GEA Group AG

XETRA:G1A

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the GEA Group AG Q3 2022 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to turn the conference over to your speaker today, Oliver Luckenbach, Head of IR. Please go ahead, sir.

[Oliver Luckenbach, executive]

Yes. Thank you very much, Sharon. Good afternoon, ladies and gentlemen, and thank you for joining us for our third quarter 2022 earnings conference call. With me on the call are Stefan Klebert, our CEO; and Marcus Ketter, our CFO. Stefan will begin today's call with the highlights of the third quarter. Marcus will then cover the business and financial review, followed by Stefan for the upgraded outlook for financial year 2022. Afterwards, we open up the call for the Q&A session. As always, I would like to start by drawing your attention to the cautionary language that is included in our safe harbor statement as in the material that we have distributed today.

And with that, I hand it over to you, Stefan.

[Stefan Klebert, executive]

Thank you very much, Oliver, and good afternoon, everybody. It's my pleasure to welcome you to our conference call today. Let me start with a quick review of the third quarter of '22. We guided for EUR 1.3 billion to EUR 1.4 billion order intake and ended the quarter in the upper half of the guided range at EUR 1.37 billion. This represents a year-over-year growth of 1.6% in reported or a slight decline by 0.7% in organic terms. The organic decline is not a reason to worry. Last year's order intake included a record level of large orders driven by one of the largest single orders of the company's history, the Novozymes order in new food. Furthermore, please bear in mind that we are preliminary focus on margin rather than on volume.

Sales grew organically by 10.2% year-over-year, marking another record for at least 10 years. Does this growth rate mean that the supply chain challenges are now finally resolved, unfortunately not? Compared to the prior quarter, the situation has not deteriorated but also not gotten materially better. We as well as our suppliers can handle the supply chain challenges now better than earlier this year. Thus, we stick to our assumption we gave in March that we expect the situation to improve by year-end. Coming now to EBITDA before restructuring expenses as a result of the strong organic sales growth, EBITDA improved by almost EUR 30 million to EUR 199 million. The respective margin improved by 0.5 percentage points to 14.7 also represents a new record level for a second quarter.

Finally, return on capital employed. We crossed the 30% mark and reached 30.6% on the last 4 quarter basis, an improvement of 6 percentage points year-over-year and now exceeding the upper end of the guided range of 24% to 30% of the current fiscal year. In total, another good quarter despite an ongoing challenging environment, but we got increasingly used to those challenges. Thus, we upgrade our guidance for the group for fiscal year '22. I will explain the details in some minutes.

Let me now provide you some information about the impact of rising energy prices on GEA. As a first reaction to the sharp increase in energy prices, we implemented energy saving measures. Despite the strong organic sales growth, we were able to reduce our gas consumption by 9.1% during the first 9 months compared to last year. Electricity consumption declined by 1% year-over-year, and this improvement looks low at the first glance. However, one should bear in mind that the electrification of our company cars increases electricity consumption. I believe these are great achievements as these savings are sticky and sustainable. Regarding energy prices, as per today, we have fixed the prices for entire Q1 '23, and we have also already fixed the prices for 50% of our energy consumption of Q2 '23.

The first quarter is the most energy-intensive quarter and as we have secured the prices for it, we can already now better estimate the potential impact from the current price development for energy for entire full year '23. The expected additional cost for energy in '23 compared to our assumption for '22 can amount to EUR 20 million to EUR 25 million. This would require price increases on our total portfolio of up to 0.5%, which is absolutely digested. But we are not only looking for energy efficiency improvements at our own factories and offices. We are also developing solutions for our customers to cut their energy bill and emission.

We developed a completely autonomously operating feeding robot. It offers numerous opportunities for dairy farmers to reduce their operating costs. As it runs fully on electricity and most of the farmers have solar panels installed, they can significantly reduce their requirements for fossil fuels, cutting fuel builds and emissions. Furthermore, the amount of feed waste can be reduced and also the amount of required labor to run a dairy farm. The new feeding robot can be integrated into cement, environment with ease. So in total, it adds to automation on a dairy farm, it makes life for farmers easier, while it cuts costs and emissions at the same time. The automated feeding robot is, for us, another great example, our new product innovations are a great contributor to achieving our mission target.

Moving on to the next slide with focuses on the sustainability pillar of our Mission 26. In October, Jon the Berlin Institute of Supply Chain Management Sustainability Award 22 in the category operations, we were honored for the contribution at Innovent's new Smoothie production facility in Rotterdam, Netherlands. At this facility, a smart waste heat recovery system, along with other energy and water-saving measures was installed. This enables Innovent’s to reduce waste stream and product losses achieving a carbon-neutral production.

And on the right side of this chart, you can see that GEA is one of the very few finalists. We are nominated for the German Sustainability Award for the 15th German Sustainability Award, which will hand it over to the winner at the 2nd of December. That's a very important award, even the German Chancellor will come to hand over the price, and we are one of the finalists and let's cross fingers that we will win the award. But at the end, even to be a finalist is a big, big success here. So this are another great example of how our solutions contribute to a more efficient use of our given resources.

