GEA Group Aktiengesellschaft (OTCPK:GEAGF) Q3 2022 Earnings Conference Call November 4, 2022 9:00 AM ET
Company Participants
Oliver Luckenbach – Head-Investor Relations
Stefan Klebert – Chief Executive Officer
Marcus Ketter – Chief Financial Officer
Conference Call Participants
Klas Bergelind – Citi
Sebastian Kuenne – RBC Capital Markets
Max Yates – Morgan Stanley
Sven Weier – UBS
Akash Gupta – JPMorgan
Uma Samlin – Bank of America
Oliver Luckenbach
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
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 2022. We guided for €1.3 billion to €1.4 billion order intake and ended the quarter in the upper half of the guided range at €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 focused on marching 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 growths, EBITDA improved by almost €13 million to €199 million. The respective margin improved by 0.5 percentage points to 14.7% also represents a new record level for a single quarter. Finally, return on capital employed. We crossed the 30% mark and reached 30.6% on the last four 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 2022. 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 growths, we were able to reduce our gas consumption by 9.1% during the first nine 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 2023 and we have also already fixed the prices for 50% of our energy consumption of Q2 2023.
And 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 2023. The expected additional cost for energy in 2023 compared to our assumption for 2022 can amount to €20 million to €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 emissions. 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 bills 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 – 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 26 targets.
Moving on to the next slide which focuses on the sustainability pillar of our Mission 26. In October, GEA won the Berlin Institute of Supply Chain Management Sustainability Award 22 in the category operations. We were honored for the contribution at innocent’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 innocent 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 2 of December. That’s a very important award. Even the German Chancellor will come to hand over the prize 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 is 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 €286 million. This means that we paid €36.74 per share on average so far. As there is just €14 million left to be spent it is highly likely that you will see an announcement with a completion of the share buyback program very soon.
And with that, I hand over to Marcus.
Marcus Ketter
Thank you, Stefan. Also 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 €167 million, large orders exceeding €15 million in single ticket size. This year these orders stand at €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 Farm Technologies was ahead. The strong organic sales growth translated into higher EBITDA before restructuring expenses, which improved to €190 million as Stefan just explained. Due to the further improvement of EBIT during the last four quarters, ROCE considerably increased. On year-over-year comparison, capital employed remained flat.
Net financial liquidity decreased to €235 million from €358 million due to the increase of our network and capital and the financing of our share buyback program. During the last four quarters, we spent €205 million on our share buyback program.
So, all in all, Q3 2022 was another successful quarter in a still challenging environment.
Looking a bit deeper into the group performance. Order intake grew to €1.37 billion as already discussed. In terms of end markets, dairy farming, dairy processing and chemicals put out with double digit growth rate. M&A remained 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 chemical 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 post moments due to the geopolitical situation. Energy is positively impacted by the high fuel prices and beverage is improving with breweries inquiring 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, €652 million.
EBITDA increased by €11 million to €95 million. The EBITDA margin, however, slightly declined from last year’s high level of 26% to 25.2%, also due to ramp up cost related to the shift of production volume to our new factory in Koszalin.
Overall, gross profit grew and more than compensated the increase in operating costs, reciting 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 €50 million remained almost unchanged year-over-year. Bearing in mind the 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 €5 million and single-digit size. Here, especially the customer industry beverages was the contributor which reached a record figure in that order bucket last year. Looking forward, the pipeline across all markets looks still good. On 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 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 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 to the New Food arena as well.
Second, the market is divided into three different segments or generations, as we call it. The first-generation are the plant-based alternatives such as burgers, sausages, drinks and so on. This has developed 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 example. 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, it’s highly complex and thus likely to come with large single-digit 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 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 their segment being placed, but we do see a very healthy project pipeline and we feel very comfortable with our target to achieve €40 billion New Food related order intake in 2026.
I hope that helps you to better understand the dynamics of the New Food market. But coming on back to Liquid & 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 €1.5 billion. EBITDA before restructuring expenses increased by €5 million to €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 one large order mounting to €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 one. 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 service 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 one percentage point to 30.9%. Over 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 €3 million to €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. High personnel as well as high travel expenses.
