1 million to EUR 13 million, and the margin improved from 8.2% to 10.7%. A decline in gross profit, driven by the divestments, was more than compensated by a reduction in operating expenses.

Closing the divisional chapter now with the next slide. The strongest contribution for EBITDA came from Separation & Flow and Liquid & Powder Technologies. On a reported basis, 2 divisions had lower sales in the quarter. Only at Food & Healthcare Technologies, sales declined due to supply bottlenecks and as well as Heating & Refrigeration Technologies, but due to negative M&A effects. Separation & Flow and Liquid & Powder Technologies increased gross profit, while it remained flat at farm technologies due to the increase in input prices discussed earlier.

The shortages at Food & Healthcare Technologies were also a burden for its gross profit development. Gross profit at Heating & Refrigeration declined due to the divestments discussed earlier. Operating costs are well under control. The increases are explained by the higher sales volume and were disproportionately lower than sales growth. In total, EBITDA before restructuring increased to EUR 138 million from EUR 121 million.

On the right side of the chart, we deducted the translational FX effect of EUR 3 million. Excluding this FX effect, as we have defined it in our full year guidance, our EBITDA would have still improved by EUR 14 million to EUR 135 million.

Coming now to one of my favorite topics, net working capital. Net working capital declined year-over-year by EUR 84 million to EUR 292 million. This improvement came especially from the division Liquid & Power Technologies. Also, Food & Healthcare as well as Separation & Flow Technologies contributed positively.

The most significant year-over-year improvements were achieved at trade payables, which improved by EUR 86 million and net contract assets, which improved by EUR 80 million, and at trade receivables, which improved by EUR 28 million. Inventories increased year-over-year by EUR 109 million, also driven by the backlog. Furthermore, an increase in work in progress and finished goods were the reasons by the higher inventory level.

Coming now to another important topic, cash generation. Our operating cash flow was a negative EUR 14 million which is below last year's figure of positive EUR 46 million. The decline is explained by higher net working capital in comparison to year-end '21 as well as EUR 75 million outflow in provision. But the latter position contains the outflow for bonus payments for the whole group and also including EUR 11 million for the payment of our pensions which was, as you know, as a successful year. CapEx-related outflow is EUR 50 million higher than last year, resulting in EUR 33 million. The increase is mainly due to investments into our new plant in Koszalin, Poland and high replacement CapEx. As a result, free cash flow is negative at EUR 49 million and below last year's figure of positive EUR 18 million. However, our free cash flow conversion ratio before restructuring clearly exceeds our targeted conversion ratio of 55% to 65% of EBITDA. 82% of EBITDA has been converted into free cash flow on a last 4 quarters trailing basis.

Net cash, including lease liabilities declined from EUR 500 million at the end of the fourth quarter to EUR 412 million. Besides of the negative net cash flow of EUR 49 million, the share buyback in the amount of EUR 37 million also reduced our cash position.

Let me now talk about our financial headroom. On the left, you see our available cash credit lines as well as their respective utilization and maturity structure as per end of March '22. Two variable tranches of borrower's note loans expiring in '23 in the amount of EUR 28 million as well as in '25 in the amount of EUR 22 million were prematurely redeemed. The reason is the extraordinary good liquidity situation and the interest we are paying for these notes. The EUR 81 million due to this year constitute evergreen credit lines.

Continuing now on the right side of the slide. Compared to last year's Q1, the financial headroom declined by EUR 300 million. The reason for this decline is: one, on the one hand explained by the cancellation of an unused credit line with the EIB, European Investment Bank, of EUR 100 million; and on the other hand, a syndicated credit facility of EUR 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 '21. The positive trend of our net liquidity, including lease liabilities has continued improving by EUR 142 million to EUR 412 million year-over-year.

With that, I hand back to Stefan for the outlook.

[Stefan Klebert, executive]

Thank you very much, Marcus. So what does that all mean for our '22 guidance? Despite all the challenges in the environment, we feel comfortable with our guidance and confirm the guidance. Therefore, we expect organic sales grows by more than 5% per year over year and EBITDA before restructuring expense between EUR 630 million and EUR 690 million and a return on capital employed in the range of 24% to 30%.

