A warm welcome to everybody on the line . Together with me in the room today is our CEO, Dr. Frank Hiller, as well as our CFO, Dr. Sebastian Schulte, and our new Head of Controlling, Mr. Oliver Neu. As usual, Mr. Hiller will walk you through the highlights of our nine-month results, and then Mr. Schulte will say a couple of words on our numbers before we hand over to a Q&A session. Please be aware of the disclosures at the beginning of the presentation, and I also want to point out that the call will be recorded. An audio replay, including your name and your questions, will be available for three months on our IR website. After that time period, it will be deleted due to data protection rules. Without much further ado, I now hand over to Mr. Frank Hiller.
Yeah, ladies and gentlemen, good morning and a warm welcome to our nine-month figures. I would like to start with an overview of our operational and strategic highlights. First of all, the market is good. Willingness to invest remains high from our customer side. This is relevant for all regions and all segments. We have double-digit % increases in new orders, in unit sales, and revenue. Orders on hand have more or less doubled on a level of EUR 0.6 billion. The limitation is not the market; the limitation is the supply chain. I think that goes along with the whole industry. We have a sharp rise in the EBIT margin before exceptional items. Our restructuring program, Transform for Growth, which we have started 18 months ago, is paying off and leads also to free cash flow in a positive territory.
We confirm our guidance for 2021 despite the supply chain challenges. We achieved further milestones in our green, more or less green activities of highway drive solutions. This is also the next point. I'd like to speak a little bit about hydrogen in this case, especially about our hydrogen engine, the TCG 7.8 H2. We presented that two months ago, and the engine will find its first application in the stationary equipment for power generation together with a regional utility company, RheinEnergie. We are really happy because this is a real highlight, and we received very good feedback from the market. As you can follow, other companies are now also following the way of the hydrogen engine. I think this has really a big potential, and the hydrogen engine complies with the CO2 threshold set by the EU for zero emissions.
It is a zero-emission engine, and we are working hard on this topic in development and preparing production for that so that we can reach full production in 2024. Also, in these circumstances with hydrogen, we are going in a cooperation with the German Aerospace Center DLR. The focus here is on making a more or less environmentally friendly construction site, which means having all the equipment around with a CO2-neutral approach and also having the relevant infrastructure for this. This is on the hydrogen engine side. Hydrogen, on the other side, the fuel cell technology is interesting for us, and we went into a strategic partnership with Blue World Technology, a Danish company and developer of fuel cell components and systems, including for stationary applications, so gensets and the automotive sector. The technology of Blue World Technology is based on the reformation of methanol, which is a renewable liquid fuel.
The key aspect of this alliance is, on the one side, and I think that's the most important, to have an exclusive distribution and service agreement with Blue World Technology for stationary fuel cell generators. It gives us the opportunity to sell also this technology in the future, and this is combined with a 10% stake in Blue World . This will be completed in quarter four this year, after the diligence has taken place. We expect also the fuel cell technology to be important in the off-highway segment for mobile applications in the future. Also, this is a step towards a CO2-neutral future of the company. Looking at our service business, service business, as you know, is relevant for us to keep our customers happy, but also, on the other side, to increase our profit.
We have defined already years ago a clear path to a stronger service business, and this really pays off. Here, we have a revenue increase of more than 16%, new orders on hand, nearly 19%, new orders intakes, sorry, more than 18%, and orders on hand also plus of nearly, yeah, 54%. We have substantial growth, especially from our parts business, and the target for this year is to reach a turnover of EUR 400 million, which was defined early in last year, and I think we are on a very good way to fulfill this. Coming to China right now is, I would say, all the construction companies. We see a market weakness in China. So far, looking at our JV with Sany, which is the most important activities, activities are running well.
Unit sales is on a level of more than 18,000 engines so far, revenue nearly EUR 160 million, and also positive EBIT contribution to our results of EUR 1.5 million. As you know it also from the newspapers, there are some effects which more or less cool the market down also by political reasons. Temporary power outages is one big topic. The other thing is coronavirus. They still have challenges on that and take quite serious measures with regional lockdowns. This is influencing activity, property market, as you know. Right now, we have also the effects by the new emission legislation in China, China VI, which was introduced mid of the year. For sure, there's still some stock level on old trucks, which more or less reduced the demand so far. We see this as a, I would say, temporary effect.
Normally, in China, downturns and upturns are quite sharp. We estimate that this might go on for six months, maybe 12 months, but we are also prepared for a market increase in China. What I would like to point out is that there is no effect on our guidance for this year by this topic, and we see also no effect on the mid-term guidance on our top line to reach more than EUR 2 billion turnover, 2023, 2024, and to reach our EBIT margin of 7-8%. Maybe so far from my side, and I would like now to hand over to Sebastian Schulte.
Thank you, Frank. Good morning, good day also from my side to our nine-month results call 2021. If we start with the top line, looking at the top line results for the first three quarters, we see, as already stated before, a significant increase in new orders from EUR 933 million in the previous year, nine months, to EUR 1.5 billion, slightly over EUR 1.5 billion, so increasing by more than 60%. One aspect to mention here is that we do have, or we did record some positive effects, particularly September and June, more than EUR 100 million coming from certain customers bringing forward their orders almost for a year, mainly in the U.S., as a response to longer lead times in particular and some price adjustments. We see also on the unit sales an increase by 34%, including torpedo engines.