Moving to Farm Technologies, order intake continued its solid organic growth rate of the prior quarters. Orders increased organically by 11.8% year-over-year. And were driven higher demand for all product categories, services, conventional as well as automated milking equipment. The mid-price development remains on a favorable level for farmers. 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 but service sales grew by an astonishing 19.6% organically, new machine sales dropped by 12.8% due to supply chain challenges, but surprisingly, this development has a strong impact on the service sales 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 stands at €350 million, a good sign for further sales growth but depending on the availability of supplies. EBITDA increased by €1 million to €26 million, the respective margin declined by 0.5 percentage points to 13.6%.
Finally, let us turn to Heating & 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 €5 million and €50 million in single ticket size.
The general environment has not changed. Decarbonization remains a driver for our business favoring demand for heat pumps. For tomorrow, the high energy prices drive the demand for energy savings solutions. Any sales increased by 15.7% year-over-year and represents the strongest growth Heating & Refrigeration technologies has ever achieved in a single quarter. 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%, but 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 €1 million to €60 million and the margin declined by 0.5 percentage points to 11.5% due to the missing business in Russia.
Closing the divisional chapter now, all divisions except for Heating & Refrigeration technologies increase the EBITDA before restructuring. As in the prior quarters on reported basis only Heating & Refrigeration at lower sales in the quarter due to the divestments. All divisions again except for Heating & Refrigeration increase the gross profit mostly due to higher volumes.
Operating costs increased and were predominantly driven by our personal and travel expenses. In total, EBIDA before restructuring increased to €199 from €170 million, excluding the translational FX effects effect of €8 million as we have defined it in our full year guidance our EBITDA would’ve still improved by €21 million to €191 million.
As always, after the divisional chapter, I provide an update on our networking capital development. Networking capital increased by €130 million to 460 – €446 million or by 1.7 percentage points to 8.9% of last four quarter sales. As in the prior quarters, the increase is due to a high 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. For tomorrow, 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 owns to an expansion in business activity.
To sum it up, the increase in networking capital is not causing any concerns to me as soon as the supply chain challenges face or inventory levels will decline as well. The inventory driven increase of networking capital as of course an impact on our free cash flow. Operating cash flow was €146 million and below last year’s figure of €240 million. The decline is explained by the higher networking capital I discussed earlier.
Last year, networking capital was a source of cash with an inflow of €50 million. This number reversed to an outflow of €67 million this year. Furthermore, cash outflow Texas was also [indiscernible] higher than last year. CapEx related outflow is €50 million higher than last year resulting in €41 million. The increase is mainly due to investments into our new plant in Koszalin, Poland and high replacements CapEx.
In total, free cash flow is worth under €3 million below last year’s figure of €250 million. Our free cash flow conversion ratio before restructuring traded downwards during the last quarters and stands now at 50% on a last four quarter trailing basis. The negative trends during the last quarters is solely explained by the increasing outsource for networking capitals, which I just mentioned.
Net cash including lease liabilities decreased from €264 million at the end of the second quarter to €235 million. The net cash flow of €84 million could not fully compensate the cash spent on our share buyback program of €114 million.
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 2022. Apart from minor changes in the volume and the utilization of the €66 million, Evergreen credit lines, nothing has materially changed compared to the prior quarter.
Continuing now on the right side of the slides, compared to last year’s Q3, the financial headroom declined by a €100 million. The reason it’s explained by the cancellation of an unused credit line with the European Investment Bank of €100 million. The decline in net liquidity is due to the increase in networking capital and the share buyback program mentioned earlier. Adjusted for the buyback, the net liquidity position, including lease liabilities would amounts to €440 million and be significantly above prior year’s level of €358 million.
With that, I hand it back to Stefan with the outlook.
Stefan Klebert
Thank you, Marcus. So with that all being said, we upgrade our guidance for the full year 2022 until now, we expected organic sales growths by more than €5 a year, and given the development during the first nine months, we increase our organic sales growth target for the full year 2022 to more than 7%.
For EBITDA before restructuring expenses, we confirm the range of €630 million to €690 million, but aim for the upper end of this range now. As you know, this range assumes constant exchange rates. During the first nine months of 2022, the FX effect was at €17 million positive. Our target for return on capital employed has also been upgraded. 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 €120 million and €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 three years on how we have improved the credibility of GEA 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 markets participants. And this was now rewarded with manager magazin’s Investors’ Darling 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 midcap 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
Yes, thank you very much, Stefan and Marcus sharing these piece of kind and open up the line for the Q&A session.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And your first question comes from the line of Klas Bergelind from Citi. Please go ahead. Your line is open.