As till now, the risk from direct exposure to Russia and Ukraine appears manageable from today's perspective and does not have an impact on our guidance range. Contrary, the negative effect of the indirect exposure can currently not be reliably assessed. But as I said, everything we see, we are comfortable with the guidance and we confirm the guidance.

Finally, this brings me to our road map for '22. The next important date will be in August with our Q2 numbers. And this concludes my presentation, and I'll hand back to Rebecca for the Q&A session.

[Rebecca Weigl, executive]

Many thanks, Stefan and Marcus, for the presentation of our Q1 results. And dear ladies and gentlemen, we are now happy to take your questions.

[Operator]

[Operator Instructions] Your first question today comes from the line of Klas Bergelind from Citi.

[Klas Bergelind, analyst]

So the first one I have is on pricing. Can you help us, Stefan, with how much the organic growth in revenues was pricing this quarter and split between services and equipment? And if you could comment on the pricing in the project business and how the pass-through is working currently. We've obviously seen several companies with big backlogs fighting big price/cost pressures versus earlier cycle names handling it better. And obviously, I'm not asking you to speculate on future cost inflation. But against the current cost inflation, if you could give us a sense of your confidence level. Obviously, you reiterated a guide, but I would like to have a little bit more detail. I'll start there.

[Stefan Klebert, executive]

Yes. I mean what we can say and what we also can see that so far, we are managing that very good because you could see that we also increased our margin in the first quarter. Our price increase, which we had in the first quarter, in the order intake is about 5% to 6%. And that also makes us very optimistic that we can cover the cost. Also other costs, which might hit in, in the next month.

[Klas Bergelind, analyst]

And on the revenue line, as well, Stefan, if you could help us, I just want to see sort of the difference between orders and revenues on the pricing, if you have it.

[Stefan Klebert, executive]

Yes. So revenue, it should be in the range of 2% to 3%.

[Klas Bergelind, analyst]

Okay. Very good. My second one is a follow-up to the EUR 120 million -- or follow-up to this cost inflation, the EUR 120 million that you talked about last quarter. I think you said back then that you were half covered for the year on the energy side, more naked, if you like, into the second half. And general inputs have also gone up again since we last spoke. So I'm curious if you have a new number for that EUR 120 million, whether that be EUR 130 million, EUR 140 million, maybe more. Yes.

[Marcus Ketter, executive]

Okay. Klas, this is Marcus. So that was a gross figure because they were also savings also at the purchasing. But it's a very liquid situation. So what we're going to do now is to give you a net figure where we say, okay, this is the price increase we see in total coming out of purchasing. And that net figure is in the range of EUR 120 million to EUR 140 million. But as I said, it's a net figure, not really compared with the gross figure you're just referring to.

And then looking at the situation, I also want to give everyone here a little bit more insight on that so that it's clear what -- that we can manage that. So there was EUR 120 million, EUR 140 million net price increases coming out of purchasing, that means that's around 2.5% to 2.9% of revenue. So on the -- in other words, we need to increase revenue by 2.5% to 2.9% to neutralize that effect there.

[Klas Bergelind, analyst]

Very clear. And it seems, obviously, given what's going on in orders and the conversion, that it seems that's impossible.

My very final one is on the order intake for the second quarter. You had some preordering in farm tech, but quite small impact at group level, it seems, if this was only in farm tech. And underlying demand seems to be around EUR 1.4 billion ex the large orders.

I think you mentioned a little bit about some muted momentum in food. You said that the dairy backlog is already high. Are we cautioning a little bit on any end market sequentially? And if you could help us with maybe the actual order number, what you're targeting for the second quarter.

[Stefan Klebert, executive]

Yes. I would -- thank you, Klas. I would not say that we are, let's say, cautioning with very good project activity still ongoing. I mean we have -- if you remember our numbers that we grew organically by 20% in the first quarter, we grew last year and the full year, 15%. We did not have any strong decline in the situation in COVID here. And for the next quarter, we would expect, I would say, minimum EUR 1.3 billion but also could be EUR 1.4 billion of intake.

