GEA Group AG

XETRA:G1A

Earnings Call Transcript 2023-Q1

[Oliver Luckenbach, Head, IR]

Yes, Nadia. Thank you very much. Good afternoon, ladies and gentlemen, and thank you for joining us for our First Quarter 2023 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. Marcus will then cover the business and financial review and afterwards, Stefan takes over again for the outlook. 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 Stefan.

[Stefan Klebert, CEO]

Thank you, Oliver and good afternoon, everybody. It's my pleasure to welcome you to our conference call today. Once again, we had strong start into the year, this time into fiscal year 2023. Despite a record order intake in Q1 last year, we have further increased order intake organically by 3.9% to almost €1.6 billion. With regard to sales, growth was even stronger organically up to 13.9% to about €1.3 billion.

Due to the fact that we are continuously passing on price increases, we managed to improve our EBITDA before restructuring expenses significantly by 24.3% to €172 million. The respective EBITDA margin was up by 120 basis points to 13.5%.

Last but not least, we also increased our ROCE by 3.8 percentage points to 33.1%. On the back of this extraordinary strong performance in the first quarter, we decided to upgrade our guidance for fiscal 2023 as follows.

For organic sales growth, we are now expecting an increase of more than 8%, EBITDA before restructuring expenses is forecasted to be in the upper part of the range of €730 million to €790 million. The expectation for the respective EBITDA margin is now raised to at least 14%. And with regard to ROCE, we are guiding for more than 32%. Please bear in mind that the guidance for EBITDA and ROCE is based on constant exchange rate.

Let me now come to two sustainable technologies and solutions for our customers. You all know that GEA is mainly operating in the food, beverage, and pharmaceutical sectors. Three energy-intensive industries where GEA Technologies can make a big difference, but we are also able to support other high emission industries on their journey to carbon-neutral production.

Take the cement or glass industry, for example, we have engineered a process that captures CO2 from production before it is released into the atmosphere. This helps making industrial processes more ecofriendly. There are interesting options allowing for a sustainable use of the captured carbon. It can be safely stored, for example, in depleted oil or gas field and a broach which is referred to as carbon capture and storage or the captured carbon may be used as a raw material in industrial processes. This is known as carbon capture and utilization. Those options help to reduce the carbon footprint of the industrial sector.

We offer our customers flexible, small or medium sized CO2 captures -- capture plans. The pilot plant shown on this picture allows our expert to continuously advance the system in collaboration with our customers. Of course, carbon capture is just one lever in an overall system of climate-friendly management. But we are convinced that it will take us a long way towards a more sustainable future.

Let me now introduce another interesting technology to you lithium production and processing. In few of the growing demand for electric vehicles, demand for lithium is increasing worldwide. Lithium-hydroxide is used as a starting material for the production of batteries for electric vehicles.

Other applications include photo developers, ceramic products, and the production of borate. GEA is offering technologies for all key process steps in lithium production and has won a large lithium order in the first quarter.

We are equipping additional production lines of the energy storage and specialty chemical group, Albemarle for the production of lithium hydroxide. The order value for the two centrifuge packages is €24 million. The filtration and sedimentation centrifuge will be installed at the company's Kemerton lithium hydroxide processing blend in Western Australia.

That concludes my first part of my presentation and I hand over to Marcus.

[Marcus Ketter, CFO]

Thank you very much. Also warm welcome from my side. As you just said, we had a strong start into the year with a very healthy Q1 2023 where we've managed to exceed last year's Q1 record order intake number of €1.54 billion by 2.4% or 3.9% in organic terms.

Five large orders with a total value of €126 million were received in this quarter in comparison to three large orders totaling €92 million in Q1 2022. EBITDA before restructuring margin reached 13.5% and was driven by an improved gross margin.

Operating costs increased due to higher expenses for selling and administration. ROCE improved further due to the strong improvement in EBIT before structuring expenses. Overcompensating the increase in capital employed, all divisions contributed to this positive development.

Our net liquidity decline from €412 million to €274 million, mainly because of the second tranche of our share buyback program, which we finished at the end of fiscal year 2022.

Between the first quarter 2022 and year end 2022, we bought back owned shares for a total €170 million. As you all know, these shares are held as treasury shares. So, all-in-all, a very successful quarter.