Klas Bergelind
Thank you. Hi. Hi, Stefan and Marcus, Klas at Citi. 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 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 here. Thanks.
Stefan Klebert
Yes. Hi, Klas. I mean, what we see in the order intake is – it’s not so easy because we are not only selling components, but our best guess, best estimate is that we see about 6% from – 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 a – the world of companies differentiate themselves who are really good in pricing and those who missed it or started too late.
So I think in GEA, we did it very really well. We need to continue. We will continue an increase prices and that of course depends on the wages headwind at the moment. One – I mean one-third of our staff is in Germany and there is still negotiations going on between the trade unions and let’s see how this will end up. But headwind from wages will in 2023 definitely be higher than compared to 2022. That’s our expectation. And of course we need to factor that 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
Thank you. 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 you look at current orders, you’re down mid-single-digit a bit more in volume terms then. And I wanted to zoom in on separation and flow where orders are down 10% quarter-on-quarter, when I strip out the €10 million of launch orders you had in the second quarter. Is there any softness here on the shorter cycle business through the quarter or is the easiest of a tough compare as you see it?
Stefan Klebert
Yes. I mean, 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 order in the first quarter. And I mean, when we look at the pipeline to be honest, we don’t see any materially changes here. However, I mean, it’s – we are living in the same world like everybody and of course 2023 might be a year based on a – 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 here.
Klas Bergelind
No, that’s good to hear. My very final one is on the margin fund, 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 margin further in 2023? And I’m talking beyond just hiking prices to compensate for wage inflation. We know about procurement manufacturing, but what about these sales excellence initiatives, your ambition to lower SG&A in the equipment business and so forth? That would be really helpful.
Stefan Klebert
Okay. It’s a very comprehensive question. Let’s say, because there’s a lot of activities going on to improve margins further. I mean, that we just opened our new factory in Koszalin. We are about shifting production to Koszalin that also means that in 2023, we will see a bigger impact coming out of manufacturing costs here, for instance. That is one example. We have a lot of initiatives in service going on where we push our 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 higher growth rate here. So it’s a mix from 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 2026. And we are very optimistic that we will have this 15% margin or beyond latest in 2026. I missed one of your questions before that you also asked for the order intake guidance for Q4, which is meanwhile a GEA habit that we do so, and we also expect a very good order intake for the Q4 in the area of €1.3 billion or a little bit above, so at the end, we’ll see a solid growth for the full year.
Klas Bergelind
Thank you.
Stefan Klebert
Thank you.
Operator
Thank you. We will now go to our next question. One moment please. And your next question comes from the line of Sebastian Kuenne from RBC Capital Markets. Please go ahead. Your line is open.
Sebastian Kuenne
Yes. Hi, gentlemen. 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 said there are potential project delays. What end markets 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 this seems to be not recurring. And is there some issues, specifically with the beer sector – with the brewing sector that you see coming up, given that the costs 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? Thank you very much.
Stefan Klebert
Okay. A lot of questions, I’ll 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 million, €50 million or sometimes even €100 million, we also have projects in the pipeline with a three 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? And therefore, it’s very difficult to predict on a quarterly basis this kind of large project. 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 that 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 cancellations. We have almost zero cancellations I would say. It is happening very, very seldom. 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 auto situation here.
Sebastian Kuenne
Thank you. And maybe one quick follow up on the Dairy business, which is 30% to 35% of your revenues. You indicated in the previous call that you don’t see the risk from down – from trading down of customers switching out of cheese, for example. But at the same time, we hear comments from the known that say they started seeing volume impacts due to the high inflation of dairy products. So basically that they see some of their volumes squeezed in the market. Why do you think this won’t affect GEA much?
Stefan Klebert
I mean, the question would be what is the alternative for the population? And I mean all the market intelligence we have shows 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 Europeans, a different picture and different few, because we hear a lot of all this vegan and vegetarian alternatives and soy milk, and oat [ph] and things like that. But if you see the world as a whole, and, you know, we, of course we are very international business and doing a lot of installations also in Asia, there is no question mark that dairy might not be in a gross scenario for the next few years. Yes, I mean, we are very optimistic that this trend of growing demand for dairy will continue.
