Draegerwerk AG & Co. KGaA (Xetra:DRW8) Q2 2026 Earnings Call

0:00 Ladies and gentlemen, welcome to the Dragerwerk Q2 twenty twenty six Earnings Call. I'm Moritz, the Chorus Call operator. I would like to remind you that all participants will be in a listen only mode and the conference is being recorded. The presentation will be followed by a question and answer session.

0:23 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, sir. Good afternoon and thank you for joining our conference call on our financial results for the first half of twenty twenty six. I have with me today Gerhard Bichlesko, Group CFO as well as Tom Fischler and Nicolas Samerschmidt, both Investor Relations. We would like to take you through the results with the presentation that we made available on our webpage this morning. Following the presentation, we will open the floor to your questions. Let's get started on Page five with the business highlights. With continued good demand, excellent net sales development and significantly higher profitability, we delivered a strong business performance in the first six months of 2026.

1:23 At around €1,750,000,000 order intake was slightly above the high prior year level, while net sales grew by more than €90,000,000 to around €1,600,000,000 Thanks to the good operating business, the improved gross margin and some customs refunds, our EBIT more than tripled to around €64,000,000 lifting our EBIT margin to 4.0%.

1:55 As a result, the good earnings performance, our free cash flow rose considerably to around €16,000,000 from minus €42,000,000 of the prior year. As communicated last week, we raised our guidance. I will come back to this and our outlook at the end of the presentation. With that, I turn over to Gerd Hatfic for a review of the financials. Gerd Hatfic please. Thank you, Stefan, and welcome everyone. Please turn to page seven for a group overview. As usual, all growth rates are quoted on a currency adjusted basis. As Stephan Drager said, we continue to see good demand for our Technology for Life.

2:40 Order intake rose by 1.8% in the first six months. This was driven by all regions except The Americas, which saw a significant decline as a result of a major order for hospital infrastructure systems from Mexico in the second quarter of twenty twenty five. Despite this substantial base effect, our order entry for the group was due to a very strong development in safety on par with the prior year's quarter. Compared to order intake, sales showed a much higher dynamics with an increase of 7.7% in the first half of the year and 8.5% in the Q2. In both reporting periods, the decline in APAC was offset by significant growth in EMEA and The Americas as well as a noticeable increase in Germany.

3:37 Our gross margin in the first six months improved by 1.7 percentage points to 46.5% supported by both divisions. Functional expenses rose by €24,000,000 percent in the first half of the year, driven by higher personnel costs evenly split between Germany and the rest of Europe. Freight costs and marketing expenses each accounted for roughly one eighth of the rise. In Q2, the increase was more pronounced at 8% mainly reflecting the same cost drivers in the second quarter. Importantly, in both periods, financial expenses grew slower than net sales and keeping it that way is our target for the full year. Looking ahead, we are watching our headcount development closely.

4:24 Freight rates also remain a headwind due to geopolitical tensions in The Middle East. We are working to offset these pressures and we remain confident in keeping full year expense growth below net sales growth. Our EBIT in the first six months rose significantly from around €20,000,000 to around €64,000,000 lifting our EBIT margin from 1.3% to 4.0%. In the second quarter, our EBIT more than doubled rising from around €20,000,000 to around €46,000,000 Consequently, our EBIT margin climbed from 2.6% to 5.4%. In addition to the strong net sales growth, the operational business supporting a higher gross margin and slightly better currencies, Earnings were driven by one off of €7,800,000 from the customs refunds received in Q2 recognized in our cost of goods sold.

5:23 Shortly after the half year balance sheet received additional customs refunds of around €14,200,000 including interest payments. This one off will be recognized in our Q3 earnings. We also consider further customs refunds of around 7,000,000 to €9,000,000 to be possible. However, it is currently not clear whether when and in what actual amount such refunds will be received. Thanks to the significant increase in EBIT, our rolling twelve month DDA also improved considerably from around €17,000,000 to around €129,000,000 Let us now take a closer look at the development of the Medical division on page eight.

6:12 At around €956,000,000 order intakes in the first six months was 3.7% below the prior year figure. As I mentioned before, the main reason for this was the Mexico effect. It shows in this deep year over year decline in the Americas region. Adjusted for this, order volume in the Medical division would have remained around stable. Demand for anesthesia machines and ventilators as well as patient monitors declined while warming therapy devices, consumables, accessories and services went up. APAC recorded a slight decline while demand in Germany and EMEA increased noticeably. In the second quarter, the Mexico effect had a significantly stronger impact than the first half of the year driven by the considerable decline in The Americas, order intake decreased by 11.5%.

