DRW3.DEDRW3.DEXETRA
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Operator: Ladies and gentlemen, welcome to the Q3 2025 Earnings Conference Call. I am Mattilde, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Stefan Drager, CEO. Please go ahead.
Stefan Dräger: Yes. Good afternoon, and thank you for joining our conference call on our financial results for the first 9 months of 2025. I have with me today Gert-Hartwig, CFO; as well as Tom Fischler and Nikolaus Hammerschmidt, both Investor Relations. I would like to take you through the results of the presentation that we made available on our web page this morning. Following the presentation, we will open the floor to your questions. Let's get started on Page 5 with the business highlights. With a significant increase in orders, noticeable growth in sales and very good earnings, we delivered a strong business performance in the first 9 months of 2025. Despite difficult economic conditions, demand for our Technology for Life rose to around EUR 2.6 billion. The last time we had such a high order intake after 3 quarters was in our record year 2020. Growth was driven by both divisions and all. The same is true for net sales, which increased to around EUR 2.3 billion. Earnings before interest and taxes almost reached the prior year level at around EUR 77 million despite the positive one-off effects mentioned above in the prior year. As a reminder, last year, we had divested a non-core business in the Netherlands and unused property in the United States and a building in Spain, totaling around EUR 30 million in one-off effects. Similar effects are missing this year. In addition, this year, we need to compensate for some quite strong headwinds, currencies and tariffs had a substantial negative impact on our earnings. So without these headwinds, our EBIT would have been significantly above the prior year level. Our business in the third quarter made a substantial contribution to the strong overall performance in the first 9 months. Net sales were significantly above the prior year level in Q3, while EBIT more than doubled. In addition to our top line, we were able to improve our operating cash flow in the first 9 months with a considerable increase by more than EUR 35 million to around EUR 93 million. This development has also been recognized by investors. Until the publication of our preliminary figures, our preferred shares had already increased by around 44% year-to-date. On the day after the publication, they rose by 12%, resulting in an increase of around 63% in the current year. Our common shares have shown strong performance as well with an increase of around 41% year-to-date. Ladies and gentlemen, as communicated 2 weeks ago, we now expect the net sales growth and the EBIT margin in the upper half of our forecast range. I'll come back to our outlook at the end of our presentation. With that, I turn over to Gert-Hartwig for a review of the financials. Gert-Hartwig, please.
Gert-Hartwing Lescow: Thank you, Stefan, and welcome, everyone. Please turn to Page 7 for a group overview. As usual, all growth rates are quoted on a currency-adjusted basis. As Stefan Drager said, we continue to see strong demand for our Technology for Life in both divisions in all regions. Order intake rose by 9% to around EUR 2.6 billion in the first 9 months of '25. The Americas led the growth with an increase of around 19%, followed by EMEA and APAC. In Germany, the order volume was slightly above the prior year level. In the third quarter, orders grew by roughly 7% as the slight decline in Germany and APAC was more than offset by an increase in the other regions. Our net sales development has further accelerated in Q2. We are well on track to compensate for the slow start in the year caused by some supply chain disruptions. Net sales rose by more than 10% in the third quarter. In the first 9 months, they increased by roughly 4% to around EUR 2.3 billion. All divisions and regions contributed to growth in the respective reporting periods. The positive development in the third quarter was driven in particular by a significant increase in the EMEA and Americas regions. I'll comment on that when we get to the divisions. Our gross profit margin increased by 0.7 percentage points in the first 9 months to 45.1% despite currency headwinds and higher tariffs. The margin improvement was strong in the Medical division than in the Safety division. Operating costs rose only moderately, reflecting disciplined expense management. Our functional expenses increased around 6% in the first 9 months, but mainly driven by the absence of last year's EUR 30 million one-off income. Excluding the positive one-off effects