Looking a bit deeper into the group performance. Order intake grew to a record €1.58 billion, a 3.9 percentage year-over-year increase on an organic basis. Three divisions grew their order intake organically by Liquid and Product Technologies and Food and Healthcare Technologies reported a decline.

From a customer industry perspective, Dairy Farming and Beverage were strong again, but also New Food has been a strong growth contributor. As I just said, this quarter has seen several large orders. Four in Liquid and Product Technologies and one in Separation Flow Technologies. But also our base orders, these are orders below €1 million have seen an increase year-over-year.

Given the strong order backlog at the beginning of the year and the fading of supply chain bottlenecks, sales generation strongly accelerated to an organic growth rate of 13.9% in the quarter. Service sales grew organically by an outstanding 16% year-over-year, driven by healthy organic service sales growth of all divisions. Also new machine sales have been very strong growing by 12.7% year-over-year.

Two divisions have been particularly strong. Farm Technologies and Heating and Refrigeration Technologies, growing their new machine business even by more than 20% organically. The service sales share was 36.6%, 0.4 percentage points higher than last year. The strong organic sales growth combined with an increase in the gross margin overcompensated higher operating expense resulting in an EBITDA of €172 million, a €34 million improvement versus Q1 2022. By looking at the EBITDA margin, we achieved a significant year-over-year improvement of 1.2 percentage points.

Now let me continue with the figures for the division Separation and Flow Technologies, which had a very strong quarter. Order intake grew organically by 13% year-over-year. Demand was strong in the custom industry's chemical, dairy processing, and renewable resources and in nearly all size brackets.

As Stefan has told you a few minutes ago, SFT has won a large order with a total volume of €24 million for filtration and sedimentation centrifuge, which will be used at our customer Albemarle for lithium hydroxide processing.

The order backlog is substantially up by 17% year-over-year and 13% quarter-over-quarter to €670 million, which lays a good foundation for further sales growth in the coming quarters.

Organic sales grew considerably by 14.4% year-over-year, driven by double-digit organic growth rates of both service and new machines. The service sales share while being already on a high level increased further by 0.9 percentage points to 46.7% in the quarter.

EBITDA increased strongly by €14 million to €95 million and the EBITDA margin improved by 0.6 percentage points to 25.5%. Higher sales, good capacity utilization in the new machine business, and the higher service sales share resulted in a significant increase in gross profit, which overcompensated higher operating costs.

Let's move on to Liquid and Powder Technologies. Order intake decreased organically by 2% year-over-year, while the customer industry's beverage, food and New Food showed a positive development in this quarter.

Dairy Processing, Chemical and Farm were below prior year's level. Liquid and Powder Technologies has won four large orders totaling €102 million this quarter versus three large orders totaling €92 million in Q1 2022.

These large orders were received from the following customer industries, two in dairy processing, one in food, and one in New Food. The one in New Food has been the cell-based meat aura we talked about during the last conference call.

By looking at our order intake performance year-over-year, I would classify Q1 as a strong quarter even being 2% below last quarter. Q1 2022 was an exceptional quarter as many orders were placed after a rather soft COVID year of 2021. This was mainly the case for large dairy processing projects in Asia-Pacific and North America.

Since then, dairy is back on a long-term normalized level with a lot of good small and mid-sized projects, as well as increased service business. Overall, we see a healthy project pipeline across all our customer industries.

Sales increased organically by 2.1% year-over-year. While the service sales grew organically by 11.6% year-over-year, the organic new machine sales declined slightly by 0.4% year-over-year. The high order backlog at the beginning of the year has not yet been processed as many large orders are still in the engineering phase. This explains the muted new machine sales generation in the quarter and will lead to an acceleration of sales growth over the coming quarters.

Besides the muted sales growth, EBITDA before restructuring expenses rose by €2 million year-over-year to €30 million and EBITDA margin increased by 0.5 percentage points to 7.8%.

Gross profit rose due to improved projects margins, while operating costs remained virtually unchanged.

Continuing with Food and Healthcare Technologies, order intake was down by 8.3% organically year-over-year. The decline is mainly driven by the business unit frozen foods due to some larger orders in the prior year quarter. Most other areas in Food and Pharma at similar order levels compared to Q1 2022. Organic sales growth was 14.9% year-over-year, driven by both a very strong new machine and service sales growth.

