GEA Group AG
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Earnings Call Transcript

Earnings Call Transcript
2021-Q3

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O
Oliver Luckenbach
Head of Investor Relations

Good afternoon, ladies and gentlemen, and thank you for joining us today for our Q3 2021 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 third quarter, Marcus will then cover the business and financial review before Stefan takes over again for the outlook 2021. 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 in the material that we have distributed today. And with that, I will hand over to you, Stefan.

S
Stefan Klebert
Chairman of the Executive Board & CEO

Yes. Thank you very much, Oliver, and good afternoon, everybody. It's my pleasure to welcome you to our conference call today. In Q3, we accelerated profitable growth. Order intake grew organically by almost 30% year-over-year. In the prior quarters, we were often asked when we expect large order intake will pick up again. And as expected, this was now the case in Q3. We received 4 large orders totaling EUR 167 million. Sales momentum accelerated considerably to an organic growth rate of 6% in Q3 year-over-year after 2.8% in the first half.The 6% organic growth is the strongest quarterly organic growth rate for more than 3 years, and we are on track to achieve our guided 5% to 7% organic sales growth this year. The same holds for our EBITDA guidance, also driven by the strong sales growth, EBITDA and EBITDA margin improved further in Q3 to EUR 170 million or 14.2%. Moreover, ROCE came in strong at 24.6%, driven by a combination of higher profitability and lower capital employed.Let me step back for a second from the quarterly margin development to put these numbers into a strategic perspective. With a 13% margin in the first 9 months, we are now already within the guided margin range of 12.5% to 13.5% for next year. This brings me to the key developments in Q3 2021. First, let me start with our Capital Markets Day almost a month ago in London. It was great to finally meet investors and analysts personally again, and we received great feedback from you for our Mission 26 strategy. Thank you for your positive reviews, we very much appreciate that. Second, with the Novozymes order, we received one of the largest order in the company's history and the largest order in the market segment, new food so far. This great project is also from an advertising perspective, highly interesting for us. We are the one-stop shop for customers to cover the entire value chain of new food projects. Third, we entered the last phase of our portfolio planning program. We signed the contract to sell the refrigeration contracting business in France and close the disposal of the refrigeration contracting businesses in Italy and Spain.Fourth, the division Refrigeration Technologies was refocused and rebranded to heating and Refrigeration Technologies to better reflect the division's leading position as a supplier of sustainable heating and cooling technology under one roof. Last, but certainly not least, sustainability. The organization has done a great job to improve the financial KPIs as discussed a minute ago. However, the team has also done a fantastic job to improve the sustainability aspect of [ KR ]. As a result, we again received an upgrade by an ESG rating agency. MSGI upgraded us from A to AA in their ESG rating. This makes me very proud and it's a great achievement.Let me now elaborate on our share buyback program, which we announced in August. As per end of September, we already spent EUR 40 million of the planned EUR 300 million, which equals about 1 million shares. The average price for these shares is EUR 39.64, a good investment given the fact that the share trades now current trading, EUR 42.66. On Monday, we announced the status as per last Friday. As per October 29, we spent EUR 68 million and bought back 1.7 million shares at an average price of EUR 39.56. With that, I hand over to Marcus, who will take you through the financials of the quarter.