7:07 In Germany and APAC, demand was also below the prior year figure, while EMEA recorded strong growth. Net sales rose by 7.6% to around €898,000,000 in the first half of the year. In Q2, growth was even stronger at 9.7%. In both reporting periods, The Americas were by far the biggest growth driver followed by EMEA and Germany. Due to a favorable product mix, our gross margin in the first six months expanded by 2.1 percentage points to 44.6% despite negative currency developments. Functional expenses rose by around 6.2% in the first half of the year and by 9.6% in the second quarter.

7:56 This is primarily due to higher personnel expenses and freight costs. Our EBIT in the Medical division was still negative at minus €14,300,000 after six months, but it improved significantly coming from minus €33,700,000 in the prior year period. This also applied to the EBIT margin which rose from negative 4.0% to negative 1.6%. In Q2, EBIT came back to positive territory at €4,300,000 after negative €5,900,000 in the prior year quarter lifting the EBIT margin from negative 1.4 to positive 0.9%. Our rolling twelve month DDA improved significantly too by €54,400,000 to around minus €5,400,000 I will now turn to our Safety division.

8:53 We are on page nine. Order intake in the first six months rose significantly by 9.5%, driven by strong demand in all product areas and regions respiratory and personal protection products, gas detection and occupational health and safety equipment were particularly in demand. Services also made a significant contribution to growth. Above all, The Americas, Germany and APAC showed strong momentum. In the second quarter, order momentum picked up even further. The division recorded strong order growth of an impressive 19.0%, thanks to very good development in all regions, particularly The Americas and APAC.

9:40 Net sales rose significantly by 7.8% in the first half of the year driven by considerable growth in The Americas and EMEA as well as an increase in Germany. The APAC region recorded a decline. In Q2, net sales increased by around 7% due to the positive development in The Americas and EMEA. In Germany, net sales were just below the prior year figure, while APAC developed more weekly. Despite higher customs expenses, our gross margin in the first six months increased by one percentage point. This was in part attributable to higher capacity utilization and lower negative currency effects. Functional expenses were 2.7% above the prior year level, primarily due to the increase in personnel and marketing expenses and freight costs.

10:35 In the second quarter, functional expenses increased by 5.6%. Here too, the development of personnel cost was the main driver. Our EBIT in the Safety division increased significantly in the first six months from €54,000,000 to €78,000,000 This lifted the EBIT margin from around 8% to around 11%. In Q2, EBIT grew from around €26,000,000 to around €42,000,000 The EBIT margin consequently rose from seven point six percent eleven point three percent. Rolling twelve months DBA improved by around €57,000,000 to around €134,000,000 Let's move on to the development of our cash flow and other key figures on to slide 10.

11:25 In the first six months, we significantly improved the operating cash flow by around €43,000,000 to around €60,000,000 In addition to the increase in earnings, this was mainly due to lower income tax payments and effective working capital management, especially better development of trade payables and contract liabilities. Higher operating cash flow as well as lower investment out outflow led to an improved free cash flow by €58,000,000 Going forward, we expect free cash flow to continue to develop positively.

12:02 Looking at our net financial debt, we had a significant reduction by around €79,000,000 to around €190,000,000 The reason for this was the increase in cash and cash equivalents due to the strong free cash flow. As a result, the already healthy ratio of our net financial debt to EBITDA further improved to 0.5. At the beginning of the first quarter, we repaid a maturing note loan in the amount of €50,000,000 with our own liquidity. Our twelve month rolling return on capital employed rose from 9.9% to 15.7%. This was due to the high EBIT in the past four quarters.

12:47 At around €798,000,000 net working capital was 88% higher than in the prior year. Our equity ratio as of June stood at around 52%, around one percentage point above the year end level of 2025. With that, I hand back to Stefan Drager for our outlook on Page 12. Ladies and gentlemen, 2026 has been very successful for Drager so far. Our strong operating business in the first six months and the usually higher dynamic in the second half make us optimistic about the further course of the business. Therefore, we continue to expect net sales growth between 26% net of currency effects.

13:38 Regarding our earnings guidance, we have made two positive adjustments in recent weeks. Due to the strong operating performance and the customs refunds received in the second quarter, we raised the lower end of the EBIT margin to five point five percent two weeks ago, Following the additional custom refunds received after the balance sheet date, we raised our guidance once more and we now expect an EBIT margin between 68%.