Let me now provide an update on our share buyback program. In short, we are almost done with the program, but let us have a look on the detailed numbers. As per October 31, the most up-to-date figures and not as per end of Q3, we repurchased so far 7.8 million shares and spent EUR 286 million. This means that we paid EUR 36.74 per share on average so far. As there are just EUR 14 million left to be spent, it is highly likely that you will see an announcement with the completion of the share buyback program very soon. And with that, I hand over to Marcus.

[Marcus Ketter, executive]

Thank you, Stefan. Also, warm welcome from my side. Starting with the headline numbers of Q3 2022. Order intake declined organically by 0.7% year-over-year. Last year's quarter included a record figure of EUR 167 million of large orders exceeding EUR 50 million in single ticket times. This year, these orders stand at EUR 128 million year-over-year, lower but still a very good result. Organic sales growth was strong with 10.2% year-over-year. All divisions delivered a solid organic sales growth, except for Farm Technologies as the supply chain challenges are still present. In this quarter, especially from Technologies was effect.

The strong organic sales growth translated into higher EBITDA before restructuring expenses, which improved to EUR 190 million as Stefan just explained. Due to the further improvement of EBIT during the last 4 quarters, ROCE considerably increased. On a year-over-year comparison, capital employed remained flat. Net financial liquidity decreased to EUR 235 million from EUR 358 million due to the increase of our net working capital and the financing of our share buyback program. During the last 4 quarters, we spent EUR 205 million on our share buyback program. So all in all, Q3 2022 was another successful quarter and a still challenging environment.

Looking a bit deeper into the group performance. Order intake grew to EUR 1.37 billion, as already discussed. In terms of end markets, dairy farming, dairy processing and chemicals stood out with double-digit growth rate. M&A remains a headwind due to the disposals at heating and refrigeration technology. Organic sales grew by a strong 10.2% year-over-year. This growth was once again driven by the service business, which grew organically by 14.5%, but also the new machine business grew by a very satisfactory 8.1%. This results in a further increase of our service sales ratio by 0.8 percentage points to 34.5%. EBITDA before restructuring expenses improved, which was mainly due to higher volume and a slight improvement of gross profit margin, especially from the service business. The increase in gross profit was able to more than compensate for the operating cost increases.

Now let me continue with the figures for Separation & Flow Technologies. Order intake grew organically by 1.8% year-over-year. The customer industry's new food, dairy processing and chemicals acted especially as growth drivers. The pipeline for dairy processing looks promising, driven by demand for medium-sized and replacement projects. In chemicals and pharma, demand is generally very favorable, but there is some risk for postponements due to the geopolitical situation. Energy is positively impacted by the high fuel prices and beverage is improving with breweries acquiring for replacement solutions.

Organic sales grew by 11% year-over-year, driven by the strong organic service sales growth of 16%. Despite the ongoing supply chain challenges, new machine sales grew by 7.1%. The service sales share increased by 1.8 percentage points to 45.7%. Forward-looking, the preconditions for further sales growth are good as the order backlog remains on a record level at now EUR 652 million. EBITDA increased by EUR 11 million to EUR 95 million. The EBITDA margin, however, slightly declined from last year's high level of 26% to 25.2%, also due to ramp-up costs related to the shift of production volume to our new factory in Comas. Overall, gross profit grew and more than compensated the increase in operating costs, resulting in a solid Q3 performance.

Let's move on to Liquid & Powder Technologies. Order intake declined organically by 14.2% year-over-year, large orders with a single ticket size of more than EUR 50 million remained almost unchanged year-over-year. Bearing in mind that last year's large order intake included the Novozymes order, which we have often talked about and was in the very high double digits. This year's large order intake is actually a very good figure. The order intake decline came from orders below EUR 5 million in single ticket size. Here, especially the customer industry beverages were the contributor, which reached a record figure in that order bracket last year.

Looking forward, the pipeline across all markets looks still good. On a few occasions, we might see some delays in order placement, but this is not a widespread observation. New food stands out in a positive way. Here, the pipeline looks very positive. As we received many questions about the pipeline for new food during the last month, let me give you some more background information. Some listed new food pure plays are experiencing a declining demand for plant-based food and drinks. This is, however, not a huge concern for us for the following reasons. First, we do not only serve the pure plays, but also the established food producers as they would like to expand into the new food arena as well. Second, the market is divided into 3 different segments or generations as we call it.

The first generation are the plant-based alternatives such as burgers, Forged, drinks and so on. This has developed a somatic daily business for us. The second generation are highly complex technologies needed to derive plant-based ingredients. The Novozymes project in last year's Q3 is a good exam. These ingredients are needed to improve the texture of the plant-based food products. The final third generation is cell-based food production, like the second generation, highly complex and thus likely to come with large single ticket size.