The service sales share increased by 0.4 percentage points or 32.2% in the quarter. Despite strong sales levels, order backlog remains at historically high levels, which indicates further sales growth momentum.

EBITDA increased by €5 million year-over-year and the respective margin improved from 9.6% in Q1 2022 to 10.4% in Q1 2023. Gross profit increased year-over-year due to healthy organic sales growth, while operating costs were under proportionally impacted from higher administrative expenses.

Moving to Farm Technologies. Q1 has been the fifth quarter in a row with strong year-over-year organic order intake growth hitting a record order intake level of €253 million. Solid global demand for automated milking and manure equipment is driving the 6.6 organic order intake growth.

Given the strong organic order intake growth in the past quarters and our expectation that the contraction of milk prices as well as rising interest rates will lead to some slow decision-making processes, we might see a temporary phase of moderate order intake growth going forward.

The order backlog is substantially up by 14% year-over-year and 19% quarter-over-quarter to €346 million, which led a good foundation for further sales growth in the coming quarter.

Sales increased organically by 24.7%. This very satisfactory development was driven by outstanding organic new machine sales growth of 29.7% year-over-year and a very healthy service sales growth of 19.9% year-over-year. Due to the very strong new machine business, the service sales ratio declined by 2.8% to 47.6%. EBITDA increased strongly by €13 million and the respective margin improved to 12.5% from 6.8% in Q1 2022.

Gross profit has been significantly above prior year's level, driven by strong organic sales growth and also due to consistent price adjustment during the last month, which overcompensated the increase in operating cost from higher selling expenses.

Finally, let us turn to Heating and Refrigeration Technologies, another division with extremely strong order intake and sales growth in the quarter. Order intake increased organically by an outstanding 32.5% year-over-year. This strong development was driven by significantly higher volume of orders in both between €1 million and €5 million as well as between €5 million to €50 million and good demand in North America.

From a customer industry perspective, distribution storage centers, climate control, as well as marine, have shown good growth in the quarter. The training environment remains positive. The decarbonization of processes is a strong growth driver which is reflected in a high demand for heat pumps. Almost all regions with a good outlook and the US, in particular look interesting.

Also in this distribution, the order backlog is substantially up by 25% year-over-year and 20% quarter-over-quarter to €268 million, which is great for sales generation in the coming quarters.

Organic sales increased strongly by 19.2% year-over-year and was driven by new machine sales growth accelerating from 7.4% in Q4 2022 to 21.1% year-over-year in this quarter.

Also, service sales showed a healthy organic growth rate of 14.9%. Its sales share, however, declined by 3.5 percentage points to 38.4% due to the strong new machine sales.

EBITDA rose by €3 million to €60 million and the respective margin improved from 10.7% in Q1 2022 to 11.8% this quarter. Gross profit was up year-over-year due to higher sales and better gross margin, which overcompensated the increase in operating costs.

Closing the divisional chapter now with the overview on the EBITDA contribution and as you can see, all five divisions contributed to the profit improvement. There are, however, differences in the extent of the contribution and it clearly stands out that SFT as well as FT have been the major drivers behind the year-over-year EBITDA improvement.

In total, EBITDA before restructuring increased to €172 million from €138 million. There's been only basically zero translational FX impact this quarter.

Coming now to another important topic, networking capital. As in the last years, the first quarter is showing the typical seasonal uptick in net working capital from year end. This quarter-over-quarter increase is driven by an increase in inventories, which in turn is triggered by our strong order backlog.

In a year-over-year comparison, net working capital increased by €77 million to €360 million due to higher inventories and trade receivables as a result of the strong business development, partly offset by increase in trade payables and advanced payments.

Despite the year-over-year and quarter-over-quarter uptick in net working capital remained with a net working capital to sales ratio of 6.9% well below the guided corridor of 8% to 10%.

Coming now to another important topic, cash generation. Operating cash flow was a negative €49 million, which is below prior year's quarterly figure of €14 million. The decline is explained by the following. Firstly, a higher net working capital outflow resulting from the inventory buildup due to the elevated order backlog.

Secondly, higher outflow and provisions of €88 million and thirdly, €46 million cash outflow for others. The provision position contains the outflow bonus payments for fiscal year 2022, which was, as you all know, a very successful year. In addition, we paid out the first tranche of the inflation compensation payment to all employees in Germany, which accounted for roughly €10 million.