[Operator]

Your next question comes from the line of Uma Samlin from Bank of America.

[Uma Samlin, analyst]

My first question is on the overall demand picture. Could you please just give us a bit more color on what's been driving exceptional or strong demand? And to what extent do you see the preordering contributing to that?

Have you seen any change in sort of sentiment of your customers, given that what has happened in Russia and now the lockdown in China? Or do you continue to see very strong momentum in order?

[Marcus Ketter, executive]

So perhaps let me take that question. Overall, demand is pretty good. So the overall picture has not changed for us. Of course, what you see is there's a lot of inflation in the value chain, but the overall demand in our end markets has been quite, quite good. Russia, Ukraine affects us. As we said, it's manageable. It affects us, but it's manageable, but didn't have any real effect on the overall picture.

China, question, is this more really for our suppliers actually if there's a clogging of ships there in Shanghai. And if that actually adds to the pain in the supply chain, but it doesn't really take anything away from the demand in our industries. So especially, Dairy Processing has been very strong in the last quarter.

[Uma Samlin, analyst]

Okay. And I guess my second question is that given your order remains to be very strong, the disconnect between your order intake growth and sales growth have potentially widened further in the quarter. So when do you expect sales growth to somewhat catch up towards the level of your order backlog growth? Do you -- what do you -- I mean, what do we need to see to happen for the sales growth to accelerate in the year? And to what extent does it depend on the supply chain challenges?

[Stefan Klebert, executive]

Yes. That's a good question. But I think we are in good -- in the same situation, like you can see in almost every industry at the moment. Our backlog is increasing, and it is not so easy to execute sales simply because of supply chain shortages. It is also not easy to say when will it be fully opened again. We feel at the moment restrictions in the supply chain. We cannot unfortunately process the backlog as soon as we would like to do that.

And as I said, we are in a good situation, vis-a-vis, with all the other companies. And it's very difficult to predict. I mean it will definitely remain, I would say, for the rest of the year that it is -- that there is still a supply chain shortage and that we will see bottlenecks in supply chains. So far, I think we handled it very good. I mean we could achieve a significant organic growth in the first quarter, and we are continuing to manage the situation here.

[Operator]

Your next question comes from the line of Max Yates from Crédit Suisse.

[Max Yates, analyst]

Just my first question was around the Separation & Flow margin, but that was obviously very strong this quarter, with pretty high incremental margins. So I just wanted to understand, could you talk a little bit about kind of what drove that specifically? And then maybe from here, sort of 24.9%, is that sustainable? Or do we think there was something kind of that maybe artificially elevated that this quarter so we should be a bit more conservative? But some color around that would be helpful.

[Marcus Ketter, executive]

Yes. There was, as you said, a very good EBITDA margin. And the reason is that we are seeing the effect of higher revenue there and high utilization of capacity at SFT and with the operating leverage, then the EBITDA margin, considerate growth. That's the simple answer to your question. The revenue actually accelerates the margin improvement.

Can I expect this going further? We have a very strong order intake at SFT. Therefore, we do not see that the revenue would be going down. Quite the opposite, we think the revenue will be further going up. The only thing which might actually hinder us a bit, our supply chain issues, challenges there, where we cannot convert order intake as quickly into revenue or proportionately into revenue as it is. But there was also a question actually when will that change there. So right now, we are in upward trajectory in regards to revenue, and the good margin should be -- yes, should be able that we keep them.

[Max Yates, analyst]

Okay. And just in terms of that supply chain impact, do you have a number in mind of sort of how much that cost you in terms of revenues in the quarter?

[Marcus Ketter, executive]

No. Actually, we have -- as you have seen, we have an increasing revenue, but it's not proportionately increasing to the percentage increase of order intake. That is my point. So we expect to see further increasing revenue as we guided. We feel quite comfortable with the guidance we set for this year, greater 5%. However, as you have seen, order entry grew by 20.4%, so we are lagging behind the revenue growth there. So...