M
Marcus A. Ketter
CFO & Member of Executive Board

Thank you, Stefan, and also a warm welcome from my side. Let's go to the executive summary here. As Stefan has already highlighted, the headline number of order intake, sales and EBITDA before restructuring expenses, I will focus on the additional KPIs. The higher profitability and the further strong year-over-year reduction of net working capital resulted in a higher return on capital employed of 24.6%. With this number, we are now at the midpoint of our fiscal year 2021 guidance. On net liquidity, the sustainable reduction of net working capital was the main driver for the increase in net liquidity, including financial leases rising by EUR 299 million to EUR 358 million now. The net working capital to sales ratio is only 7.2%. A significant sequential and year-over-year improvement, which I will explain later in detail. To sum it up, Q3 2021 was another great quarter.Order intake and sales growth are gaining momentum. Profitability increased further as does capital efficiency. We are well on track to achieve our targets for fiscal year 2021. So let's start with the group performance here. Order intake increased organically by 29.6% year-over-year and all divisions contributed to this growth positively. Separation & Flow, Liquid & Powder as well as Food & Health care technologies grew organically by double-digit rate. As Stefan already highlighted, large order growth has picked up. received in total 4 large orders amounting to EUR 167 million compared to a large order volume of just EUR 37 million in last year's Q3.Sales was up by 6% year-over-year on an organic basis, driven by both new machines and service sales. It is worth noting that organic sales growth of new machines was 6.2% year-over-year, which is the strongest growth for more than 3 years. EBITDA before restructuring margin reached 14.2% and was driven by gross margin improvement in new machines as well as in the Service business.Now let me continue with the figures for Separation & Flow Technologies. Order intake grew organically by solid 21.4% year-over-year. All major customer industries grew year-over-year, sequentially, especially the orders below EUR 1 million single ticket size developed very well and remained on the high level of the prior quarters. Due to the record high starting backlog, organic sales development was strong with a growth of 9.2% year-over-year. While new machine sales grew organically by 6.4% and Service sales grew even stronger with 13.1% year-over-year. As the division ended the quarter also with a record backlog, the outlook for the fourth quarter for sales is also favorable.Coming now to EBITDA, which increased strongly from EUR 68 million to EUR 84 million. The EBITDA margin improved by 3 percentage points to 26%. This development was driven by better new machines margin, a higher service share and better capacity utilization. To sum it up, Q3 '21 was another great quarter for Separation & Flow Technologies the good top line momentum resulted in an all-time high backlog, which indicates further top and bottom line momentum in the following quarters.Let's move on to Liquid & Powder Technologies. Order intake increased organically by an incredible 72.5% year-over-year. The low base from last year just partly explains this growth rate. The key driver is the significant order flow from the customer industry's food, especially new food within Novozymes order as well as beverages and chemical. As Stefan mentioned earlier, some of the large orders, which we always saw in the pipeline were now placed. Sales developed flattish year-over-year with a slight decline by 0.7% organically. This is not very satisfying and is a result of the weak previous quarters, leading to a starting backlog, which was significantly below last year's level. However, the backlog at the quarter end has significantly improved, it is now just EUR 100 million below the peak level, which was reached in Q1 '20.This is a good indication for an accelerating sales momentum going forward. Service sales declined slightly by 1.2% on an organic basis year-over-year, and its sales share declined by 1.4 percentage points to 21.3%. This development is mainly due to internal structural effects, which we have discussed already in prior conference calls. EBITDA before restructuring expenses increased by EUR 13 million to EUR 44 million. However, please note that out of the EUR 13 million improvement by about EUR 7 million comes from a reimbursement of corporate charges. The remaining improvement was due to better backlog quality and better order execution, leading to another improvement in gross profit.Let me now continue with Food & Healthcare Technologies. Order intake increased organically by 12.4% year-over-year. And was driven by significant growth in the food as well as the pharma business. In the latter customer industry, we booked one large order exceeding EUR 30 million. Sales declined on an organic basis by 1.5% year-over-year despite the starting backlog being above prior year's level, organic sales growth remained slightly negative. This is related to requested delivery dates on the starting backlog being less biased towards Q3 2021. Going forward, sales momentum should from now benefit from more favorable delivery dates in the backlog as well as a higher backlog level.EBITDA before restructuring increased by EUR 6 million year-over-year, resulting in a double-digit margin of 11.5%. Also in the first 9 months, FHT is a double-digit margin business. The margin currently stands at 10.1%. The favorable margin development in Q3 '21 was driven by a very solid increase in gross margin due to better execution, backlog margin quality and efficiency measures.Moving to Farm Technologies. Farm Technologies had 4 consecutive quarters with double-digit organic order intake growth, partly driven by preordering and some customers we're anticipating raw material induced price hikes. Thus, growth is cooling down, but order intake still grew in Q3 '21 by 2.5% organically year-over-year. The trends towards automated equipment is still strong and drive demand. Farm technologies started the quarter with a record order backlog, which was driving growth. Organic sales grew by 15.9% year-over-year with new machine sales outperforming services. Thus, the drop in service sales is not related to any weakness of the Service business itself.EBITDA before restructuring grew by EUR 4 million, and margin grew to 14.1%, driven by higher volume and better margins in the new machine business and efficiency measures. Finally, let us turn to heating and Refrigeration Technologies. Order intake increased organically by 8.5% year-over-year. Please note that the decline of the reported figure is due to the disposal of Bock earlier this year. Organic sales increased by 2.8% year-over-year for the first time since the outbreak of the pandemic new machine sales are growing again on an organic basis. Service sales grew organically even stronger with 4.3% in combination with the disposal of Bock which had a much lower service ratio compared to the heating and Refrigeration Technologies division now. The division's service sales share is at 43.7%.EBITDA before restructuring margin increased from 10% to 12%, resulting from a higher gross margin in the new machine business. Now closing the divisional chapter with the overview on Slide 16. And as you can see, all 5 divisions contributed to the EBITDA improvement. On a reported basis, two divisions had lower sales in the quarter, only at liquid and powder as well as heating and Refrigeration Technologies sales declined. This was due to the lower starting backlog and negative M&A effects. Across all divisions, gross margin improved, and as a result of this, all divisions increased their EBITDA year-over-year with Separation & Flow Technologies being the strongest driver for group EBITDA.GCC consolidation and EBITDA declined by EUR 15 million, primarily due to the initial consolidation of GEA Group Services, the reimbursement of corporate charges mainly to Liquid & Powder Technologies for last year and higher bonus provisions. On the far right side of the chart, we deducted the translational FX effect of EUR 1 million. Excluding this FX effect, as we have defined it in our full year guidance, our EBITDA would have improved by EUR 24 million to EUR 169 million. Let's now continue with net working capital on Slide 16. On a year-over-year view, we reduced our net working capital further by EUR 249 million to EUR 333 million, while the respective ratio improved by 5.1 percentage points to only 7.2%. All divisions contributed to that positive trend. With the strongest improvement in net working capital were achieved in net contract assets, reflecting our improved project management. Furthermore, trade receivables and payables were strong contributors to the net working capital improvement. Inventories improved just slightly. To sum it up, we are satisfied with the development of our net working capital. For the time being, we confirm our target corridor for net working capital over sales of 8% to 10%.This leads us as always, to another important topic, cash generation. Operating cash flow came to EUR 240 million, which is significantly above last year's figure of EUR 169 million, mostly driven by a higher contribution from net working capital. CapEx-related outflow is EUR 4 million higher than last year and coming to EUR 26 million. Free cash flow increased from EUR 148 million to EUR 214 million. Net cash, including lease liabilities, improved from EUR 203 million to EUR 358 million, driven by a strong net free cash flow of EUR 197 million, which includes EUR 40 million outflow for our share buyback program.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 majority structure as per end of September 2021. In August, a EUR 650 million syndicated credit line with the maturity in 2022 was replaced by the equivalent credit facility due in 2022. Also in August, a EUR 200 million syndicated credit facility, which was solely set up due to the uncertainty of the global pandemic was not prolonged and expired. The EUR 80 million with the majority in 2021 constitutes evergreen credit lines. Continuing now on the right side of the slide, where 2 KPIs weakened, which I would like to explain. The first KPI, which slightly weakened compared to last year's Q3 is the equity position. This is a result of the dividend payment. Last year, dividend payments was split into 2 single payments. EUR 76 million were paid in Q2 2020 and EUR 78 million were paid in Q4 2020. This year's dividend was entirely paid in Q2 2021. Thus, the total burden on equity from dividend is actually EUR 231 million since the end of Q3 2020. The second KPI, which weakened the financial headroom is a decrease from EUR 950 million to EUR 750 million and is due to the expiration of the EUR 200 million credit facility in August, which we intentionally did not prolong. All other KPIs on this table have improved compared to last year's Q3, especially the positive trend of our net liquidity, including lease liabilities has continued improving by EUR 299 million year-over-year. With that, I hand it back to Stefan.