The position others includes mainly cash outflows for prepaid expenses and a minor effect from valuing our currency derivatives. The slight step up in CapEx related outflow of €2 million year-over-year to €35 million is in line with our fiscal year 2023 guidance of around €240 million. As a result, free cash flow is negative with €52 million and below prior year's quarterly number of negative €28 million.

Consequently, our free cash flow conversion ratio before restructuring, which is calculated over the last four quarters has been below the target corridor of 55% to 65% as only 41% of EBITDA was converted into free cash flow.

When reason for the lower cash generation has been the net working capital outflow of €80 million over the course of the last four quarters. However, we expect to be within our cash conversion ratio of 55% to 65% for the whole year 2023, even though that might be at the lower end of that range.

Net cash, including lease liabilities declined from €347 million at the end of the fourth quarter to €274 million, driven by the negative net cash flow of €72 million.

Let me now talk about our financial headroom. On the left, you see our debt instruments as well as their respective utilization and majority structure as per end of March 23.

As per March 31st, merely €1 million out of the €61 million uncommitted bilateral credit lines were drawn and €100 million of fixed rate borrowers note loan, which will be due in February 2025. GEA's liquidity position is supported with an undrawn committed syndicated credit line of €650 million with majority due in 2027. This debt instrument currently serves only as an additional liquidity back up facility for us.

To sum it up, we have only €100 million of financial debt. Continuing now on the right side of the slides. Equity improved because of the higher net profit resulting in an equity ratio of 40.4% after 37.7% at the end of Q1 2022. The decline in net liquidity is due to the second tranche of our share buyback program mentioned earlier.

Adjusted for the buyback, the net liquidity position including lease liabilities would result to €444 million.

And finally, some good news from our credit rating agencies, Moody's has confirmed our BAA2 rating and has upgraded the outlook from stable to positive in March 2023.

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

[Stefan Klebert, CEO]

Thank you, Marcus. Let me now come to our outlook for the fiscal year 2023. First of all, we have decided to if no longer quarterly order intake indication because we want to avoid short-term speculation. However, and I say that very clear, we do feel very comfortable with our current order pipeline, otherwise, we will not have upgraded our full year 2023 guidance.

As a reminder, the upgraded guidance is as follows; organic sales is now expected to grow organically by more than 8%. Our EBITDA before restructuring expenses we forecast to reach the other part of the range of €730 million to €790 million with a comparable margin of at least 14% and ROCE should now exceed 32%. Please bear in mind that the guidance for EBITDA and ROCE is based on constant exchange rate.

Finally, our roadmap for 2023, the next important date will be the release of our Q2 results in August 10, followed by our Q2 results in November.

This concludes our presentation and I hand back to Oliver for the Q&A.

[Oliver Luckenbach, Head, IR]

Yes. Thank you very much, Stefan, and Marcus. And I want to hand the call back to you operator to start the Q&A please.

[Operator]

Thank you so much. [Operator Instructions] And now we're going to take up a first question and it comes from the land of Klas Bergelind from Citi. Your line is open. Please ask your question.

[Klas Bergelind, Citi]

Thank you. Hi, Stefan and Marcus. Klas at Citi. My first one was on the next quarter orders then, but I'll leave that Stefan. The one I have is really on FX for you, Marcus, to start with expectations out there quite wide ranging from a negative €20 million I think the flattish at the EBITDA level. You don't have that much transaction exposure, but sometimes there are also moving parts, which is tricky for us from the outside of gauge.

How much at the current spot do you think we should adjust for at the upper end of the €790 million at the EBITDA level, no FX impact or all the way down to negative €20 million, I'll start there.

[Marcus Ketter, CFO]

Klas a very good question. Hello. Quite frankly, we feel actually very comfortable with the fiscal year consensus for the EBITDA before restructuring and we are fully aware that the consensus is actually on a reported basis, but of course, before restructuring there.

So, we looked at different scenarios regards to the translational FX effect and as I said, with the fiscal year consensus, we see here for the EBITDA before restructuring, we feel comfortable with that. Translational FX effect as in the first quarter were basically around zero.