So what is currently going on in the market. We still see good demand for technology for the first generation of new food products. The second and the third generation are now gaining traction. The large Novozymes order in last year's Q3 was just the beginning. This does not mean that we will see every single quarter a high double-digit order in that segment being placed, but we do see a very healthy project pipeline, and we feel very comfortable with our target to achieve EUR 400 million new food-related order intake in 2026. I hope that helps you to better understand the dynamics in the new food market.

But coming now back to liquid and Powder Technologies quarterly results. Organic sales increased by 8.4% year-over-year. The service business contributed again strongly with an organic growth of 12.5% year-over-year, but also the new machines business grew solidly by 7.3% on an organic basis. The service sales share rose by 0.3 percentage points to 20.6%. Going forward, sales should continue to grow solidly as the backlog marked a record level with more than EUR 1.5 billion. EBITDA before restructuring expenses increased by EUR 5 million to EUR 49 million, the respective margin, however, declined slightly by 0.1 percentage points to 11%.

Continuing with Food & Healthcare Technologies. Order intake decreased organically by 0.2% year-over-year. The decline is due to last year's Q3 included 1 large order amounting to EUR 33 million. In Q3 2022, no large order was booked, the healthiness of the pipeline remains positive and has not materially changed compared to the prior quarter. Also, there's no customer industry or technology out or underperforming compared to the average. All in all, a health picture.

Organic sales grew by 13.3% year-over-year, both servers as well as new machines grew by double-digit growth rates. Service sales increased by 15.6% year-over-year and new machines by 12.4%. And this was achieved despite the ongoing supply chain challenges. The service sales ratio improved by 1 percentage point to 0.9%. Forward-looking, the business sentiment remains positive with order backlog, just a touch below the record level reached in Q2 2022. EBITDA before restructuring expenses improved by EUR 3 million to EUR 29 million, but the respective margin dropped by 0.4 percentage points to 11.1%. Gross profit increased, but operating costs increased as well due to supply chain challenges, higher personnel as well as high-tier.

Moving to Farm Technologies. Order intake continued its solid organic growth rate of the prior quarter. Orders increased organically by 11.8% year-over-year and were driven by higher demand for all product categories: services, conventional as well as automated milking -- the price development remains on a favorable level of. However, they need those high prices to compensate for the headwinds from increasing costs for feed, fuel equipment and now also increasing interest rates. Nevertheless, we do currently not see a dramatic change in order behavior.

Organic sales increased by just 0.4% year-over-year. Our service sales grew by an astonishing 19.6% organically. New machine seats dropped by 12.8% due to supply chain challenges. But surprisingly, this development has a strong impact on the service health ratio, which increased by 7.6% year-over-year to 48.2%. Order backlog remains close to the record set in the prior quarter and send us EUR 350 million. A good sign for further search growth, but depending on the availability of supply. EBITDA increased by EUR 1 million to EUR 26 million, with respective margin declined by 0.5 percentage points to 13.6%.

Finally, let us turn to heating and refrigeration technologies. Reported order intake declined by 9.4% year-over-year due to divestments. The organic order intake figure, however, increased by 9.7%, driven by orders between EUR 5 million and EUR 50 million in single ticket size. The general environment has not changed. Decarbonization remains a driver for our business favoring demand for heat pops. Furthermore, the high energy prices drive the demand for energy savings solutions.

Organic sales increased by 15.7% year-over-year and represents the strongest growth, heating and refrigeration technologies as ever achieved in a single call. contrary to the other divisions, it was not the service business, which was the main growth driver. New machine sales grew organically by an impressive 23.6%, while service sales grew organically by 5.5%. Thus, it should not be a surprise that the service sales ratio declined by 8 percentage points to 35.7%. EBITDA before restructuring expenses declined by EUR 1 million to EUR 6 million, and the margin declined by 0.5 percentage points to 11.5% due to the missing business in Russia.

Closing the division of Chapter now. All divisions, except for heating and refrigeration technologies increased the EBITDA before restructuring. As in the prior quarters on a reported basis, only heating a refrigeration had lower sales in the quarter due to the divestments. Our divisions, again, except for refrigeration, increased their gross profit mostly due to higher volumes. Operating costs increased and were predominantly driven by higher personnel and travel expenses.

In total, EBITDA before restructuring increased to EUR 199 million from EUR 170 million. Excluding the translational FX effect of EUR 8 million as we have defined it in our full year guidance. Our EBITDA would have still improved by EUR 21 million to EUR 191 million. As always, after the divisional chapter, I'll provide an update on our net working capital development. Net working capital increased by EUR 130 million to EUR 446 million or by 1.7 percentage points to 8.9% of last 4 quarter sales.

As in the prior quarters, the increase is due to a higher inventory level, which itself results from ongoing supply chain shortages. As you know, the shortages led to higher levels of finished goods as well as working programs. Furthermore, reduce the impact of shortages on our ability to execute orders, we are building up safety stock and thus raw material levels have increased. The increase in trade receivables is owed to an expansion in business activity.