mentioned above, the cost increase amounted to 2.4% in the first 9 months and to 1.5% in the third quarter. In nominal terms, however, functional expenses were on a slight decline in Q3. Due to the only moderate increased costs and the significant growth in net sales, we more than doubled our EBIT to around EUR 57 million in Q3, coming from around EUR 24 million in the prior year quarter, which had been still supported by the positive one-time effects amounting to EUR 10 million in the quarter. Our EBIT margin rose from 3.6% at 3.1% to 6.8%, strong earnings performance in the quarter. Over the first 9 months, EBIT came in at around 3% margin, slightly below last year's EUR 80 million and a 3.5% margin. Again, the positive one-off effects from the prior year are now missing. In addition, headwinds from currencies and tariffs strained our EBIT as the euro appreciated sharply against key trading currencies. Carefully monitor the development of foreign currencies and manage risks proactively through hedging and price adjustments. Having said that, FX still had a negative impact of roughly EUR 22 million on EBIT. Our operating performance improved year-on-year, and that improvement nearly but not fully offset the absence of one-offs and the FX and tariff drag; thus, our EBIT declined slightly. Finally, our rolling 12-month EBITDA improved significantly from roughly EUR 30 million to around EUR 49 million. Let us now take a closer look at on Page 8. We grew order intake by almost 12% to around EUR 1.5 billion in the first 9 months of 2025, driven by high demand for ventilators, anesthesia machines, services, and consumables. In the second quarter, mid-double-digit million euro order for hospital infrastructure from hospital further powered our growth in the Americas. But even without this large order, demand in the Medical division rose year-on-year. In the third quarter, order intake in the Medical division increased by more than 5%. The decline in APAC was compensated for by the significant growth in EMEA and by the positive development in the other regions. Thanks to EMEA and the Americas, in particular, net sales rose significantly by more than 10% in the third quarter after a slight decline in the prior year period. Looking at the first 9 months, net sales increased by around 5% to EUR 1.3 billion, driven by all regions. In APAC, growth was driven mainly by EMEA and China, with business development somewhat uneven in China. After solid growth in the first 6 months, demand has cooled considerably in the third quarter. Although the resolution of our Q1 supply chain problems had a positive impact in Q3 as expected, these effects were offset by the overall weak business in China, resulting in a decline in net sales compared to the prior year quarter. Our gross margin expanded by nearly 3 percentage points in Q3 and by 1.1 percentage points in the first 9 months, thanks to a favorable product and country mix and lower quality expenses from field actions. Functional expenses rose by 6% in the first 9 months of 2025 and by roughly 8% in the third quarter. Excluding the proportionate positive one-off effects from the sale of real estate in the prior year, the increase amounted to roughly 4% in the first 9 months and also in the third quarter. Earnings in Medical returned to positive territory in Q3 as we are making progress in improving the profitability in the division. Our EBIT grew considerably from minus EUR 4 million to plus EUR 11 million, lifting the EBIT margin from minus 0.9% to 0.3%. For the first 9 months, EBIT amounted to around minus EUR 23 million after around minus EUR 28 million in the prior year period. As mentioned before, one-off effects in the prior year's period played a role. Our rolling 12-month EBITDA improved significantly by around EUR 22 million to around minus EUR 45 million. I will now turn to our Safety division on Page 9. In the first 9 months, order intake rose by roughly 6%, driven by gas detection, respiratory and personal protection products, and Engineered Solutions. Orders for occupational health and safety normalized after last year's large order for NBC Protective filters, leading to a lower demand in Germany. EMEA and the Americas delivered strong double-digit order growth, while APAC remained almost stable. After a somewhat slower development in the second quarter, order intake accelerated in Q3 with orders rising by roughly 9%. In addition to the significant increase in EMEA and the Americas, growth in APAC also contributed to this development. Q3 net sales rose significantly by roughly 10%, driven by EMEA and the Americas in particular. The first 9 months, net sales increased by more than 2%, thanks