S
Stefan Klebert
Chairman of the Executive Board & CEO

Thank you very much, Marcus. Let me now come to our confirmed outlook for the fiscal year '21. After a very good development in the first 9 months, we confirm our guidance for all 3 parameters for full year '21. We expect organic sales to grow between 5% and 7%. EBITDA before restructuring to be within a range of EUR 600 million to EUR 630 million, and ROCE to end within a corridor of 23% to 26%. We are very well on track regarding EBITDA and ROCE but keep a very close eye on the upcoming challenges for the execution of our backlog, which might arise from shortages of supplies.Let me share how we react on these challenges. The world has significantly changed in '21 in almost every regard, concerning supply chains. Fortunately, we mitigated most of the effect so far. And we not just kept our business up and running, but we increased at the same time our profitability. How did we avoid being severely affected by supply chain issues and material cost inflation so far? In most cases, a more proactive supply chain management helped us to prevent shortages. Most importantly, the new processes, which we set up during the reorganization of our group structure, enabled us to discover developments much earlier and to have a significantly higher degree of flexibility to mitigate these effects. Higher utilization of frame contracts alongside with focusing on larger suppliers and the up build of safety stock enabled us to avoid any larger disruptions. So far, the disruptions were just minor.Regarding material costs, in many cases, we achieved partly much better prices than before. And regarding energy costs, literally, heating and electricity, we expect a total bill of around EUR 20 million for the full year '21. We changed the energy procurement process significantly compared to how it was handled in the past. Instead of a local approach since the beginning of 2021, one agency monitors and negotiates the energy requirements for GEA on a global basis. This enables us to achieve much better prices and to keep the expected energy-related costs increases in full year '22 to an amount in the low to mid-teens in absolute terms.Coming now to logistics. The reasons for the disruptions and the cost inflation for logistics services are manifold. Fortunately, with the changes of the procurement processes, we reduced the logistics build despite the price increases, thanks to a closer market monitoring in combination with a higher focus on global suppliers. This begs for the equation how we react with our price strategy on this volatile development. Generally, we have now more price rounds compared to a normal year where we increased prices just once a year. As cost inflation became such a hot topic and is visible for everyone, price rounds are more accepted among customers than this would be the case in a normal year. Furthermore, when making an offer to our customers for a certain project, we bake into that offers the spot prices for our suppliers and limit the validity of the quotations to 2 weeks to reduce our price risk.To summarize it, of course, we cannot guarantee that we will never run into a shortage of some supplies. Those disruptions which we have seen so far were minor. In the short term, the situation is likely to deteriorate which increases the risk of further supply chain disruptions. However, as just described, we took according actions to limit the impact of such a scenario. Regarding the cost increases, we can compensate a part of those by increasing internal efficiency on 1 side and on the other side, by hiking prices. Our EBITDA guidance of EUR 600 million to EUR 630 million for full year '21, takes cost increases of up to EUR 25 million into account. So all in all, we are well prepared. Finally, this brings me to our roadmap for '22. The next reporting date will be in about 4 months. with our annual report and our guidance for full year '22 on March 3. '22, followed by our Annual Shareholder Meeting at the end of April. This concludes my presentation, and I hand back to Oliver for the Q&A session.