[Max Yates, analyst]

Sure. That makes sense. And just a final one. Within your free cash flow bridge, you have a EUR 75 million outflow for provisions. Could you just talk a little bit -- I think you mentioned kind of variable compensation-related outflows, but obviously, it looks quite large in terms of the cash flow. Could you just sort of clarify exactly what that is?

[Marcus Ketter, executive]

Yes. That's pure cash flow. So it's nothing to do with any expense for the last quarter. The expense was taken when we put in the accrual last year, EUR 65 million -- approximately EUR 65 million of that is the total for bonus payments, which we have done in the first quarter. So we utilized the accrual we had there for the cash payment. An additional approximately EUR 11 million is the cash payment for our pensions there. So that makes up the number of EUR 75 million.

[Operator]

Your next question comes from the line of Akash Gupta from JPMorgan.

[Akash Gupta, analyst]

My first question is also on the demand and not just the near-term demand, but demand picture in the next, let's say, 4 to 6 quarters. I mean if we look at the current situation right now, we have food inflation that is quite unprecedented and might worsen in the coming period. We have weakness in euros that may make you a bit more competitive than your U.S. competitors. But then we also have higher energy cost and then higher energy efficiency focus on -- from your customer side to invest or upgrade.

So taking all these puts and takes into account, like how do you see the demand picture to pan out in the next 4 quarters? Like do you see any sign of a worry on the horizon that we might see some kind of weakness after, let's say, a couple of good quarters? Or do you think that we might see a more sustained demand growth in the next 4 to 6 quarters? So that's the question number one.

[Stefan Klebert, executive]

Okay. I would say -- I mean my favorite sentence is always as long as there are human beings on the Earth who need to eat and drink something, our business is in safe harbor. And it doesn't matter how much more food will cost, people need to eat, people need to drink and people need medicine. Therefore, I would say the demand will remain very strong. And there are especially 2 additional factors, which we expect will help us to accelerate growth in the medium to long term. This is, first of all, the pressure on energy saving.

I gave you 2 examples in the presentation at the beginning that we are really focusing in R&D to develop energy-saving devices because production of food is always a very energy-intensive business. It has to do a lot with fermentation, with pasteurization and then you have the cooling chain as well.

So the energy saving is a huge topic. We started to focus on that topic already 1.5 years ago, and we expect that we can release a lot of interesting products. And I gave you 2 examples, to help our customers to save energy, which is important for them because of 2 reasons: first, to reduce the CO2 footprint, independent of what energy costs; and the other factor is, of course, the price of the energy. So as higher energy cost is as more, they -- our customers will be willing and have a need to invest in modernizations and new devices.

And the second very interesting thing is the new food topic. We just had in Cologne the trade show, Anuga, where we presented our first mobile test center for new food, and that was perceived very well. And we have, at the moment, much more requests from a lot of traditional customers, also a lot of start-ups, that they want to work together with us to find out if their processes are working. So we even have a bottleneck here that we have too little resources to serve them with that speed, the market is questioning.

So to summarize it, the overall demand, as long as the population is growing, people need to eat and drink something, this is a continuous growing demand. And on top of that, we see the thing with the -- that customers need to save energy, and the additional driver is new food. So we are very optimistic that also growth will remain intact in the future.

[Akash Gupta, analyst]

If I may ask a follow-up on working capital. I mean at 6.1%, your working capital is still significantly below -- or not significantly, but somewhat below the guidance corridor that you have set. And we are at a time when companies are still building up inventory because of the supply chain disruptions. So maybe if you can comment on how should we see working capital development in the next couple of quarters?

[Marcus Ketter, executive]

Yes. We left the guidance actually in place for the reasons because there will be, of course, some inventory buildup we are -- that's also seen in the first quarter. But we were able, actually to manage that pretty well. So it was 2 percentage points approximately below last year's quarter and just 1 percentage point above the end of last year. So there might be some buildup in work-in-progress and in inventory. And we think that we will still be able to manage that, but we are still careful actually to change the guidance range, which we have given there. But I don't expect that you will see a major uptick in net working capital.