to growth in all regions. That said, our safety business is back on track after slight weakness in Q2. Our gross margin expanded by 1 percentage point in Q3 and was stable in the first 9 months, thanks to a favorable product mix. Functional expenses rose about 5% in the first 9 months. This was mainly due to other operating income in the prior year period from the sale of our fire alarm systems business in the Netherlands and the sale of real estate. Higher marketing expenses also had a negative impact on function costs. Excluding the other operating income of the prior year period, functional expenses decreased slightly by 0.3% in the first 9 months of the year and by 2.4% in the third quarter. So good expense management and safety. Q3 EBIT improved significantly to roughly EUR 46 million after EUR 28 million in the prior year quarter. The EBIT margin increased to 12.6%. After the first 9 months, the EBIT came to just under EUR 100 million, down from EUR 108 million. The EBIT margin was just below 10%. Rolling 12-month EBITDA decreased slightly by roughly EUR 3 million to around EUR 94 million, coming from EUR 97 million in the prior year. That concludes the Safety division revenue. Let's move on to the development of our cash flow and other key figures on to Slide 10. In the first 9 months, we significantly improved operating cash flow by around EUR 35 million to roughly EUR 93 million. This was mainly due to effective working capital management, especially better development of trade receivables, trade payables and other liabilities. Outflows from investing activities more than tripled from EUR 2 million to about EUR 76 million, resulting in a free cash flow of around EUR 17 million after around EUR 35 million. Among other things, the significant increase in outflow was due to a base effect in the prior year, the sale of our fire alarm systems business in the Netherlands and the sale of the property in the U.S. led to a considerable inflow, which is now missing. On the other hand, Drager added an investment to one of its holdings in the first quarter of 2025, which has contributed to a higher outflow year-to-date. Looking at our net financial debt, we had modest reduction, keeping our leverage at a healthy 0.7 net financial debt to EBITDA. Our 12-month return on capital employed rose from 10.9% to 12%. This was due to the significant increase in our rolling 12-month EBIT, which was much stronger than the increase in capital employed. The considerable growth of our rolling 12-month EBIT resulted from the good performance in the fourth quarter of '24, which had delivered much higher earnings compared to Q4 '23. Net working capital was around 3% higher than in the prior year at around EUR 21 million. Our equity ratio as of September 30 stood at nearly 50%, remaining at the year-end level of 2024. Now I hand back to Stefan Dr ger for our outlook on Page 12.
Stefan Dräger: Ladies and gentlemen, Q3 was a strong quarter for Drager. Our excellent order development and the increasing sales momentum make us optimistic about the further growth of the business for this year. Therefore, we now expect the upper half of our previous guidance. We now expect net sales growth of 3.0% to 5.0% net of currency effects and an EBIT margin of 4.5% to 6.5%. EBIT is now expected to be in the range of EUR 10 million to EUR 18 million so far, business development during the year has given us a good basis to reach our targets. We start in the most important quarter of this year with our typical seasonality. In the next coming weeks, we will remain focused on execution to deliver on our promises. With this, I would like to end the presentation and hand over to the operator to open the line for your questions, please.
Operator: [Operator Instructions] The first question comes from the line of Oliver Reinberg from Kepler Cheuvreux.
Oliver Reinberg: I would have 3 and probably take them one by one, if possible. The first one would be on the ventilation market, if you just can discuss the dynamics there. I mean I assume the whole industry has benefited from the exit of Bayer, GE and Medtronic. There have been some kind of voices who claim that Tania and Hamilton have gained most from these kind of changes and Dr gerwerk somewhat less. I mean I assume everyone has seen significant growth. I was just trying to get a kind of feeling, do you feel that's fair? Or do you believe you have captured your kind of fair share in this kind of market development? And also to what extent if we move into next year, is that kind of challenging base effect? Or will this kind of market consolidation support further growth next year? That would be question number one, please.