O
Oliver Luckenbach
Head of Investor Relations

Yes. Thank you very much, Stefan and Marcus. And with that, Anette, please be so kind and start the Q&A session.

Operator

[Operator Instructions] And the first question comes from the line of Klas Bergelind from Citi Research.

K
Klas Henrik Bergelind
Director

Stefan and Marcus, Klas at Citi. So the first one is on the orders and looking into the fourth quarter. The large orders in the third were, of course, quite big, so that's a tough comp, but it seems like there should be some momentum on the larger side also into the fourth quarter. We're seeing large orders coming through across several sectors at the moment in the broader industrial universe. So if you could talk about the pipeline and then on the base orders, history suggests that you're typically up 5% to 10% quarter-on-quarter on your seasonality. So what I'm trying to get to is that it's the EUR 1.3 billion, EUR 1.4 billion level also looks achievable in the fourth quarter. I will start there.

S
Stefan Klebert
Chairman of the Executive Board & CEO

Okay. Thank you very much, Klas. And maybe the first question for the order intake. We always said in the Q1 and Q2 call that the pipeline is quite solid also for the large projects for LPT, and we could see that in Q3 we could book some of them. And we are also still quite optimistic that it can continue like that. So we expect for the second -- for the Q4 now, order intake in the range of EUR 1.2 billion to EUR 1.25 billion. So in that range, it should be, which brings us clearly to a number which is far above EUR 5 billion at the end of the year. And so on the second part -- no, no, continue, Klas.

K
Klas Henrik Bergelind
Director

So obviously, I appreciate that. But at the same time, you should have some seasonal strength, right, on the base business. Otherwise, it would imply quite weak large orders.

S
Stefan Klebert
Chairman of the Executive Board & CEO

No, I would not say so. I mean, as I said, this is what we expect, what our latest expectation is we see good continuing developments. As I said, in all businesses. So we have not any feel, let's say, that the positive trend is coming to an end. Everything we see is very optimistic.

K
Klas Henrik Bergelind
Director

Okay. That's good. My second one I have is on the margin development. You typically have a higher margin quarter-on-quarter looking into the force, but we obviously have the mix being a bit negative as you invoice more LPT orders, so I get that. But unless other cost increases a lot quarter-on-quarter, then I struggle to see why the margin shouldn't be on par at least for the fourth quarter. And if that happens for EBITDA will be above the upper end, unless you are, as you say, Stefan, a bit cautious on supply chain, logistics, price cost into year-end?

M
Marcus A. Ketter
CFO & Member of Executive Board

Yes. Klas, this is Marcus. We are staying a bit cautious on the fourth quarter there. We understand your reasoning. We are looking at the same way. So if everything goes well, there is some upside actually to the margin. But on the other hand, we need to see there are material shortages there. So, so far, we were able to mitigate all these. But as I said, we're going to stay a bit cautious for now on the fourth quarter. But as Stefan said, we are optimistic to reach our goals here definitely.

K
Klas Henrik Bergelind
Director

That makes sense. My final one is on the preordering in Farm Tech, which was expected. But is there anywhere else in the group here is a similar behavior or expect to see similar behavior as you're pushing through more price side I had expected a bit more quarter-on-quarter growth in Food & Health care, for example, was there any preordering there that is now rolling over?

S
Stefan Klebert
Chairman of the Executive Board & CEO

No, not that we can confirm that.

Operator

And the next question comes from the line of Marcus Yates (sic) [ Max Yates ] from Credit Suisse.

M
Max Yates
Research Analyst

It's Max Yates from Credit Suisse. Just my first question was on the order backlog. So obviously, it's up 21% versus this time last year. And I was just thinking about kind of how much of that backlog is to be delivered in next year? And maybe kind of how much confidence does that give you on kind of organic growth sort of staying at high single-digit levels. I'm just trying to think about kind of how we can best use that order backlog number and how best we think about organic sales growth in that context going into next year?

S
Stefan Klebert
Chairman of the Executive Board & CEO

Okay. I mean, it's absolutely right. I mean the strong order backlog makes us quite optimistic for a good growth rate also next year. That's very clear. Normally, we see realization times between 6 to maybe 15 months, which we need on average to execute the backlog. So we are having a good, let's say, tailwind for sales coming out of the backlog for next year. Yes. But I mean, it's -- you know all the supply shortages is, of course, something which is very difficult to predict. I mean, if we will get all the electronic devices, all the components which are -- which includes the chip at the right time. And if there would be no shortage, then we would be very optimistic but this is very difficult to predict. However, I mean, given the quite significant improvement of the backlog, we are very optimistic for next year. And guidance will come, of course, like you know, always in the first quarter.