[Klas Bergelind, Citi]

Yes. No, that's good. No. To get to negative 20, which is a similar drag I think as you had back end during COVID, you need to have quite a negative scenario for FX in the second half. So unless your mix of cost versus income have changed considerably, might not look that likely.

Okay. The second one is on the cost inflation. Am I right to think that €128 million in net cost inflation for the year that there is some maybe some downside to that number that it can come in lower given what we see on the cost side? And also when you think about your price increases, how much of the -- if you could remind us would be tied to that inflation? It seems like pricing after the backlog is relatively sticky, but curious on any comments there?

[Marcus Ketter, CFO]

So, when we look at actually the cost inflation on the supplier side, we still stick with the number we set, but we see actually that it might be a little bit less than that. So that that the direction is actually -- it could be a bit lighter than €128 million we mentioned there. So, -- and on the order backlog on sales price increases, that's sticky. Absolutely.

[Klas Bergelind, Citi]

Okay. My third and final one is on the large order in SFT. We don't see that often it's in lithium. Obviously in the short-term, maybe the battery outlook is mixed, but in the very long-term, it's very solid. If we can talk about the opportunity or if this can grow into something bigger. Also carbon capture, you're providing a slide here.

Obviously, some of your peers have much more meaningful exposure some of these D card drivers, but it would be really good if you could get some sort of base level, how much of both within HRT but also within SFT, can we sort of call being green new growth so we can have a base to work from? Thank you.

[Marcus Ketter, CFO]

Okay, Klas, we're actually looking at the green base of revenue there. And we have not come up with our own methodology here. So, that's why we do not give out our own methodology numbers for green revenue and the baseline for that.

So, we're not there yet in that sense given on these kind of numbers because we are -- hopefully, we are discussing internally. If that makes sense for investors or not have our own definition of green revenue and green OpEx and CapEx. So, we cannot give you a baseline as of today.

However, HRT and also partly SFT just mentioned is, of course, the business is driven by decarbonization and which is, of course, that trend, which we are seeing right now in Germany.

I mean, every news is based -- includes CO2 and Pharma. So, I think we are absolutely on track with that. However, we don't give out numbers right now because we have not as I said, our own methodology for green revenue and business.

[Klas Bergelind, Citi]

Thank you.

[Operator]

Thank you. Now, we're going to take our next question. And the next question comes from the line of Sven Weier from UBS. Your line is open, please ask your question.

[Sven Weier, UBS]

Yes. Good afternoon. Thanks for taking my questions. The first one is around the guidance increase. And as Stefan you already mentioned, when you stop guiding on orders, you wouldn't have done raising the guidance if demand was bad.

But I was just wondering, I mean it comes relatively early for you guys. I mean, we hardly see that for you before that you raised guidance already a few weeks after giving it in the first place. So, I would just wondered if you could give some more color what else has driven that? Is it a combination of supply chains improving more than you thought? Is it also you feel you have now more visibility on demand for in for out in the rest of the year or what is it that has really driven such a quick upgrade of the guide?

[Stefan Klebert, CEO]

Yes, I mean, thanks for the question. As when at the end, I mean look, if one quarter is in the box, we have nine remaining months and it's a question of the math at the end also if we would have stick to the old guidance.

Your question would have been -- don't you expect any growth anymore for the remaining nine months if we achieve a growth rate in sales more than 12% in the first quarter.

And then we would guide for a total growth of 5%, but then that sounds not really realistic. So, it's very clear that we see a continuous very good business we have a very good order intake this quarter.

Just remember that last year the growth rate of order intake was more than 20% and we beat that number again this quarter. We also have a solid pipeline. We also expect that we see a good full year. We also see that on the supply chain the problems are, let's say, becoming less.

So, we are more confident than let's say someone ago that we get all the products we need to execute the order backlog. That altogether makes us very optimistic and therefore, we thought it's the right time to upgrade the guidance because we feel comfortable that this is what we can deliver.

[Sven Weier, UBS]

Understood. And then I was just wondering when we think about the EBITDA guidance, wven if we take the high end now and your growth rate on topline, it basically for the coming quarters, it doesn't really imply any more margin improvement for Q2 to Q4.

And so you basically had all the improvement already in Q1. Is that really what we should expect? So you have further top line growth? You have some more savings, I guess. So, what's behind that?