Stefan Dräger: Yes. This is Stefan answering your question, Mr. So, I believe all the market participants that are still there, they get a fair share, including ourselves of the opportunities that come from the withdrawal of the 3 players. And so, for me, I couldn't understand why they made this withdrawal these 3 players and I see that for the times to come, very beneficial to be in the market. As you know, we have the longest tradition and experience and the greatest production capacity for all players as we invented the ventilator in 1907, my great, great grandfather this. And I still see it for the future as very beneficial to be in there. And I see that both Mr. Hammerschmidt and myself, we address our customers personally the video message to let them know that we will be there at their side in the future. So, it's not a secret. For Hamilton, it's a challenge because although it's a U.S.-owned company, operations are based in [Biel/Bienne] in Switzerland, the tariffs for the U.S. are 39%. So that led to some extra effort to cope with that, that we don't have. So, it's beneficial for other European ventilator manufacturers, including the one in Sweden.
Oliver Reinberg: That makes sense. And do you believe you can still grow from this kind of base next year? Or is that a kind of demanding base, of which we would expect to kind of decline?
Stefan Dräger: No, I would not expect a decline. I think the overall market has still opportunities and room for growth, as the medical technology and environment, the general positive trends they are still there and continue. So, despite maybe some single countries drop out, the global trend is still there.
Oliver Reinberg: Super. That's helpful. The second question is just on supply chain. I mean, there's obviously the kind of discussion on Nexperia, the kind of Dutch company where the conflict with China, I think, largely people focus on the automotive industry, but I think they're also a major supplier for chips for the Medtech industry. I'm just wondering, is there any kind of risk factor that you face here in particular as we move into the kind of Q4 now?
Stefan Dräger: Not a big effect. We do use some of these chips, but only to a small extent. And we have larger inventory that we keep on stock as the automotive people do. And from what we can see, luckily, these are used for applications that are not so regulatory dependent. So it's easier to replace and there are alternative suppliers. So we may see some smaller effect, but not in Q4, maybe in the next year.
Oliver Reinberg: That's super. That's reassuring. And then the last question, obviously, it's a bit too early for next year. But just to get any kind of flavor, we are making nice margin progress in 2025. At the midpoint, we would probably run 50 basis points ahead of the kind of normalized run rates toward a 10% EBIT margin in 2030. I'm just wondering, looking at the pulls and pushes for next year, I mean, is there any reason why you should be below the kind of 6% EBIT margin, which would be implied by this run rate for next year? And in particular, can you provide any kind of color what incremental margin headwinds you expect from currency next year, please?
Stefan Dräger: So I'll give you the first part we keep reiterating. So the business cannot be judged by the quarter. So it can always be a bad quarter that does not mean that the worst is bad. And the same holds true if we have a very good quarter like. So if we look at the figures and analyze where we are, then we see we had an exceptionally good margin in the Q3. And so in addition, we had an exceptionally good margin in Q4 last year. So if we go back on an average margin for this coming Q4, then there is a reason to assume that it is not so extraordinary, then you might probably speak at the first glance. And going back to the margin to normal, that's partially fueled because there are some large tender businesses that start delivering in this current quarter. So it's better to be a little bit cautious with the forecast and development of the future. The effect of the currency, I hand over to Gert-Hartwig.
Gert-Hartwing Lescow: Yes, there will be given current average rates, there will be an additional FX headwind. We are in the final steps of finalizing planning and currency adjustments, but it's possibly in the range of another percentage point margin. We will provide more clarity on that with the publication of our guidance for '26.
Operator: [Operator Instructions] The next question comes from the line of Virendra Chauhan from AlphaValue.
Virendra Chauhan: So for now, just one question around your margins. So Q3 was fairly strong margin. And like you pointed out in your notes as well as presentation that it came from the strong net sales growth that you saw in this quarter. Now, of course, the sales growth guidance as well being upgraded, is there a chance that we see a similar year-on-year margin expansion in Q4 as well, because Q4 of last year was also very strong, I think close to 12%, if I remember correctly. So that's my question around your EBIT margin, please.