M
Max Yates
Research Analyst

Okay. Understood. And maybe if you could just help us secondly on your hedging on raw materials. So I mean, so far, I think you've kind of done a relatively good job of both sort of raising prices and hedging. But I guess just if we think about sort of hedging from here, do you sort of current sort of hedges and costs reflect sort of raw material spot rates? Or are you kind of currently re-hedging your raw materials that we should see a sort of further impact from here? So maybe just an update on kind of how to think about what the impact from raw materials might be and whether we should expect an incremental impact next year as sort of you hedge at new high levels?

M
Marcus A. Ketter
CFO & Member of Executive Board

Yes. So let me clarify. We are hedging only FX. So that's what we do. We have not done any hedging on the raw material side on the steel side. We looked at that it for our purposes and not very efficient because we're usually not buying tons this year, but we are having tons of steel in the pre-products which we are purchasing there. So what we -- how we hedge is really that we have contracts and contracts in place, and these are then our hedges. Of course, now these frame contracts are going to expire beginning of next year. And then, of course, we will see a price hike there unless the situation on the steel market is actually further -- or is smoothening up. So yes, we expect to see from the new frame contracts price increases for next year.

M
Max Yates
Research Analyst

And are we talking here about your sort of EUR 400 million sort of raw materials, Bill? Or are we talking about sort of frame agreements within components?

M
Marcus A. Ketter
CFO & Member of Executive Board

No, we're talking about everything we are buying in steel. So as I said, we don't buy raw material steel. There is usually still which we have in pre-products there. So we see -- there's going to be contracts expiring.

M
Max Yates
Research Analyst

Okay. So I mean, just finally on this, because I think you mentioned kind of back in back, I think it was the Q2 call that you had -- you helpfully gave us the sort of EUR 400 million of direct raw materials purchasing that you saw 10% inflation on this. So is there any way you can give us a feeling of kind of what either your steel purchases within that EUR 400 million or the total EUR 400 million what current spot rates may imply in terms of a headwind for next year. And I appreciate you will aim to offset it with pricing, but at least the gross number, would be helpful.

M
Marcus A. Ketter
CFO & Member of Executive Board

No, the headwind is not going to be only in steel. The headwind is going to be in everything we are purchasing. So what we will actually also come up with when we give the guidance, when we say how we see the headwinds at that point in time. So it's not only we're talking about steel. I mean, the price increases are everywhere, basically, if you buy components, you name it. There are always price increases when you start new contracts and have negotiations. So it's really a broader inflationary environment when it comes to the purchasing side. But as I said, we're going to do this with the guidance actually for next year.

Operator

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

L
Lucie Anne Lise Carrier
Executive Director

I have a couple of follow-ups, actually. The first one is on the backlog that you are having. How much of that backlog includes potentially some orders related to entity, which are about to be disposed over the next couple of months or weeks that you have already -- that haven't completed the disposal.

M
Marcus A. Ketter
CFO & Member of Executive Board

Okay. It's very, very minor, just in the range of lower 2-digit there. So that's what it is. We are nearly through the process of divesting, it's really small, really small companies. So it's nature driven .

L
Lucie Anne Lise Carrier
Executive Director

Okay. So you said like losing low single-digit million or something?

M
Marcus A. Ketter
CFO & Member of Executive Board

No double digit, low double digit.

L
Lucie Anne Lise Carrier
Executive Director

Okay. And just in terms of the execution as well as the backlog, will you start to execute the Novozyme contract already from next year? Or is that more 2023?

S
Stefan Klebert
Chairman of the Executive Board & CEO

Yes. We will start next year already.

L
Lucie Anne Lise Carrier
Executive Director

Large share? Or are you able to guide us on that or not really?

S
Stefan Klebert
Chairman of the Executive Board & CEO

Not really because might it be too detailed here, that we talk about the single projects here. But we will start definitely next year and not at the end of the next year to say so.

L
Lucie Anne Lise Carrier
Executive Director

Okay. The second follow-up I had was around the supply chain constraint. You very helpfully gave us the impact you expect on EBITDA this year, EUR 25 million. Have you seen actually -- because you were talking about the materialization of the backlog. Have you seen really already kind of the inability to kind of -- or potential loss or cancellation or delays of your sales on the back of the supply chain constraint. And just on the EUR 25 million you are expecting for this year on EBITDA, how much was the third quarter or maybe the first 9 months of the year?

S
Stefan Klebert
Chairman of the Executive Board & CEO

Yes. So we clearly did not see any cancellation of order intakes or projects based on supply chain shortages. And I have to say it maybe once again, we so far could cope with the situation very good, yes. So of course, we also see price increases, as we said. But as I also mentioned before, we also have been able to do various price increases not only once a year in some areas even twice a year. And that is, let's say, what makes us very optimistic and what we also see in the numbers of the backlog that we don't feel any margin drop so we can pass over the prices and the increase to our customers. And we also have the situation that we have a good relationship to the most important suppliers that we can so far cope very good with the situation.

L
Lucie Anne Lise Carrier
Executive Director

And in terms of the cost impact you've had year-to-date from the EUR 25 million?