Sebastian Kuenne
Thank you very much.
Operator
Thank you. We will now go to our next question. One moment, please. And your question comes the line of Max Yates from Morgan Stanley. Please go ahead. Your line is open.
Max Yates
Thank you, and good afternoon. 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 estimates 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 isn’t 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 bid that is more difficult. How are you seeing that cost evolve? And is there any feeling if costs stay at these levels, what that kind of growth or what that net cost headwind, the sort of €120 million and €140 million that you had this year might look like for next year?
Marcus Ketter
Yes. We expect that also this headwind 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 suppliers side.
Max Yates
Okay. But, 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 – would be more level. Is that the way you are thinking about it? Because obviously you have to make assumptions to price…
Marcus Ketter
Really. 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 source that, that’s much, much more components we source. I mean, energies this year, it will spend this year about €35 million to €40 million for energy. And the total spend is about €2.6 billion, €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 convene all the negotiations. That also might depend heavily on the 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, that 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
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 two things and how we should think about as a percentage of sales, the working capital trajectory from him?
Marcus Ketter
So our range was 8% to 10%, and we were very careful with that beginning of the year. As you know, at the end of last year, we had a 5.1 percentage point. And we were asked by many to revisit our guidance range. And at that time, we said, well, it’s going to be – it’s not going to be an easy year for networking capital. And so it was not – so the increase falls from 5.1% to 8.9%. And also we are fine with the range and the guidance that we have given because we have foreseen that work in progress would increase in inventory would 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. That’s why I set in my presentation that we think that we will be able to decrease inventory again, when we look at safety stock levels for materials, which were hard to get and now might start to be all 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’ve said, we see potential to reduce the 8.9% network capital sales ratio. Again, that’s going to be already in Q4. I can’t promise but it’s not getting worse. So I expect that network capital sales ratio has linked out.
Max Yates
Understood. Thank you.
Operator
Thank you. We will now go to our next question. One moment please. And your next question comes from the line of Sven Weier from UBS. Please go ahead. Your line is open.
Sven Weier
Yes, good afternoon, and thanks for taking my questions. The first one is on the statements you’ve made in earlier quarters right at Q4 would actually see the highest organic top line growth rate, maybe also because by Q4 you would’ve assumed a little bit of improvement in supply chain. I was just wondering if you still see that Q4 should have the highest organic? That’s the first one. Thank you.
Stefan Klebert
Okay. Hi. Hi, Sven. Yes, 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 are let’s say reducing month-by-month or week-by-week. That 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 seven or eight weeks ahead of Christmas. So I would say maybe next year, it is really coming to hopefully more normal situation. But it will remain a challenging Q4 in terms of executing backlog and get everything delivered we request.
Sven Weier
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
Yes, I mean, that’s like you know wasn’t like we said, we are guiding for larger or more than 7%. Yes, that does not mean that we believe it’s seven point [ph] toward the end.
Sven Weier
Yes. And thank you for that. And then the other one is when – also when I follow 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 500 million, 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 four to six, but it looks like it could be another year of above average growth, assuming a flat auto pipeline.
Stefan Klebert
Yes. Yes. That’s a very good point, Sven. And also here I can confirm what you say or what you think. We will start definitely with a much higher backlog into 2023 compared to the backlog we had to start in the year 2022. 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 a certain opportunities for next year.
Sven Weier
Thank you, Stefan. 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 I was attending Tritech in September, and I felt there was a lot of excitement also around fermentation, applying the – which is more of 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 structurally good market, but it seems to me that it’s really – really arising 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 bio energy basically in the breweries? Thank you.
Stefan Klebert
Yes. I mean, fermentation is of course one of our key competence as we have in and GEA has a lot of knowledge and knowhow 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 discuss at the moment with customers in the new food area, which might be interesting.
Energy saving for breweries, yes, that’s always a topic, very clear. We are working on innovations here as well. We 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 about [indiscernible] breweries especially having in – having mind the high energy costs; so that’s also on our agenda, very clear.
Sven Weier
And maybe I can squeeze in a very final one. It’s just on the buyback. I mean, you said you 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 [indiscernible]?