To sum it up, the increase in net working capital is not causing any concerns to me. As soon as the supply chain challenges face our inventory levels will decline as well. The inventory driven increase of net working capital is, of course, an impact on our free cash flow. Operating cash flow was EUR 146 million and below last year's figure of EUR 240 million. The decline is explained by the higher net working capital I discussed earlier. Last year, net working capital was a source of cash with an inflow of EUR 50 million. This number reversed to an outflow of EUR 67 million this year.

Furthermore, cash out for taxes was also EUR 2 higher than last year. CapEx related outflow is EUR 50 million higher than last year, resulting in EUR 41 million. The increase is mainly due to investments into our new plant in Comas in Poland and higher replacement CapEx. In total, free cash flow is worth EUR 103 million below last year's figure of EUR 250 million.

Our free cash flow conversion ratio before restructuring trended downwards during the last quarters and stands now at 50% on a last 4 quarter trailing base. The negative trends during the last quarter is solidly explained by the increase in outflows for net working capital, which I just mentioned. Net cash, including lease liabilities decreased from EUR 264 million at the end of the second quarter to EUR 235 million. The net cash flow of EUR 84 million could not fully compensate the cash spend on our share buyback program of EUR 114 million.

Let me now talk about our financial headroom. On the left, you see our available cash quality lines as well as the respective utilization and maturity structure as per end of September 2022. Apart from minor changes in the volume and the utilization of the EUR 64 million evergreen credit lines, nothing has materially changed compared to the prior quarter. Continuing now on the right side of the slide. Compared to last year's Q3, the financial headroom declined by EUR 100 million.

The reason is explained by the cancellation of an unused credit line with the European Investment Bank of EUR 100 million. The decline in net liquidity is due to the increase in net working capital and the share buyback program mentioned earlier. Adjusted for the buyback, the net liquidity position, including lease liabilities would amount to EUR 440 million and be significantly above the prior year's level of EUR 358 million.

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

[Stefan Klebert, executive]

Thank you, Marcus. So with that all being said, we upgrade our guidance for the full year '22. Until now, we expected organic sales growth by more than 5 years of year. And given the development during the first 9 months, we increased our organic sales growth target for the full year '22 to more than 7%. For EBITDA before restructuring expenses, we confirm the range of EUR 630 million to EUR 690 million, but aim for the upper end of this range now. As you know, this range assumes constant exchange rates. During the first 9 months of 2022, the FX effect was at EUR 17 million positive. Our target for return on capital employed has also been upgraded and we now expect to reach the upper end of the guided range of 24% to 30%. Regarding inflationary headwind, we stated in the prior quarters that the net inflationary impact on purchasing ranges between EUR 120 million and EUR 140 million. We confirm this figure as the picture has in this regard, not materially changed.

Let me close my presentation with this slide, dear investors and analysts. Thank you very much. We received a lot of feedback during the last 3 years on how we have improved the credibility of GEA's equity story and how we could do better. We highly appreciated any feedback from you -- and during the last years, we have improved our reporting and how we communicate with capital market participants. And this was now rewarded with Manager Magazine's Investor Starling Award among the MDAX companies we ranked first. Almost at the same time, we learned that we are ranked in the institutional investor survey. third among all small and mid-cap European capital goods companies.

Ladies and gentlemen, thank you very much for voting for us. This is a motivation to keep on delivering on our promises. And this concludes my presentation, and I hand back to Oliver for the Q&A.

[Oliver Luckenbach, executive]

Yes. Thank you very much, Stefan and Marcus. Gary, please be so kind and open up the line for the Q&A session.

[Operator]

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

[Klas Bergelind, analyst]

So the first question I had was on the pricing, both on orders and sales. if you could let us know if the levels were very different versus the second quarter, I get it to 6%, 7% pricing on orders and around 4% on sales. And to what extent you are hiking now again Stefan given that wages are creeping up, which is likely to be a bigger year-over-year headwind in 2023 versus 2022? And how do you feel about price versus wage compensation into next year? I'll start there.

[Stefan Klebert, executive]

Klas, I mean, what we see in the order intake is -- it's not so easy because we are not only selling components, but we -- our best guess best estimate is that we see about 6% coming from prices in order intake, while in sales, it should be around 3% to 4%. If we look to the next year, it is very clear that we have to continue with our pricing activities. And by the way, I think you can also see it in the margins. I think we are one of those companies who really manage pricing very well because that is also what you can see at the moment, there is the world of companies differentiate in those who are really good in pricing and those who missed it or started too late.

So I think in GEA, we did it really well. We need to continue. We will continue and increase prices. And that, of course, depends on the wages headwind at the moment. I mean, 1/3 of our staff is in Germany, and there are still negotiations going on between the trade unions and let's see how this will end up, but headwind from wages will, in '23, definitely be higher than compared to '22. That's our expectation. And of course, we need to factor that in, in the prices. We also have clear actions planned for the fourth quarter already, and we will continue to increase our prices to that level which is necessary.