There's, of course, some upward pressure in regards to, as I said, inventory. It is including a work-in-progress, but we are very tightly managing our accounts receivable and also have programs in place for the accounts payable to extend with our suppliers on their payment terms.

[Operator]

Your next question comes from the line of Lars Brorson from Barclays.

[Lars Brorson, analyst]

Can I start, Marcus, because maybe just following up on the price/cost equation. I think it's an important question for the year. And just clarify exactly what is meant by gross versus the new net. Am I to assume that the earlier gross of EUR 120 million versus, I think, we talked about 150, 200 basis points of pricing, so call it EUR 80 million of pricing was a net 40 that now goes to a net EUR 120 million to EUR 140 million, and that is following incremental raw material price increases that have come through and also your incremental pricing that you have pushed through.

And sorry, but just to be absolutely clear, when you talk about needing another 2.5%, 2.9% of pricing to neutralize, that is incremental to what you've already priced through on an accumulated basis or what you priced through in Q1? Sorry, I'll start there, please.

[Marcus Ketter, executive]

Okay. So first, what we gave you, just to clarify, what we gave you was a gross figure, meaning how much do we see the purchasing prices increase? And how much do we see still purchasing savings, which is mitigating this effect. We said that's actually a situation is way too liquid to do it that way, so we're switching the methodology actually now to simply a net figure. What we see is the net price increases coming out of purchasing. There we're on the same page, right?

And then now I said it's EUR 120 million to EUR 140 million, that net figure, which is coming out of purchasing price increases. And my calculation was that considering our revenue of around EUR 4.8 billion, that means to mitigate this effect for the whole year, we would have to have for the whole year a price increase of 2.5% to 2.9% on the basis prior to the increase of EUR 120 million to EUR 140 million. That was my point. Did I make myself clear?

[Lars Brorson, analyst]

I think you did. You need to neutralize pricing for the full year 2.5% to 2.9%. I think you said you priced up orders 5% to 6% in Q1; revenue, 2% to 3%. So maybe the question therefore is, what confidence do you have in achieving price/cost neutrality for the full year? Or if not for the full year, for the second half of the year?

[Marcus Ketter, executive]

Well, it's -- that's the price increase we see, as I said, for the whole year. So there's also an effect between the quarters or between the first and the second half of the year. We have done already price increases last year. So all in all, we feel actually quite comfortable to mitigate this effect, especially looking at the 2.5% to 2.9% we did price increases, which were higher last year already.

[Lars Brorson, analyst]

Can I ask secondly just to the raw mat equation? And just at a high level, what would be the updated gross raw mats impact? Maybe I can go back and calculate that. But I'm curious as to how to think about the impact around pricing in -- on your sourced components and raw material. You typically don't work with a lot of hedging, but you obviously with alloys, particularly nickel alloys, have some quite meaningful exposures there. So maybe you can also just clarify what, if any, of your key metals and alloys are hedged? And if none of it is, how to think about the impact, particularly from nickel for you this year, please?

[Marcus Ketter, executive]

Okay. So we don't hedge because we don't buy nickel directly. We have a lot of pre-products where we have stainless steel and of course, there are nickel in there. But that's why we don't hedge because we are not getting -- not sourcing simply stainless steel and a bit of carbon steel. It's all in the pre-products we are purchasing from our suppliers. And therefore, it's very hard to say how much the volume of that is in tonnes and then do the calculation how much nickel we would have to hedge there.

So it's all in the pre-products. And what we see, we did -- we do thorough analysis here constantly of what we see the supplier prices increasing and considering the raw material price increases, which go into the calculation of our suppliers. But that's not only the raw material there, they have the labor, they have the IP, they have the profit, et cetera. We see that the price increase when coming back down to the number is EUR 120 million to EUR 140 million coming out of purchasing, including all the alloy and steel and stainless steel price increases there.

