Outlook and Objectives
Economy
The current economic situation in all regions of the world remains dominated by the consequences of the worst crisis since the depression in 1929. However, economic forecasts are becoming increasingly upbeat in most countries. The Organization for Economic Cooperation and Development (OECD) expects an economic recovery to begin in 2010. China will take a leading role here since it was only exposed to the global crisis to a limited extent and has supported its domestic economy with a massive economic stimulus program. North America, the euro zone, and the other Asian markets are also expected to return to positive growth rates. Average real GDP growth of 2 percent is forecast for the OECD countries.
In Germany, leading economic research institutes predict that the recovery will be sluggish and that the country is not likely regain the economic strength of mid-2008 – just before the dramatic slump in output – until towards the end of 2011. Domestic demand is expected to pick up slowly due to only slight improvements in sales prospects and tougher borrowing conditions, while companies’ reluctance to take investment decisions is set to continue as a result of current overcapacity. Overall, GDP growth of between 1 and 2 percent is forecast for Germany in 2010.
For 2010, the German Engineering Federation (VDMA) believes that the German mechanical engineering sector can roughly maintain its 2009 production volume overall, with a slight upturn emerging in the course of the year.
The stabilization of the financial markets that has been achieved due to massive government intervention and guarantees has created the conditions for an upturn. However, it cannot be ruled out that the international financial and banking system will experience further turbulence, caused by problem loans for example, which in turn will impact the real economy. Reducing structural budget deficits will become a necessity in the wake of expansionary financial policies to cushion the effects of the global financial and economic crisis. Whether the emerging upturn proves self-sustaining will not become clear until after government stimulus programs have expired.
Commodity prices are expected to continue rising in 2010, assuming demand in China increases and the global economy picks up. This should favor investment in energyefficient technologies and new commodity sources, one of GEA’s core areas of activity.
New segmentation
On September 22, 2009, the Supervisory Board adopted a new segment structure with the goal of supporting further profitable growth by focusing the organization of the group’s business areas squarely on technologies. The operations of the nine existing divisions, which are reported in two segments, will be reorganized into five new segments. The group’s overall portfolio will not change, but the companies that were previously allocated to two operating segments will now be reassigned to five segments. From 2010, these five segments will also represent the reporting units in accordance with IFRSs. Generally, the reorganization will make it easier to achieve operational synergies within the segments and allow downstream administrative levels to be streamlined. The group began reorganizing its core business following the sale of the plant engineering activities and the closure of Ruhr-Zink. The Other segment will remain unchanged following the reorganization of the group effective January 1, 2010.
In particular, all business activities involving heat exchangers are now bundled into a single segment. Previously, they were spread across two segments, which led to overlapping and duplication with regard to acquisitions, product development, and increasing internationalization within the former organizational structure. We expect the bundling of similar business activities in the course of the resegmentation to produce substantial synergies, in particular in the sales, purchasing, and production areas. The group can now coordinate and implement investments and product development more effectively than before. In addition, the future segment structure reflects GEA’s leading position in a wide variety of technologies.
In the course of this reorganization, we will also reduce the number of legal business units, which will further decrease the complexity of the group. The elimination or streamlining of lower administrative levels will save administration costs. The larger areas of responsibility created by the merger of legal units will also increase our attractiveness as an employer.
From 2012, we expect the reorganization of GEA Group to lead to a potential sustainable improvement of at least EUR 65 million in annual earnings. This contrasts with one-time expenses of approximately 1 to 1.5 times the annual savings.
Business outlook
Product development at GEA is driven by the search for energy-efficient and resourcefriendly solutions for our customers’ processes. In the medium to long term, the steady growth in the global population and the worldwide increase in demand for processed foods and energy will ensure that the group’s order situation is less cyclical than the industry as a whole. Growth rates in our core markets – food processing and energy technology – are forecast to exceed global GDP growth. In particular, we expect business in the Asian and Middle East growth markets to pick up in the short term, while the other regions will grow more slowly.
We have systematically implemented the program of measures to adjust capacity, enhance efficiency, and reduce administrative costs that we initiated in the fourth quarter of 2008. Excluding changes in the consolidated Group, we were forced to reduce our workforce by a total of 1,314. The full positive effect of these measures will be felt for the first time in 2010.
In fiscal year 2010 we expect
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an increase in investment in the food industry based on continued growth in demand for processed foods,
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an upturn in investment in the energy market, especially in the oil and gas business, due to assumed medium-term price rises,
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growing interest in energy-efficient process solutions that boost demand for GEA’s engineering solutions and products,
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an increase in the price of key materials, which will reduce the current reluctance to invest in anticipation of falling plant prices, and
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continued low interest rates.
Provided that the trends described above will materialise, demand for GEA Group’s products and services should increase compared with the third and forth quarters of 2009. Consequently, we expect a moderate increase in order intake, a corresponding stabilization of revenue, and therefore margins to at least match the fiscal year 2009 level.
However, it is expected to take two to three years for the effects of the global financial and economic crisis to be overcome in all segments and therefore in the group.
It remains to be seen how GEA’s key sales countries control their heavily increased debt without implementing spending cuts that may again lead to the global economy slowing down.
In view of the measures we have initiated to reduce complexity, we believe that we can achieve a sustainable EBIT margin of 12 percent across the economic cycles.
We will continue our strategy of acquiring companies – especially in the food processing and energy technology segments – that complement our customers’ existing technological processes or open up new markets. From 2010, we expect the current global economic situation to be more strongly reflected in sellers’ price expectations than before.
The group’s net liquidity amounted to EUR 47.1 million as of December 31, 2009. Unused cash credit lines totaled EUR 949 million. We are forecasting cash outflows of EUR 220 million in 2010 from the remaining provisions for discontinued operations. Overall, in addition to expected payments relating to discontinued operations and restructuring, we expect to be able to fund significant investments in the Company’s future from operating business and available credit lines.
The Executive Board and Supervisory Board will propose a dividend of EUR 0.30 per share for 2009 to the Annual General Meeting. This is in line with our long-term goal of distributing a third of the group’s earnings as a dividend.
Bochum, March 1, 2010