Stefan Dräger: As I just explained on the question from [Indiscernible] Q3 was a very good margin that resulted from a favorable mix of the products in the portfolio. And it is safe to assume that will normalize and decline slightly for the Q4 and for the future. And also keep in mind that Q4 in 2024 was also a very good margin if you compare the quarters. So keep that in mind and think about this so should not be overoptimistic for the good margin to persist. As I said in, we do not think in quarters because in single quarter can always be a little bit up or down versus the others. So we, as much as we appreciate the current good result and the general outlook on the single quarter and the margin, I expect that for the Q4, there could be a slight decline. The EBIT margin overall that is more the focus that is as we said in our guidance, the upper end of the previous guidance. And it is in line with what we said earlier that we strive for a continuous improvement of the EBIT margin that should be about the same figure as the calendar year. So for this year, it's 25 that we said that already a couple of years ago, then it should be plus/minus 5%. And again, 2026, you can think about the ballpark figure of 6%.
Virendra Chauhan: Sorry, maybe can I just ask one more question. So on your connected care launch, the silent ICU that you had talked about on the previous call, and it was scheduled to be launched in H2 '25. So I had 2 bits on that. One is what is your early customer feedback? What is that? And then secondly, when do you expect in terms of a time line that this entire project or focus could translate into meaningful revenue generation for the firm?
Stefan Dräger: The customer feedback from the ICU projects, it's very excited. So we are very happy to observe that, and we look very much forward to taking off. We just this we started our marketing campaign where we took the horn more explicitly for this approach. And so I expect that from the next year on, that can be effect to the business from these kind of projects.
Operator: We now have a question from the line of Jean-Marc Mueller from JMS Invest.
Jean-Marc Mueller: First, I would like to congratulate you on a very good Q3 results. Quickly on Q4. I mean, you spent quite some time when we spoke about the numbers adjusting them for one-offs. And it's fair to say that in Q4 last year, albeit the numbers was good, it was actually worse by roughly EUR 10 million than what it should have been because you had an impairment charge last year in Q4, right? The underlying number would have been EUR 124 million, not EUR 114 million.
Gert-Hartwing Lescow: Yes, that is correct.
Jean-Marc Mueller: So when you're now saying that Q4 might be maybe a little weaker than last year, are we talking about adjusted numbers or reported numbers?
Gert-Hartwing Lescow: There is a range and what we try to emphasize is, and I think you're iterating that, Q4 last year was also operationally a strong quarter. And depending on the delivery and given that it is just by the total number of net sales, there is a higher, if you will, sensitivity to variations in net sales variations. There is a chance that we also get at the lower end when it comes to reported figures even. Not that we are striving for that, but the discussion was just wanted to point out that the Q4 was operationally and also nominally in spite of the charge, a relatively strong quarter.
Jean-Marc Mueller: Yes. Okay. I understand. I understand. And maybe ask a little differently. I mean, it's the most important quarter, I understand that, and it's typically a big number when it comes to full year results. But the range of the guidance is still very wide. I mean we're talking from the lower end to the upper end, we're talking about roughly EUR 70 million EBIT range. Maybe you can help us a little bit what would need to happen that we really hit the lower end of the range and what has to happen that we get to the upper end of the range?
Gert-Hartwing Lescow: There is a couple of factors. And obviously, firstly, I mean, let me just, that's not what we're planning forward. I think you're asking what risks, we have seen FX turning against us, and this could certainly be a risk going forward. We do see that in spite of the good development overall, we do see some areas where our business is developing not as nicely, if you will. We talked about China, in particular in the Q3, where we saw a bit of like up. We also see that our safety business, while very robust overall is in Germany, for example, being put under pressure due to the general market trends for the industry.
Stefan Dräger: For the industry. And that s the customer to a chemical industry.