S
Stefan Klebert
Chairman of the Executive Board & CEO

Yes. I mean, in 6 weeks, there is Christmas and then the year is gone. So you can expect that the vast majority of that is in the books.

L
Lucie Anne Lise Carrier
Executive Director

I guess I was just trying to figure out whether the comp base for the first half of next year was going to be particularly demanding if, let's say, in the first half of this year, you had relatively small impact. That was, I guess, more -- and then just lastly, I wanted to ask about the cash flow dynamic and a little bit around what I would call the financing of the growth because it seems that the working capital are very, very low. CapEx is also seemed to be lower than what it was historically. On the working capital side, is it also because you're getting better down payments than previously? Or how do we finance really this growth without working capital and CapEx going forward?

S
Stefan Klebert
Chairman of the Executive Board & CEO

Well, we're not getting better down payments than earlier we are getting down payments perhaps it's better than it was 3, 4, 5 years ago, but not better than like in the last 2 years. there. However, we are now getting also the large orders in again. But additionally, actually, when you look at it, we are very tightly managing our net working capital here and especially with accounts receivable, we got in a lot of money, and we're very efficient there, and we are extending our payment terms with the suppliers, and that has been going on for the last approximately 9 months. And that's the reason why we are able, including the advanced payments that we are able now to have a record loan for our company at 7.2%.

Operator

And the next question comes from the line of Sebastian Kuenne from RBC.

S
Sebastian Kuenne
Analyst

Yes, I have to follow up on this on the CapEx question actually. So you have a run rate for PPE investments of about EUR 100 million this year but a higher depreciation charge again. To finance your growth vision, let's say, for 2026, I mean what do you think would be the run rate of CapEx that you expect for the next years. That will be my first question.

S
Stefan Klebert
Chairman of the Executive Board & CEO

We said at our Capital Markets Day, Mission 26 that on average, it's EUR 200 million per year. also considering that we invest a lot in our global SAP project, but also both, as you said, for additional growth, EUR 200 million per year.

S
Sebastian Kuenne
Analyst

And that will start then from when, from next year?

S
Stefan Klebert
Chairman of the Executive Board & CEO

Next year. That starts from next year.

S
Sebastian Kuenne
Analyst

Okay. Understood. Then on the -- again, on the EUR 25 million cost increase, I have to asked also the question again. We understand that most of this is in the book, but we are, of course, interested in what's happening next year. And if I look at steel price, I look at alloy surcharges, this is all still going up. So alloy surcharges up by 50% year-on-year. Can you confirm that your contract, especially the long-term contracts have clauses that allow you to pass this on or what the scale is of cost that you have to bear next year?

S
Stefan Klebert
Chairman of the Executive Board & CEO

Yes. That's a good question. And I can confirm that this is the case. I mean, when we do the really large projects, normally, we have a lot of sub-suppliers producing also parts for these large projects. And it is a very clear rule that we have back-to-back agreements that whenever we take in a large project, we have a calculation based on quotations where we can be sure that we can also get this cost, that is everything which is related with material with assembly. So this is where we are trying to limit our risks. And as I said, we also of course are focusing on price increases. And due to the fact that, let's say, the whole industry is meanwhile used to understand and understand that price increases are necessary.I would say, there might have been times where it was much more difficult to pass on prices. than it is maybe today. That does not mean that everything is accepted. But I think we have a certain common understanding in the industry at the moment that prices are picking up. And this is what everybody needs to do. Otherwise, you get squeezed out. So for us, it's more -- I would say, what worries me more is the question of availability of parts, which we need, especially all the electronic parts. And this might be a larger concern, I would say, for next year, do we get all the parts we need, especially when it is about the electronic parts. But price increases, we can -- I would say, we can handle that, yes.

S
Sebastian Kuenne
Analyst

Understood. And then my final question would be on the projects that you have for new foods. I think the Novozyme contract was well communicated. But if you take that large contract out, what is new food at the moment? Are we talking EUR 20 million, EUR 30 million orders -- order volume this year? And where do you see this for next year given the current tender activity, the current discussions that you have in clients, where do you see that next year?

S
Stefan Klebert
Chairman of the Executive Board & CEO

Yes, yes. So we have already today, not only in Novozymes, we also have other large orders from this new food. So it's above EUR 100 million, so roughly EUR 120 million. And we also expect that this is growing. We also spoke about that during the Capital Markets Day that we expect in '26 that it will be a EUR 400 million business. At the moment, there are many, many activities going on. It's rather a question that we have to make a decision internally to whom do we quote because GEA is really excellent positions in that market. We are really the full scope supplier for new food. I think there is no other company who can provide and deliver what we can deliver. And that's, therefore, I would say every company, every startup who is really thinking about investing in new food production lines. They -- I would rather say they need to talk to us, and we have to make decision to whom do we quote and in which customer do we invest the man days or man weeks to make a calculation. So this is, for us, a very interesting and growing market.

S
Sebastian Kuenne
Analyst

And could you answer the question, where you see this business next year, given the current discussions that you have? Is that...