[Marcus Ketter, CFO]

Well, we said topline growth is going to be above 8%. Okay, the growth rate in the next quarter might be a bit lower than in the first quarter there, but you can still expect sales growth in the coming quarters. We also said that the EBITDA margin we expect is going to be about 14.0% EBITDA margin. So there's also growth improvement here on the EBITDA margin side.

On the other hand, we also have to take, of course, into account that there is a wage cost increases of around 80 million. It's still to come, so we need to factor this in. All the wage increases did not start from January 1st, but started beginning of April and beginning of May. So this is also coming our way.

[Sven Weier, UBS]

The final question, if I may, just on the motives again of declined order pipeline. I mean, I just came off another call with another food equipment maker and we've been discussing around, how much impact is there from the inflation benefits that some of the food and beverage companies are obviously making at the moment? How much does that stimulate also the CapEx budgets? I mean the answer the other company came away with was that they rather see the opposite, that they see the food and beverage companies under pressure from the supermarkets to come up with ever lower costs and that's driving the investment into more efficient machines and cost reductions on there. Is that the same what you are seeing?

[Stefan Klebert, CEO]

I mean first of all let me let me say what is I think very important and that's also what you can see during the last years we are in a very stable business environment. I mean as long as people are living on that planet who need to eat and drink something, we are in a very safe harbor and our customers will continue to invest. That's I think very, very important to understand. We also feel that there are many, many additional opportunities for us to grow.

Be it new food for instance, be it the new technologies we just explained, CO2 capturing, lithium, but also the drive and the necessity from our customers to upgrade and invest into more sustainable products. And we just recently announced and disclosed our new Add Better label, which is a TÜV certified process for products which contribute significantly to a better world in terms of saving energy, or saving water, or saving resources.

And there is a very clear trend when we talk to our customers. They are very open and they also need to invest in more resource efficient equipment and that also will drive the growth in our industry.

[Sven Weier, UBS]

Very clear. Thank you both.

[Operator]

Thank you. Now we're going to take our next question. Please stand by. And the next question comes from Max Yates from Morgan Stanley. Your line is open, please ask your question.

[Max Yates, Morgan Stanley]

Thank you. Just my first question was just around what you're seeing regionally. I think in one of your divisions, you called out North America being particularly strong, but could you talk more broadly about, are you seeing very different trends across Asia, Europe and North America, or is it all sort of relatively consistent when you think about your orders?

[Stefan Klebert, CEO]

I mean, North America is quite strong. That's right. Also the Asian region is still very, very good here. So if we compare the regions, I would say North America and Asia are the drivers.

[Max Yates, Morgan Stanley]

Okay, and maybe just a quick follow up and I fully appreciate you don't want to guide on orders. I guess my only kind of question is when I look at the pattern of orders last year, it was obviously a very strong Q1 and then we kind of ended the year almost 200 million lower by the time we got to Q4. So I guess what I was trying to work out is to what extent is a kind of 1.5, 1.6 level in Q1 representative of just strong seasonality? Or for many businesses, we think about kind of run rates from there. I guess the simple question is, will orders be sort of closer to that kind of 1.5, 1.6 level, or should we be thinking about kind of normalizing kind of down to what we saw the rest of the year? Because I guess if we think about sequential versus year on year, if we stay at these sequential levels, we're going to see very, very strong year on year growth rates. So any help you can give us around whether this is a seasonally strong Q1 or this is a decent run rate?

[Marcus Ketter, CFO]

I mean, we committed in our mission 2026 to a continuously annual growth. And we are extremely optimistic that this is exactly what we can deliver. As I said, we stopped to give indications in the form of quarter-to-quarter simply to avoid speculations. And that has nothing to do with our confidence. We see a continuous, interesting pipeline, and we also see a continuous growth in our business.

[Max Yates, Morgan Stanley]

And I guess that comment is extended to orders as well.

[Marcus Ketter, CFO]

Pardon?

[Max Yates, Morgan Stanley]

So that comment around continued growth, I would assume that that is true of order intake as well?

[Marcus Ketter, CFO]

Yes, if, if, if, I mean, we cannot grow in sales if order intake is decreasing, that's very clear in the medium to long term. On the other hand, it's, it's also very clear and normal in our business that sometimes a quarter is not the right, the right dimension to, to really, let's say, judge the performance because large orders, when it is about 50, 80, 100 million or so they also can easily swap from one quarter to the other and that has nothing to do with our market situation, with our performance, with the willingness to invest and therefore it is more important to look at the full year.