Gert-Hartwing Lescow: We also see that in the U.S. for different reasons, many customers are reluctant to fully engage in investments. And to the degree that we see some of these risks to materialize over proportionally and perhaps not see the support or a bit of a slowdown in the support, we see a risk that we also get to the low end. But let me also reiterate, we would be disappointed if our margin falls below the 5%. But at this point, we wouldn't rule that out either.
Jean-Marc Mueller: Okay. And the upper end would just be flawless execution of all the projects?
Gert-Hartwing Lescow: Exactly. Exactly. The flawless execution will clearly lead to the upper end.
Jean-Marc Mueller: But this is what you're good at, no, flawless execution?
Gert-Hartwing Lescow: Well, you can keep the fingers, the thumbs pressed and I'm sure it will help us. Say you will get an FX development that for change is not running against us, but in our favor happen.
Jean-Marc Mueller: No, no. I understood. And an add-on question quickly on the cash flow. I mean also Q4 last year, the cash flow was pretty solid despite that the working capital movement in Q4 was actually negative. What should we expect this year? I mean, we obviously, we should still expect a positive free cash flow, I would assume. But the magnitude, I mean, you lowered your investment guidelines. So I would assume that also cash flows in Q4 should be fairly strong. Is this a fair assessment? Or do you see things which will go against the strong cash flow in Q4?
Gert-Hartwing Lescow: By and large, I would support that, and that leads is in our range of possible net financial debt, we expect in the normal course to be at the lower end, so more positively for us. There is no underlying risk for our Q4 cash flow situation.
Operator: [Operator Instructions] We have a follow-up question from the line of Oliver Reinberg from Kepler Cheuvreux.
Oliver Reinberg: Probably also two or three. I mean the first question would be on anesthesia. There was some kind of news flow in the industry. Obviously, Jetting now has lined up with Philips. And in fact, also GE has introduced and called out the kind of launch of a new workstation, which is more meaningful apparently. I'm not sure if this is kind of normal industry development? Or is there a certain risk that may provide a kind of headwind for Anesthesia going forward? That would be the first question, please.
Stefan Dräger: I would say that's a normal industry development. There are discussions, say, all the time. And we're also having discussions and that's a normal thing. So we're not afraid of this development.
Oliver Reinberg: Right. So when you're also having discussion, that means you also are generally open to more different new ways of distribution. Is that the way to understand that?
Stefan Dräger: That's very correct. And so there are obviously the companies like that do not have certain modalities and they are seeking and contacting the ones that have, because they want to become a full service suppliers. So that's a long development. And that has its pros and cons. And as I said, we are not afraid of this setup.
Oliver Reinberg: Okay. Perfect. Understand. And on China, I mean, we've seen an improvement in the first half. Q3 looks like a kind of a larger change to the opposite again. I mean this is larger volatility? Or because you're calling that out, is there any kind of specifics that happened here? And why has it happened if you have any visibility here?
Stefan Dräger: Basically I would say there's nothing new. It's very fragile from where we ended last year. And so far, it's say, stable, but at a modest level. And it's not likely that it comes back to where it was. So, for various reasons.
Oliver Reinberg: Understood. And last question, any update on the defense-related demand in Germany in terms of what have you seen so far? Is there any kind of acceleration being seen at the moment?
Stefan Dräger: Please keep in mind that last year in Q1, we received a large order for this last Mask 2000 for the Army of roughly EUR 15 million. And so that obviously did not repeat this year. And despite this not repeating a single order effect from last year, our orders are currently having a double-digit growth of around 25% year-over-year for the defense business. So, it is eventually picking up, and we do expect to receive more than EUR 100 million in orders in the current year.
Operator: [Operator Instructions] Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Stefan Drager for any closing remarks.
Stefan Dräger: Thank you very much to all of you that with us today for your time and your interest in here, and we look very much forward to meet you again, hopefully, sometime in person in the future. Have a pleasant afternoon and evening. Goodbye.
Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you.