14:12 But even without any refunds, which are an unplanned margin tailwind in this year, we are going to perform well in 2026. This resilience is a result of our shift from net sales growth to earnings growth, which we started ten years ago. Since then, we have been making very good progress in improving our profitability each year.

14:38 And we are well on track to reach our ambition to improve the EBIT margin by one percentage point per year to reach 10% by the year 2030. Now is the right time to sharpen our equity story and to explain our markets and our position and the resulting growth and margin improvement. We will therefore host a Capital Markets Day for institutional investors and analysts on 11/18/2026 at our headquarters here in Lubeck. The entire executive board will present followed by live on-site demonstrations of our innovations and use cases.

15:25 Invitations will be sent out shortly. We look forward to welcoming you in person on our premises in November.

15:36 With this, I would like to end the presentation and hand over to the operator to open the line for your questions, please. Thank you. Ladies and gentlemen, we will now begin the question and answer session. And the first question comes from Oliver Rainberg from Kepler Cheuvreux. Please go ahead. Yes, good afternoon.

16:22 Three questions from my side. First one to be on Safety. I mean, the division continues to perform quite strongly both in terms of top line and also margin outlook. I was wondering if you can provide us some thoughts like how sustainable this momentum is. And also in terms of margin, we are now probably approaching the full year and all time high peak. I mean, is this the kind of level from where you see further expansion potential? Secondly, just on cost inflation. I mean, most companies now see more headwinds driven by the kind of geopolitical challenges. I was wondering if you can provide some kind of color to what extent costs have also increased on your side. And then thirdly, I think in your prepared remarks, you also talked about that the order intake in Medical in therapy devices is a bit declining.

17:10 I wonder if you can share some kind of thoughts in terms of what we see in the market. I mean, GE is about to launch a new anesthesia device in H2 and monitoring people talk about larger sized deals and there was also kind of change in ownership. Had any of this an impact on your kind of demand level here? Thank you. Yes. Okay. First question Mr. Heinrich on safety. Yes, I would absolutely say the development in the profitability and sales growth in the Safety division is sustainable. So from the very different markets that we serve, by far the largest part is very solid and healthy and sounds.

18:10 Some like the chemical industry is a little bit weak. However, is picking up overall. Yes, it's sustainable and our expectation it should continue to develop as we see. However, maybe going directly to your third question, see Medicare should develop even faster in particular and with profitability in the near to mid term future. So the difference between the two should become lesser and a larger part of the data overall is the growth development and profitability carried by the medical division.

19:03 What other players are doing that is sometimes a little bit different from what we are doing, but we see as well here in the medical, to say, environment markets are intact and the general development of newer technology including the service oriented device connectivity that we are pushing are enabling the customers to develop further for assisted therapy and automation.

19:55 And in times where say personnel is crucial, that's very good thing to do as we can see more and more as we are bringing this to the market That is very, very feasible on that side, a very positive outlook. Your second question on the geopolitical, say, effect on Drager, does it let's say, is that in an induced hike of expenses or cost? Yeah. I would say it we can no longer say that it goes unnoticed.

20:47 So the blocking of the state of Hormuz and Iran conflict do have some limited effect on Drager. We see currently higher logistics cost in air and sea freight. The rates have gone up all over the globe with an expected impact of up to €10,000,000 for the full year 2026. And in the region, we see a little bit lower top line as the business is muted, it is becoming difficult to travel in the area. However, it's relatively small given to the comparison to the overall cost and size of the business of Drager.

21:41 But it does have some limited effect in the meantime. I remember I predicted in the first call we had this year that it will last for the minimum for the remainder of the year, and that is what we are currently seeing. And it will take years to rebuild the capacities. Whenever that commences, rebuilding of the refineries and so then we will benefit for sure. That's very helpful. If I just can follow-up on the safety margin, I mean, we are approaching now kind of peak level most like this year. I mean, is this the peak or do you see further expansion potential from there?

22:30 Yeah. We will discuss this further on the Capital Markets Day with you hopefully in person, mister Reinbach. So in general, I would not say it's the peak and from now we will see a decline. So that's for sure. So I don't feel that. Okay. Perfect. Thanks very much. Ladies and gentlemen, this was the last question. I would now like to turn the conference back over to Stefan Drager for any closing remarks.

23:17 Well, it appears that you are saving all your questions for the discussion in November. So I look very much forward to meet as many as possible from you in person by then. So until then, thank you very much for your interest, for being with us today and have a pleasant summertime and look forward to see you meet you again in the not too distant future ideally in November. Thank you very much and goodbye. Ladies and gentlemen, the conference has now concluded. Thank you for joining and have a pleasant day. Goodbye.