[Max Yates, Morgan Stanley]

Understood. Thank you.

[Operator]

Thank you. [Operator Instructions] Now we're going to take our next question and it comes from land of Akash Gupta from JPMorgan. Your line is open, please ask your question.

[Akash Gupta, JPMorgan]

Yes, hi, good afternoon, Stefan, Marcus and Oliver and thanks for your time. My first one is also on orders and I mean you have been pretty consistent in guiding on quarterly orders and you are abolishing this practice which comes at a time when some of your peers are reporting high uncertainty and talking about customer hesitant to sign off CapEx in the near term due to banking crisis.

So I wanted to ask if this high uncertainty to convert the pipeline into orders is also playing a role in your decision to not guide on quarterly orders, and should we expect a higher than normal volatility in quarterly orders going forward at least in the next couple of quarters? That's question number one.

[Marcus Ketter, CFO]

Okay, I can maybe give you a simple answer. The answer is no.

[Akash Gupta, JPMorgan]

So just to confirm, you don't see any high uncertainty to convert the pipeline into firm orders?

[Marcus Ketter, CFO]

Can you repeat that? I understood that you are asking if we expect a larger volatility in the future and that was my answer. I said no.

[Akash Gupta, JPMorgan]

Okay. And then the second one I –

[Stefan Klebert, CEO]

The decision we made not to give a quarterly order income indication was not based on the volatility of order intake at all, competitors not at all. We thought this is the time actually to go and go a little bit, go more long term than just quarterly view.

[Akash Gupta, JPMorgan]

Okay. But you don't see any higher level of higher than normal level of volatility in the near term as some of your competitors are saying?

[Marcus Ketter, CFO]

No.

[Akash Gupta, JPMorgan]

Okay. And then the second question I have is on these energy efficient solutions which you have been talking about quite some time. I mean when we look at your order and particularly base orders, do you have an indication in terms of how much of your orders are driven by these energy efficient solutions which may have a faster payback period and therefore, despite all the macro headwinds we see on the horizon, the fundamentals for this part of the business may be superior than the rest of the group. So any color on that would be great.

[Marcus Ketter, CFO]

Thanks. This is at the moment not such a significant number because you also know that the pressure on customers is just started with the Ukraine war to really put a focus on energy savings. We are also about launching this product but we sold already very successfully.

Some of them, for instance, I also mentioned in informal calls, at cool solution where we add a heat pumped to our spray dryers, which is really a significant saving in energy. That's also a product we sold very successful already.

And this will accelerate because there is increasing pressure to save energy. I think this in minds in our -- perform our customers much more open than before to do something to save energy. Then additional pressure is to do something to reduce the CO2 footprint So this will accelerate the most important message is that GEA is I would say really at the forefront in the industry here, because we are really focusing on our R&D.

On this kind of innovations, we already have a lot of these products available for sale. And we already have achieved some really great successes that customers are accepting and also appreciating that we have this kind of product.

[Akash Gupta, JPMorgan]

Thank you.

[Operator]

Thank you. Now we'll go and take our next question. And the next question comes from the line of Sebastian Growe from BNP Paribas Exane. Your line is open. Please ask the question.

[Sebastian Growe, BNP Paribas Exane]

Good afternoon. Thanks for taking my questions. Two one, those are mostly on the plant engineering heavy businesses. Starting with LPG. So when I look at the numbers and it gives me like a rather slow start to the year at the same time, however, that's for the execution, at the same time, however, the order trend has been quite encouraging starting as of second, third quarter last year.

Second question simply is how we should think of the further acceleration and execution in the coming quarters, will these orders become rather quickly than into revenues or turn into revenues and the same then also for the EBITDA, should we see a sequential acceleration here for the segment in particular?

[Stefan Klebert, CEO]

Yes. I mean, when we talk about LPG, this is always the vast majority are large projects, which normally take a while if we know the intake and until we see the full effect in the P&L, we have a very, very solid backlog here and also say it's conversion, which we can expect for this year. And there is also a very good and optimistic view that we continue our growth story here in LPG as well.