[Klas Bergelind, analyst]

My second one is on orders; you typically comment on orders here for the next quarter. I'm wondering if you could give a comment now. And then if I look at current orders, you're down mid-single digit, a bit more in volume terms then. And I want to assume in on separation and flow where orders are down 10% quarter-on-quarter when I strip out the 10 million of large orders you had in the second quarter. Is there any softness here on the shorter cycle business through the quarter? Or is this just off a tough compare as you see it?

[Stefan Klebert, executive]

Yes. I mean you know that it is sometimes very difficult to really judge on a quarterly basis, the business of a company like ours that is -- I mean, SFT is also -- they had a very, very strong start with large orders in the first quarter. And I mean, when we look at the pipeline, to be honest, we don't see any material changes here. However, I mean it's -- we are living in the same world like everybody. And of course, '23 might be a year based or let's say, impacted by a recession in many countries. So let's see how it will end up in next year. But so far, I can say we do not see any material change in the pipeline.

[Klas Bergelind, analyst]

Okay. No, that's good to hear. My very final one is on the margin, Stefan. It looks like you're going to hit 15% in the fourth quarter given your guide. That's your 2026 margin target and 15% is in a seasonally strong fourth quarter, but nevertheless, it illustrates solid progress. Can you talk through some of your initiatives here to improve margins further in 2023? And I'm talking beyond just hiking prices to compensate for wage inflation. We know about peculiar manufacturing. But what about the sales excellence initiatives, your ambition to lower SG&A in the equipment business and so forth? That would be really helpful.

[Stefan Klebert, executive]

Okay. It's a very, very comprehensive question, let's say, because there's a lot of activities going on to improve margins further. I mean you know that we just opened our new factory in Koszalin. We are about shifting production to Koszalin -- so that also means that in '23, we will see a bigger impact coming out of level of manufacturing costs here, for instance, that is one example. We have a lot of initiatives in service going on where we push service activities in various countries, not only by pricing also by having more pressure on the field.

For instance, sales effectiveness is also a large project where we have employed additional salesmen, and we anticipate and expect that next year, therefore, we will have the higher growth rates here. So it's a mix for many, many things and a lot of activities are going on here. And I think what you can see that we -- like you said, we are very well on track to achieve our Mission 26, and we are very optimistic that we will have this 15% margin or beyond latest in '26. I missed one of your questions before that you also asked for the order intake guidance for Q4, which is meanwhile, Gear happy that we do so. And we also expect a very good order intake for the Q4 in the area of EUR 1.3 billion or a little bit above. So that we, at the end, we'll see a solid growth for the full year.

[Operator]

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

[Sebastian Kuenne, analyst]

My first question is on your comments of potential project delays. I know you said you expect a strong Q4 order intake, but you also say there's potential project delays. What would that refer to? that would be my first question. And then you mentioned that in LPT last year was driven by strong investments for beverage, but that this seems to be not recurring? And are there some issues with specifically with the be sector with the brewing sector that you see coming up given that the cost of brewing are going up so strongly?

And my last question for now regarding your order backlog. You seem to reprice it based on the currency environment. So the backlog goes up a bit stronger than your order intake would indicate. I was wondering if you were to clean up these numbers, are there any cancellations that you currently see? And what is -- how do you see the risk of cancellations going forward.

[Marcus Ketter, executive]

Okay. A lot of questions. I try to answer the questions here. I mean, project delays are -- or let's say, like that when we negotiated with customers about large projects, let's say, 30, 50 or sometimes even EUR 100 million or we also have projects in the pipeline with a 3-digit number. It is almost impossible to predict in which quarter the customer will make finally the final decision and when we can book it because we book it only when we also normally have ensured the down payment, and we can be sure that the financing is there.

And of course, in a volatile world, which we are all living in at the moment, this is even more difficult to predict. We see customers thinking twice. Should we do it? Should we do it in that size and so on. But -- and therefore, it's very difficult to predict on a quarterly basis, this kind of large projects. However, what I can say, we have still a very solid pipeline. There is no material change. We don't see any downswing here or that customers are not approaching us to start new projects. And that is also quite understandable because I always like to say, as you know, as long as we have human beings on the earth who need to eat and drink something. I mean our business model is quite safe because our customers, they will continue to produce food and beverages.

Another question was with the backlog and the cancellation. We have almost 0 cancellations, I would say. It is happening very, very well, and it's extremely seldom. And there is nothing which really will impact us and did impact us in the past as well. LPT benefited from mainly from dairy processing and also from chemicals. This is where we saw quite good order intake during this year. Beverages were not as strong as we might have expected, but mainly from dairy processing and chemical, we had very good I could say other situation here.

[Sebastian Kuenne, analyst]

And maybe one quick follow-up. On the dairy business, which is the 30% to 35% of your revenues. You indicated in the previous call that you don't see the risk from down trading down of customers switching out of cheese, for example. But at the same time, we hear comments from Danone that say they started seeing volume impacts due to the high inflation of dairy products. So basically, did they see some of their volumes squeezed in the market. Why do you think this won't affect GEA much?