[Lars Brorson, analyst]

Finally, if I can just ask divisionally to farm tech on the point of price/cost. I know you don't give sort of a bridge divisionally. But can you help us with how much specifically was price/cost impact to margins in Q1 for farm tech? And just to clarify, the majority of that raw material pressures coming through from farm tech is in cleaning chemicals. So in the aftermarket, I guess, you're still to see perhaps more meaningful price/cost pressure on the machine side.

But just to clarify whether you -- if you can, what sort of raw mat pressures you were facing in the quarter on margins in FT, please?

[Marcus Ketter, executive]

Well, we placed around EUR 6 million in EBITDA, which we lost in the first quarter due to a price/cost there. So in that case, there were [ EUR 2 million ] to raw materials, which increased incredibly in a very short period of time, and we couldn't actually increase the price as fast enough in that sense. We did this after the fact but we lost around EUR 6 million in the first quarter of earnings in comparison to where we should have been with the margin. The increase was so quick, unbelievable, and both happened in North America, actually there. So we give you some color on that. But right now, we seem to be back on track.

[Operator]

[Operator Instructions] Your next question comes from the line of Sebastian Kuenne from RBC.

[Sebastian Kuenne, analyst]

I have a question on the discontinued operations, which gave you a gain of EUR 10.4 million, and it's a recurring position on businesses that you exited sometimes like 15 years ago. I was wondering whether this stays in the books, whether we should see ongoing bookings of EUR 10 million, EUR 15 million gains. And that's one question.

Then the other question is, is that cash effective at some point? It doesn't seem to be cash effective, one. But do you then generate that cash? How should we treat this going forward? How should we plan it going forward? I then have a question on the [ overall pricing ] after this.

[Marcus Ketter, executive]

Sure. Let's do that first, Sebastian. Quick answer to the cash effect, it's 0. There's no cash effect. And I explained to you why. There's an interest change. It's an interest change effect, which we have in discontinued operations. So the increase in interest rates then leading to a decrease in accruals in the discontinued operations. As you mentioned here, there was from the sale of the [ Luga Legends ] companies decades ago there. So it's simply a change in the accruals by higher interest. That's the answer.

[Sebastian Kuenne, analyst]

And for how many years should we expect that to continue? Because it's quite [ disposed in you ]?

[Marcus Ketter, executive]

I mean if the interest rates don't move, then the accruals don't move. If the interest rate is going up and down, then the accrual is also going up and down. That's it. So with rising interest rates, we're going to see a release of accruals. With declining interest rates, we would see more. But right now, the future looks like rising interest rates. So there might be some decline in accrual still ahead of us. But as I said, it's noncash. We're going to highlight that, and you can simply take this out from EPS.

[Sebastian Kuenne, analyst]

Yes. Good. Then on the supply issues. You mentioned it's difficult to quantify how much your revenue would have been had you not had these supply issues. But maybe you can tell us a bit about equipment on transit. We have this delayed shipping or logistics times or longer logistics times. Can you quantify the equipment that is on route, somewhere longer more than usually, as said EUR 10 million, EUR 20 million, EUR 30 million. Can you give us a number there maybe?

[Marcus Ketter, executive]

You mean our equipment or the equipment we are buying? Because both of these...

[Sebastian Kuenne, analyst]

Yes, yes, your equipment that you are selling, but you can't account for as revenues but still on routes, still in some ports and something like that.

[Marcus Ketter, executive]

No. That is actually not an issue. So I mean, not a material issue, let's put it this way. That's why we don't have the revenue. The material issue is really getting parts, chips controller. So we have now some WIP or more WIP at our companies because we cannot ship it at all. It's not that they are on route and it takes longer. That has been not, let's say, at least not a material issue in recognizing the revenue, but the problem really is getting all the parts to be able to ship it to [ ship ] systems at all. If there would have been not this chip shortages with controller, unit shortages, as an example, the revenue increase would be much higher. That's the situation right now.