S
Stefan Klebert
Chairman of the Executive Board & CEO

We don't guide we don't write any -- we don't guide a specific number for new food. But as I said at the Capital Markets Day, we disclosed that we expect EUR 120 million. and that we expect EUR 400 million in 2016.

S
Sebastian Kuenne
Analyst

But the EUR 120 million is with Novozyme? Just to be clear, the Novozyme is included?

S
Stefan Klebert
Chairman of the Executive Board & CEO

Yes, yes.

S
Sebastian Kuenne
Analyst

No excluding Novozyme is about EUR 30 million, roughly.

S
Stefan Klebert
Chairman of the Executive Board & CEO

Might be, might not be.

Operator

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

S
Sven Weier
Executive Director and Analyst

Yes. Thank you. I wanted to follow up first with the question on the order intake because that would have also been a question from my side, what Klas asked already. because when I look at Q4, you have a very good pipeline. I think the dairy, the brewery market oppose further improving. You have a good seasonality and yet you're guiding orders below the level you had in Q1, Q2. So is there just kind of a safety discount you make to the pipeline you have because of some macro uncertainties similar to Q2, Q3? Or anything else we would have to keep in mind on that guidance. That's the first one.

S
Stefan Klebert
Chairman of the Executive Board & CEO

Yes. Thank you, Sven, for the question. I think there is nothing which should worry you or concern you. I mean, we have, of course, always the situation that we have some larger projects in the air, and that is always not sure will they be booked? And can they be booked in December? Or might it be January? So this is maybe the reason why we are here a bit more cautious. And you know that we don't want to promise anything which we cannot deliver.

S
Sven Weier
Executive Director and Analyst

Okay. That's what I thought already. Second one is just, I mean, obviously, now in Q3, the operating leverage has probably been distorted by a few things and quite impressive, of course. But when you look at the backlog that you have in place for next year already, what kind of normalized operating leverage should we see out of that mix? That's the second one.

S
Stefan Klebert
Chairman of the Executive Board & CEO

I mean we are struggling -- your question, what could you maybe a bit more precise that we understand it better, what you mean?

S
Sven Weier
Executive Director and Analyst

No. I mean, when I look at the incremental margins you had on the incremental sales in Q3, obviously, quite some nice operating leverage you had, but I guess that's not a normalized level. So just thinking around the margin quality of the 2022 backlog and what kind of incremental contribution you should have out of that? Is that the normal kind of, I don't know, 20%, 25% or -- and if you could keep in mind?

S
Stefan Klebert
Chairman of the Executive Board & CEO

I think in that area of 25%, it should be.

S
Sven Weier
Executive Director and Analyst

Okay. And the last one is just on your -- just a housekeeping one on your D&A. I think you guide for EUR 200 million, including PPA. But now after 9 months, you're only running at EUR 137 million, so EUR 40 million less than last year. So isn't that EUR 200 million a bit on the high side and implying too much for the fourth quarter? Should it not be lower than the EUR 200 million?

M
Marcus A. Ketter
CFO & Member of Executive Board

You mean the depreciation amortization EUR 200 million for the last quarter? Let me just clarify.

S
Sven Weier
Executive Director and Analyst

Yes. I think you're guiding EUR 200 million for the entire year, including PPA. And I think after 9 months, you had EUR 137 million, so quite a bit lower than last year. So I was just wondering if you really think you get to EUR 200 million for the full year and in Q4.

M
Marcus A. Ketter
CFO & Member of Executive Board

Okay. I understand your question. Okay. Yes. Well, probably a bit lower than that, actually.

S
Sven Weier
Executive Director and Analyst

So the quarterly run rate we had of around EUR 40 million something is that...

M
Marcus A. Ketter
CFO & Member of Executive Board

Yes. That's probably more like it. So between EUR 160 million and EUR 180 probably. That's what's going to come up.

Operator

And our next question comes from the line of Daniel Gleim.

D
Daniel Gleim
Director

First one is for Marcus with regards to the net working capital of 7% in the third quarter, how big is the number of the safety stocks within that 7%?

M
Marcus A. Ketter
CFO & Member of Executive Board

Well, we try to increase safety stock quite frankly, but the inventory didn't really move there because it's hard to get it for the production despite getting safety stock additionally on board. So we exactly looked at that. and inventory nearly stayed flat, quite frankly. So there's no increase of safety stock included in there.

D
Daniel Gleim
Director

When you spoke about the supply chain shortages that you mitigated so far, were you speaking about the third quarter or as of today?

S
Stefan Klebert
Chairman of the Executive Board & CEO

It's more as of today. I mean, as I said, it's our organization, I would say, is doing a great job in relation management to important suppliers. So the impact so far is very limited. However, we have to do some effort that this is the case, and it is very, very unforeseeable in the future. That is something which you might hear from many other companies because a lot of companies and suppliers, especially in the electronics business, they do not even confirm any delivery times anymore, yes, which makes it always difficult to predict.

M
Marcus A. Ketter
CFO & Member of Executive Board

So what we get is used for production.