[Marcus Ketter, executive]

I mean the question would be what is the alternative for the population. And I mean, all the market intelligence we have, so it's very clear that there is an increasing demand for dairy at least for the next 10 years. This has to do with the growing population and with the growing middle class, it is sometimes -- we have sometimes, let's say, being European, a different picture, a different view because we hear a lot of all this vegan and vegetarian alternatives, enjoy milk and oat milk and things like that.

But if you see the world as a whole, and you know we -- of course, we are a very international business and doing a lot of installations also in Asia. There is no question mark that dairy might not be in a growth scenario for the next few years, yes. I mean we are very optimistic that this trend of growing demand for dairy will continue.

[Operator]

And your question comes from the line of Max Yates from Morgan Stanley.

[Max Yates, analyst]

Just my first question was around costs going into next year. And I think we can sort of all -- you've helped us with the energy costs. We can all make an estimate on wage costs. But I just wanted to understand what you're seeing in your components because you've always talked about sort of direct raw materials is a big part of your purchasing. It's mostly components. And so as raw materials have sort of rolled over and weakened, have you seen your component costs peaking?

Or are they actually still rising because of costs like energy and energy for the people that produce your components. So I guess that bit that is more difficult. How are you seeing that cost evolve? And is there any feeling of costs at these levels, what that kind of growth or what that net cost headwind, the sort of 120 million to 140 million that you had this year might look like for next year?

[Stefan Klebert, executive]

Yes. We expect that also this will continue. We also expect that we have to pay more for components. It might be slightly below what we saw this year, but not so significant because we believe and we think that the inflation will continue that this is -- will also be factored in. It depends, of course, on the overall demand. There might be suppliers which are also selling to highly volatile businesses which might decline during a recession next year, and therefore, they come under big pressure, and we could save money here, but we are prepared for a continuous headwind also on the supplier side.

[Max Yates, analyst]

Okay. But would it be fair to say if we were trying to calculate your gross cost sort of increase next year, the major components would really be things like wages and energy. -- and maybe the components costs in aggregate would be more level. Is that the way you're thinking about it? Because obviously, you have to make assumptions to price in a-- I mean energy doesn't play such a big role in our company, as I showed in one of my first slides, if you compare the total energy cost to our components we saw that's much, much more components we source.

[Stefan Klebert, executive]

I mean energy this year, we will spend this year about EUR 35 million to EUR 40 million for energy and the total spend is about EUR 2.6 billion, EUR 2.7 billion. So that's a completely different number. We -- in our cost calculation basis and what also will be factored in our pricing is, like I said, that we expect that that the headwind from our suppliers continue. We prepare for the worst, let's say, when we do the pricing and let's see how successful we can be in all the negotiations that also might depend heavily on the demand of our suppliers.

And as I said, if there is a recession in other machine-building markets, which are more volatile, let's talk about automotive industry, automotive sub-suppliers. So we have a lot of suppliers who are also delivering to these industries. And if they are facing a large decline here, it might, of course, have a kind of impact on the pricing they offer to us.

[Max Yates, analyst]

Okay. And just maybe a quick follow-up for Marcus. I just want to understand a little bit better on the working capital and sort of what the messaging is here because on the one hand, your working capital to sales is now kind of in the middle of your target corridor. But obviously, there are specific reasons around supply chains why it has gone up.

So how should I interpret the direction of working capital here? I mean is this level -- I mean it doesn't feel like this level from your comments is kind of what would be viewed as normalized. So it would suggest that you can improve from these levels as supply chain eases, but obviously, your guidance would say something else. So I'm just trying to sort of square those 2 things and how we should think about as a percentage of sales, the working capital trajectory from here?

[Marcus Ketter, executive]

So our range was 8% to 10%, and we were very careful with that at the beginning of the year. As you know, at the end of last year, we had a 5.1 percentage points. And as for many to revisit our guidance range. And at that time, we said, well, it's going to be -- it's going to be an easy year for net working capital. And it shows it was not for the increase for from 5.1% to 8.9% there. So we are fine with the range of the guidance that we have given because we have foreseen that work in progress would increase and also inventory we need to increase looking at all the supply chain challenges, which are out there.

The supply chain challenges are not increasing. Right now, we see that they are starting to lighten up the and that's why I said in my presentation that we think that we will be able to decrease inventory again, when we look at safety soft levels for materials, which were hard to get and now might start to be more plentiful in the market. And therefore, we are not adjusting the range yet because it's not a blue sky scenario out there. However, as I said, we see potential to reduce the 8.9% network capital sales ratio. Again, if that's going to be already in Q4. I can't promise, but it's not getting well. So I expect that network capital ratio has selling out.

[Operator]

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

[Sven Weier, analyst]

The first one is on the statements you've made in earlier quarters, right, that Q4 would actually see the highest organic top line growth rate, maybe also because by Q4, you would have assumed a little bit of improvement in supply chain. I was just wondering if you still see that, that Q4 should have the right organic. That's the first one.