[Sebastian Growe, BNP Paribas Exane]

Okay. That sounds good. And if we then move on to the other large plant engineering activity with FAP, my understanding is that you had some changes implemented at the segment. Maybe you can talk around that and particularly to what extent we can draw any meaningful solutions from what so far the track record has been in terms of getting to the 13% to 15% margin corridor and talk around the measures a bit? That would be very much appreciated? Thanks.

[Stefan Klebert, CEO]

That's right. But we made some changes in the FAP also in the management last year. This is simply because we feel that we can accelerate the positive development, which we which we saw at this division also. And this is what we intend to do. We reorganized internally some parts of that division.

And it's simply, let's say, to accelerate our improvement story here. And we have a target set in the mission 26 that this division will achieve a margin 13% to 15% and there is no change.

[Sebastian Growe, BNP Paribas Exane]

So it's -- thank you for this. And although, it's very early days, would you even go as far as those very implement the changes could have the potential to even go beyond the very target range?

[Stefan Klebert, CEO]

I think first, we do the 13% to 15% and once we have that achieved, we think about the future.

[Sebastian Growe, BNP Paribas Exane]

Okay. Thanks for that.

[Operator]

Thank you. And now we're going to take our last question for today. And it comes from the line of Rizk Maidi from Jefferies. Your line is open. Please ask your question.

[Rizk Maidi, Jefferies]

Good afternoon, gentlemen. Thanks for taking the follow-ups. And I actually had two. Number one is in previous quarters, you've been helpful in terms of talking about the price increases that you're achieving in your orders versus your revenues. And if my memory is correct, we're talking about 3% to 4% on the revenue side and perhaps more 5% to 6% on the order, maybe if you could just comment on Q1 orders, please, revenues and the pricing contribution, please?

[Marcus Ketter, CFO]

Yes. I can actually confirm what you said, I would say in order intake, it is rather a little bit lower, maybe 4% to 5%. But in sales, you are right with the numbers you mentioned, yes.

[Rizk Maidi, Jefferies]

Yes. Perfect. And then secondly, if we think about the EBITDA upgrade and thinking about the different sort of items that you gave in the last sort of presentation. Maybe what has sort of mainly changed? I mean, you talked about wage inflation of €80 million really starting from Q2. Any changes on the input cost increase or the pricing sort of assumptions behind your EBITDA upgrades? Any thoughts that will be helpful?

[Stefan Klebert, CEO]

Yes. I mean the expectation, Marcos just mentioned that we have calculated or expected number of 140, it will definitely from today's point of view, everything what we see not worth earning rather the opposite, we see even that it is a little bit better perspective for us. And that also might help us to come up and come out with the numbers we are promising.

[Rizk Maidi, Jefferies]

Okay, understood. And then lastly, any reason why we should not assume the sort of normal seasonal entity when you think about Q1 and the full year within GEA?

[Stefan Klebert, CEO]

You're asking about -- if you please repeat or more precise in your question?

[Rizk Maidi, Jefferies]

It's a seasonal business, right? And just perhaps is there anything fundamentally that has changed in the business that perhaps the previous seasonality?

[Stefan Klebert, CEO]

No, no, definitely not. There is no change. I mean, there is always a kind of seasonality in our order intake on a quarter basis, which you also can see if you look at the patterns in the last years. Also last year, we had a seasonality, let's say, quarter-by-quarter, but there is nothing underlying change, there is nothing which changed or makes us any -- which makes us nervous about the future or so, nothing. And yes, we also are looking forward to deliver even better numbers like we guided before. And that's the reason why we also upgrade our guidance.

[Rizk Maidi, Jefferies]

Perfect. Thank you very much.

[Operator]

Thank you. There are no further questions at time. And I would like now to hand the conference over to Oliver Luckenbach for any final remarks.

[Oliver Luckenbach, Head, IR]

I’ll just pass on to Stefan Klebert.

[Stefan Klebert, CEO]

Okay. So thank you for participating in our call. I would like to summarize the key takeaways from today's call. So first of all, after a very successful 2022, we had another very strong first quarter with strongly rising sales and earnings and a record order intake.

Secondly, we have very promising sustainable innovations and technologies also outside our very robust core markets, food, beverage and pharma.

Thirdly, we feel very comfortable with our current order pipeline. Otherwise, we would have not upgraded our full year 2023 guidance. Have a nice weekend, yes, and talk to you soon again.