D
Daniel Gleim
Director

Very clear. Maybe the last one, Stefan. I heard your comments on the fourth quarter order intake pipeline. Highly appreciated. Can we take maybe a step back and bigger picture look at '22 order pipeline? Is there anything that comes to your mind with regard to the sequential development. We had this discussion earlier this year with regards to the pandemic, how this prevents people from coming together and making decisions. When you speak with customers today in general, big picture, has the sequentially improved? Or is this the same situation? So how do you think about the order pipeline '22 compared to the order pipeline '21?

S
Stefan Klebert
Chairman of the Executive Board & CEO

I mean, what we can see that people and all the customers are getting more used to the pandemic. I would say, even if numbers are increasing, we are somehow back to normal. I mean our customers are having hygiene concepts in place, and it's -- everybody needs to take care and to follow the rules and you need to have a green pass, if you want to enter or plus came back from Italy where I was visiting customers and you always have to show your green pass, how they say. So this is, I would say, even if the numbers or despite the numbers are increasing and high life is a bit more normal, I would say, than it was 6 or 9 months ago when the numbers were the same size. So I see no significant, let's say, change in the behavior. It's not that I would say that we have to expect another pandemic hit in the first quarter. So this is not what I see despite increasing numbers.

D
Daniel Gleim
Director

So with regards to the absolute order level, there was no pull-ahead effect into '21?

S
Stefan Klebert
Chairman of the Executive Board & CEO

No.

Operator

And our next question comes from the line of Arsalan Obaidullah from Deutsche Bank.

A
Arsalan Obaidullah
Research Analyst

Actually, a little of what I wanted to ask has been asked. Just 1 or 2 more things. In terms of your -- the sort of concerns and sort of the risks to the logistics and the supply chain side that you are obviously looking at into the fourth quarter and into next year. Do you see a sort of greater exposure greater risk in certain divisions or end markets in terms of your delivery there? Or is it sort of evenly across the board? I mean some of your sort of products that are more exposed and therefore, you see more of certain divisions more risk than others? And then my sort of second sort of question is just a bit more on the increase in the operating cash flow. You obviously talked about the improvement with down payments and then also touched upon the sort of other element of about EUR 47 million. If you could just maybe give a bit more color on that, that would be great.

S
Stefan Klebert
Chairman of the Executive Board & CEO

Thank you. So I would say the supply chain issues are not different from division to division. However, it is different from the kind of component or products we purchase. So everything -- and there is a clear differentiation, everything which has to do with electronics in every product where a chip or electronic parts are included, this is really our main concern, and this is what we definitely might hear from all other producing companies. When it comes to steel or to other mechanical components, it's that we have to cope somehow with the problem or issue of price increases, which we, like I said, I think, can manage in passing on these price increases to customers, but there is not such a shortage or not that we see a similar situation. So to make a long story short again, it's rather focused and completely different depending on the product we purchase but not on the division.

M
Marcus A. Ketter
CFO & Member of Executive Board

Your second question was in regards to the operating cash flow, right? You were specifically asking here about the others EUR 47 million, right?

A
Arsalan Obaidullah
Research Analyst

Yes, yes.

M
Marcus A. Ketter
CFO & Member of Executive Board

These are accruals which have not been paid out yet. So they are as expense in the EBITDA and are not paid out yet. So what is that, for example, there's bonus accruals, which we are taking, which are not paid out yet, so they're expense but noncash items so far. So that's where the increase is coming. There are other crudes project related, for example, which we anticipate cash out, and they have been taken, but there is no cash out yet. So that's why this is add back to the EBITDA. Does that answer your question?

A
Arsalan Obaidullah
Research Analyst

Yes. It does. And so would you say that sort of going forward then is that somewhat anomalous for the quarter? Or is that -- obviously, the bonus of call is probably is, but in terms of the project-related ones, is that something there will be a higher run rate going forward?

M
Marcus A. Ketter
CFO & Member of Executive Board

Yes. We don't have that actually every quarter. And sometimes, we have the other way around, where we pay out accruals which have already been expensed in prior quarters, and then you will see the others actually turning negative here because you have the cash out of already existing codes. So if you take a look at the different quarters, that varies growthy.

Operator

Stefan Klebert, please continue with your final remarks.

S
Stefan Klebert
Chairman of the Executive Board & CEO

Yes. Okay. So thank you, everybody, for joining us and for your interest in GEA. I hope that we could show you that GEA is really on a good way and a good development. So what are the key takeaways from today's presentation. I would say, first, we have the fifth consecutive quarter of strong order intake of -- and further organic sales growth and margin expansion. That is, I would say, remarkable, and we are also very optimistic that we can continue like that. Secondly, we continued with a strong ROCE improvement. And also, we see have a very good cash flow development. And thirdly, and this is I think also important, we feel comfortable with our outlook for the year 2021, and we clearly confirmed our guidance. And with our Mission 26 employees, which we discussed and explained 1 month ago in London, we feel very, well prepared to improve the profitability and the growth rate of the company further until the next 5 years. And yes, that's why we believe and then GE is really good and interesting investment.

Operator

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