[Stefan Klebert, executive]

Okay. Sven, good question. I mean, when we met last time or during the last call, the sentiment was, of course, that the shortages in the supply chain area, let's say, reducing month by month or week by week. That's still somehow the sentiment and the feeling. However, we have to say looking back now one quarter, the expectation was a little bit better, I would say, that there is a bit more relaxed sentiment in the supply chain.

We are still struggling with a lot of suppliers to manage all the deliveries. So it's -- it might need a bit more time than originally expected. Let's see how Q4 will end up, but it's -- we are 7 or 8 weeks ahead of Christmas. So I would say, maybe next year, it is really coming to a hopefully, more normal situation, but it will remain a challenging Q4 in terms of executing backlog and get everything delivered we request.

[Sven Weier, analyst]

Yes, because if I take just the 7% organic, and I appreciate you guide more than 7 that would only imply low single-digit organic in Q4, but I guess it's going to be not so slow.

[Stefan Klebert, executive]

Yes. I mean that's like you know us and like we said, we are guiding for larger or more than 7%, yes. That does not mean that we believe it's 7. the end. Yes.

[Sven Weier, analyst]

And then the other one is when also when I followed the top line guidance, the order guidance that you've thankfully given again, you look like you could be ending up with a backlog that is maybe EUR 500 million, EUR 600 million higher at the end of the year. And so obviously, quite a good starting point for organic growth next year. I know your medium-term guidance is 4% to 6%, but it looks like it could be another year of above average growth, assuming a flat order pipeline.

[Stefan Klebert, executive]

Yes. Yes, that's a very good point. Sven also here, I can confirm what you say or what you think. We will start definitely with a much higher backlog into '23 compared to the backlog we had to start in the year '22. And that, of course, will give us opportunities to grow again with a solid number or maybe also accelerate growth. Let's see. That depends, of course, also on the supply chain issues. I mean, if this -- if all the problems will be solved sooner or later, that gives us certain opportunities for next year.

[Sven Weier, analyst]

And maybe the last question I had was coming back a little bit on the new food applications and maybe in particular, the fermentation area because that was attending transact in September, and I felt there was a lot of excitement also around fermentation, applying the -- which is more a brewing technology, right, but also applying that in new food, a lot of pipeline and also for more energy autonomous solutions for the brewers.

So yes, maybe you can deep dive a little bit more on what you see on the fermentation side. I mean you already said it's a structurally good market, but it seems to me that it's really rising at the moment and then also what you can offer to your clients on the brewing side in terms of energy autonomy with reusing the bioenergy basically in the breweries.

[Stefan Klebert, executive]

Yes. I mean our fermentation is, of course, one of our key competencies we have and gears a lot of knowledge and know-how here in that area also coming from the biopharma business, for instance. We have also here interesting, let's say, quotations out and discussions with our customers here. But as I also said before, this is sometimes a very, very long road to develop together with our customers, the right solutions. But as I said before, there are some really very, very interesting topics we discussed at the moment with customers in the new food area, which might be interesting.

Energy savings for breweries, that's always a topic very clear. We are working on innovations here as well. You might remember that I also explained here, I think it was the last call that we are also using our heat pumps in combination with the spray dryer for instance, to offer energy saving solutions. All our business units, they have very clear targets, what they need to achieve in terms of innovation for energy saving because this is, of course, a big, big topic. And above all in breweries, especially having in mind the high energy costs. So that's also on our agenda, very clear.

[Sven Weier, analyst]

And maybe I can squeeze in a very final one, just on the buyback. I mean you said you're kind of done. And I think in the last call, you said you're generally open to do another one. So I guess that's still the loss true.

[Marcus Ketter, executive]

Well, we have not made any decision yet we're going to set up a new share buyback program. We haven't said no, but there's been no decision made on that yet. Plus, we're going to finish that current program, which is still a bit ongoing.

[Operator]

And your next question comes from Akash Gupta from JPMorgan.

[Akash Gupta, analyst]

My first question is on service growth, which accelerated in Q3 to 14.5% organic from 13% in Q2 and almost 9% in Q1. Maybe if you can talk about sustainability of service growth. What is driving it? And how do you expect service growth to progress in the next few years, next couple of quarters? And was there any one-off in Q3 to explain this high level of service growth? That's question number one.

[Stefan Klebert, executive]

Okay. Thank you, Akash. I mean service now; we spoke about that also during the last call. This is one of our Mission 26 pillars. This is where we have a lot of activities going on. And we believe and we trust that this growth, what we see in service is sustainable also in the Mission 6, we promised that we want to grow faster with service than in total for the company. There are a lot of activities going on. As I said, in all this business unit. It starts with pricing activities. It continues with putting more feet on the street that we employ field service engineers. There is a lot of opportunities which we can convert into sales here. So we are very optimistic that this continues and that we also see a growing and a faster-growing service business compared to beer overall.