[Sebastian Kuenne, analyst]

Understood. Two more brief questions. Russia is now completely out. And is there any more write-down risk? And then your production, is it at capacity at the moment with all the inefficiencies that you have? Are you at capacity now?

[Marcus Ketter, executive]

So what happened for us in Russia is our business has been diminished by around 55%. We have not written off all the assets because we are still doing business there. However, it's a very focused business along the lines of the sanctions, of course. And even without sanctions, we would do no business in oil and gas. So we're really just focusing on the food, beverage and pharmaceutical there.

No material write-down has been done in the first quarter, but we are monitoring the situation. And it all depends actually on the future outlook, if there needs to be a write-down or not. But for the last quarter, that has not been the case. But as we said, as everyone says, it's a very liquid situation. So let's see how that's going to evolve further.

[Sebastian Kuenne, analyst]

And on the capacity utilization of the group overall, with all the inefficiencies, are you running at capacity? Would you say all the people are fully back in the factories, do you need to expand workforce? What's the situation?

[Stefan Klebert, executive]

Yes. I mean we also have always a lot of flexibility in all our factories with temp workers. And that is, of course, what we are using. But as you can see that we are growing and that we are also generating more sales than last year in the first quarter. That also means that our productions are quite full. It is people obviously, and that will also continue because I mean, we have the backlog.

Sometimes we are missing specific parts, and then we cannot -- it takes a little bit longer to deliver the parts to our -- or the final machine to our customers. But we are fully loaded and there is no risk of under-absorption.

[Operator]

Your next question comes from the line of Hemal Bhundia from UBS.

[Hemal Bhundia, analyst]

Hemal Bhundia from UBS. Just a few questions from me. Your overall margin execution was very good in Q1. Do you see this continuing for the remainder of the year? And do you think that you could achieve at least a 13.5% EBITDA margin for this year?

[Stefan Klebert, executive]

Yes. I mean, as you say, we started quite good in the first quarter. We showed that we are managing the situation very well. We have enough order backlog. So of course, we are also depending on external factors like availability of all the supply chain parts. But we are very optimistic to walk our talk and to continue in increasing our margin further.

[Hemal Bhundia, analyst]

And I know the question was asked previously. But on farming technologies, the margin was quite below expectations. And I appreciate you've just given an answer on that. Given that the pricing actions that you've already taken on hygiene products, do you expect the sequential improvement to be seen in Q2 already? Or could it be a bit longer?

[Stefan Klebert, executive]

Yes. We expect that we are back on track here with that issue in Q2.

[Hemal Bhundia, analyst]

And final question from me. What are your free cash flow expectations for the full year after some weakness in Q1?

[Marcus Ketter, executive]

Well, the cash conversion ratio, we are still committed to the 55% to 65% range.

[Operator]

We will now take our final question, and the question comes from the line of Akash Gupta from JPMorgan.

[Akash Gupta, analyst]

I have it on the supply chain topic. So have you given any number like how much of your bill of materials that you're purchasing is intercontinental like coming from Asia or U.S. to Europe or from one continent to other? And how much of your supply chain or your purchase is local for local? So any number on that, that would be great.

[Stefan Klebert, executive]

I mean the majority of our suppliers are local. And that's also, I mean, having in mind that the majority of our productions are in Europe. So sourcing in Europe plays an important role for all the projects and things we execute in Asia or U.S. We also have local suppliers. So 85% minimum is sourced locally.

[Operator]

I will now hand the call back for closing remarks.

[Stefan Klebert, executive]

Okay. So thank you, everybody, for listening to our Q1 call, and thanks for the very good and interesting questions. Let me summarize it. We had a good start into a very challenging year '22. I think we showed that we are increasing our margins further, we grew by more than 20% of order intake, we are above our guidance in sales growth and we also see significant improvement in EBITDA margin. And that's all in line with our full year guidance.

And we also are happy and proud to confirm the full year guidance despite all the challenges we discussed that are around of us, and we are very optimistic that we can balance all the headwinds by price management and deliver what we promised also this year at the end of the year. So thank you very much. Stay healthy, and let's all hope that the war stops soon.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.