Stefan Klebert
Well we have not made any decision yet. If we are going to set-up a new share by back program we haven’t said no, but there’s been no decision made on that yet. First, we’re going to finish that current program which is still a bit ongoing.
Sven Weier
Okay. Thank you. Thank you both.
Stefan Klebert
Thank you.
Sven Weier
Thank you, Stefan.
Operator
Thank you. We will now go to our next question. One moment please, and your next question comes from Akash Gupta from JPMorgan. Please go ahead. Your line is open.
Akash Gupta
Yes. Hi. Good afternoon everybody, and thanks for your time. 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, in the 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
Okay. Thank you, Akash. I mean, service, we spoke about that also during the last course. 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 26, we promise 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 feed on the street that we employ, feed service engineers are 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 via overall.
Akash Gupta
So just to clarify, you think that this mid-team’s level of growth can continue in the future?
Stefan Klebert
I mean, we guided in the Mission 26 for our growth in service, 5% to 6%, this is what we promised, yes.
Akash Gupta
Thank you. So basically the growth will come down to 5% to 6% from these high levels, if I understood correct?
Stefan Klebert
Not necessarily. Not necessarily. I mean, of course it also depends how inflation continues. Yes, because this also might have an impact here. But I think what you can see, that we deliver what we promise that we are working on service activities, that we see the appropriate growths coming out of service. And that is also something, where we are quite optimistic that we can continue here.
Akash Gupta
Thank you. And my second one is on 2020 growth, where you made some comments earlier. I think, I mean looking at 2023, there is some risk from demand, some risk from supply chain, but from your point of view, if you have to rank the two, what would be your main worry for 2023 growth? Would it be demand or would it be supply chain?
Stefan Klebert
The main concern you mean for 2023, in terms of sales or in terms of order intake?
Akash Gupta
In terms of sales.
Stefan Klebert
Sales, I mean in terms of sales for 2023, due to the fact that we have such a large order backlog it is of course mainly the supply chain now 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
Thank you. 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 nine months per quarter. And any comment on Q4 and the level we should expect next year? Thank you.
Marcus Ketter
Akash, you meant the GCC expenses for Q4 or, what do you mean? We couldn’t quite grasp that?
Akash Gupta
Yes, the difference between the group EBITDA and the sum for segment. So like you have one line which is negative, so we’re just wondering any, any guidance for Q4 in terms of how big that number could be?
Marcus Ketter
Up to €20 million is our guidance.
Akash Gupta
Thank you.
Operator
Thank you. We will now take our last question. One moment please. And your last question comes from the line of Uma Samlin from Bank of America. Please go ahead. Your line is open.
Uma Samlin
Hi, good afternoon, Stefan and Marcus thank you for taking my question. So my first one is on the restructuring progress that you had made, and could you please give us a bit of an update on how much that has been realized since your last CMD [ph]? So record on that during the CMD last year, you mentioned that about €90 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
Let me just get that for you actually. Okay, so far this year I can give you, I can give you numbers for restructuring expenses in the EBITDA so far this year, we’re slightly above €38 million, and that includes Q3 for the first nine months. And for the total year expectation could be another up to €20 million.
Uma Samlin
Okay. That’s very helpful. Thank you very much. And do you think that, given the process still ongoing that, do you think that there is a potential to do more than what you had expected a year ago, or it’s roughly the same?
Marcus Ketter
I mean, we gave an overall restructuring guidance to 2026; right now we are not changing that.
Uma Samlin
Okay. Thank you very much. My last questions on the sort of the demand picture in terms of the end market into the next year. I guess given we have seen a slowdown in the new market, and you also we have seen quite high inflation, from the food and beverage manufacturer side. And 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 older growth in the next year?
Stefan Klebert
I mean we expect everything we see from our pipeline, and we, it’s quite good foreseeable, at least for six months or so, is that we see a continuous interest in our product, in our technologies and 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 a 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.
Uma Samlin
That’s really helpful. Thank you very much.
Stefan Klebert
Thank you, Uma.
Operator
Thank you. With that, I will now hand the call back to Mr. Klebert for closing remarks.
Stefan Klebert
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 nine months, this is really a strong order intake, a strong sales development and especially also very good marching 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 auto 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 2026. With that, I conclude, I wish you all the best, stay healthy and yes, I talk to you in March next year, when we disclose our full year numbers.
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