[Akash Gupta, analyst]

So just to clarify, you think that the mid-teens level of growth can continue in the future?

[Stefan Klebert, executive]

I mean, we guided in the Mission 26 for our growth in service, 5% to 6%. This is what we promised, yes.

[Akash Gupta, analyst]

Okay. So basically, the growth will come down to 5% to 6% from these high levels.

[Stefan Klebert, executive]

Not necessarily. I mean, of course, it also depends how inflation continues, because this also might have an impact here. But I think what you can see that we deliver what we promised that we are working on service activities that we see the appropriate growth coming out of service, and that is also something where we are quite optimistic that we can continue here.

[Akash Gupta, analyst]

And my second one is on 2020 growth where you made some comments earlier. I think, I mean, looking at '23, there is some risk from demand, some risk from supply chain. But from your point of view, if you have to rank the 2, what would be your main worry for 2023 growth? Would it be demand? Or would it be supply chain?

[Stefan Klebert, executive]

The main concern you mean for '23 in terms of sales or in terms of order intake?

[Akash Gupta, analyst]

In terms of sales.

[Stefan Klebert, executive]

Sales. I mean, in terms of sales, EUR 423 in due to the fact that we have such a large order backlog, it is, of course, mainly the supply chain because the orders are in hand. And when we get all the material at the right time, we might be able to execute it faster than during this year, for instance.

[Akash Gupta, analyst]

And a last housekeeping question on corporate line. Maybe if you can say how much we should expect for Q4. I think it has been around 14 million to 15 million average in the first 9 months per quarter? And any comment on Q4 and the level we should expect next year.

[Marcus Ketter, executive]

You meant the GCC expenses for Q4? Or what do you mean? We couldn't quite address that.

[Akash Gupta, analyst]

Yes. And the difference between the group EBITDA and the summer 4 segments, so like you have one line, which is negative. So I was just wondering any guidance for Q4 in terms of how big that number could be.

[Marcus Ketter, executive]

Up to EUR 20 million is our guidance.

[Operator]

And your last question comes from the line of Uma Samlin from Bank of America.

[Uma Samlin, analyst]

So my first one is on the restructuring progress that you have made. Could you please give us a bit of an update on how much that has been realized since your last CMD.? So record that during the CMD last year, you mentioned about 19 million of EBITDA impact from the procurement and around 60 million from production optimization. Can you sort of give us a rough idea how much of that has already been achieved this year and how much more that we have to go.

[Marcus Ketter, executive]

Let me just get that for you, actually Okay. So, so far, this year, I can give you a number, restructuring expenses in the EBITDA so far this year were slightly above EUR 38 million. And that includes Q3 for the first 9 months. And for the total year, expectation could be another up to EUR 20 million.

[Uma Samlin, analyst]

Okay. That's very helpful. Thank you very much. And do you think that given the process is still ongoing, that do you think that there is a potential to do more than what you have expected a year ago? Or is it roughly the same?

[Marcus Ketter, executive]

I mean we gave an overall restructuring guidance to 26 million. Right now, we are not changing that.

[Uma Samlin, analyst]

Okay. My last question is on the of the demand picture in terms of the end market into the next year. I guess given we have seen a slowdown in the Europe market and you also have seen quite high inflation from the ordered beverage manufacturer side. Where do you see on the market in terms of the demand drivers into next year? And what are the sort of key areas of focus you have internally to drive further orders growth in the next year?

[Stefan Klebert, executive]

I mean, we expect everything we see from our pipeline, and we -- it's quite good foreseeable at least for 6 months or so. is that we see a continuous interest in our products, in our technologies, in our solutions. And there is nothing which would worry us and no indication that it goes down at that stage.

However, we are all knowing that we are living in an uncertain environment. We are all knowing that we -- that a lot of economies are prepared to see a recession year next year. So we'd also might sooner or later, somehow impact the overall industry. But I can just say what we see, and I can confirm that we are modestly optimistic, let's say, also that it continues at the same way next year.

[Operator]

With that, I will now hand the call back to Mr. Klebert for closing remarks.

[Stefan Klebert, executive]

So thank you very much. Thank you, everybody, for participating in that call. I try to conclude now our today's main messages. First of all, I think it's important to recognize GEA has again delivered outstanding performance. We promised -- we delivered what we promised. And if you look at the first 9 months, this is really a strong order intake, a strong sales development and especially also a very good margin development. And therefore, we could raise our guidance for the remainder of the year.

Secondly, I think what is also important to mention, we managed input cost inflation very well so far. And you can also see that our margins are increasing and that we handle the pricing topic, I would say, really good and we put a lot of focus here on that topic from the very early beginning of the year.

And thirdly, that is -- goes along with the last question. We see still a solid demand in our order pipeline, and we also expect that this continues even if the environment around us might be a bit more cloudy next year than in this year. But we are very optimistic. We are very well on track on our journey to Mission 26. With that, I conclude. I wish you all the best. The healthy and I'll talk to you in March next year when we disclose our full year numbers.

[Operator]

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