If we take out the torpedo engines, the increase is even slightly higher, 38%. Unit sales in the first three quarters was some 145,000 units. On the revenue side, we increased by 26% to EUR 1.18 billion, EUR 1.17 billion. What you see is, first of all, book to bill is 1.3, still a very high ratio. Looking at our regional distribution, this is even higher in APAC and Americas. In some of these regions, we do see that the order backlog covers more than 30, sometimes even 40 weeks of business going forward. What you also see is a slightly higher rise in unit sales than in revenue. That is due to the fact that we do observe a shift in the product mix towards smaller engines, the engines with a capacity of less than 4 L.
That explains this slight deviation in the growth path here. Orders on hand, order backlog, more than doubled now. If we compare it with the previous period, we're now on the level of EUR 660 million, which is a significant number of order backlog and gives, again, a certainty of the business volume going forward, explaining then the high order backlog coverage. To move on, still continuing with the top line, looking first of all on the left-hand side, the breakdown revenue by region. We see significant increase pretty much in all regions, led by Germany, 32%, followed by Americas, 30%, and then on par Europe without Germany as well as Asia-Pacific, and lagging a little bit behind the relatively small market, Africa, and Middle East.
As stated before, particularly with America and Asia-Pacific, without the supply chain challenges and shortages, we would have grown more in revenue in those regions because a lot of that is going into order backlog. On the right side, we'll see the revenue breakdown by our application segments. This is clearly led here, the increase by the material handling business, 71% increase compared to previous period, but also in other construction equipment, 32%, agricultural, 21%, and services mentioned by Frank Hiller earlier, growing by 16%. We have to keep in mind that the drop in service revenue in the last year also was not nearly as high as in the new engine. In total, we can see here that we have a significant increase, mostly double-digit, across all regions and across all application segments we serve.
Moving on to the bottom line, we do see a continued improvement in our earnings structure here in our earnings. If we compare it with the previous period, we are now after three quarters by some EUR 31 million EBIT. We recorded the same period last year, a high loss of EUR 66 million due to the situation we had in 2020. What contributed to this increase? Obviously, the increased volume of business, as just stated, benefiting here from economies of scale, but also it goes hand in hand with the cost savings as a result of our implementation of the efficiency program Transform for Growth. Last but not least, last year, 2020, was also negatively impacted by suppliers, particularly in the casting business, where we had to support them in order to secure our contributions from them. Summing up now, we have achieved 2.6% after nine months.
You see on the left side that Q2 and Q3 was in the range of 3.7%, 3.5%. Q3 was slightly lagging behind Q2, but also due to a slight decrease in revenue because in Q3, we had the summer month, which proved to be a little bit of a seasonal effect due to holidays on our side, but also on the customer side. Net income before exceptional items, EUR 26.8 million, leading to an EPS before exceptional items of EUR 0.22. Moving on to some selected key figures, we see here on R&D, slight decrease in R&D expenditure, EUR 66 million to EUR 59 million on the percentage of sales. The decrease is obviously higher because sales have gone up significantly in this period compared to the previous one.
Also, in CapEx, we've gone down a little bit, but we had quite a high level still in 2022, which at that point had been boosted up by the extension of leases and replacement of expired leases. The whole subject of IFRS 16, if you take that out, like some EUR 3 million lower than on the previous year. I think very, very good news is working capital. It increased by 11%. However, we increased business significantly. We were seeing here that the ratio has gone down from 18% as of December 31st, now to 17%, and the ratio decrease is influenced significantly due to quite a rigorous management on the working capital side, mainly on receivables and payables, where we are implementing a much, much stronger global management on that. We will see later that this helped us also in terms of cash flow.
Cash conversion cycle has been reduced significantly over the past nine months. Bringing me to cash flow and net financial position, we do see here sharp rise in cash flow, starting with cash flow from operating activities, + EUR 87 million, now at EUR 68 million in the first three quarters. Obviously, driven by the earnings performance improvement and the earlier mentioned net working capital management across the group. We'll now look at free cash flow. We'll see also a significant increase because paired by what I just said, we'll have here reflected the slight reduction in CapEx as well. We are now positive after the first three quarters by EUR 15 million, which again is positive news. In that sense, net financial position stayed more or less constant, particularly as lease liabilities have gone up a little bit.
If we take them out, we managed to further reduce net financial position by some EUR 5 million. Finally, moving on, the balance sheet structure as well as the financing overview. First of all, equity ratio remains at a very comfortable level. We are above 45%, and that's what we currently have defined as our target number. Here, we're well on track. On the credit financing side, we informed earlier this year that we had managed to early retire the credit line, KfW, that is the German state support facility. We managed to return that credit line of EUR 150 million, which was granted to us as a support aid during the COVID crisis. We retired that ahead of schedule and secured with other banks bilateral lines summing up to EUR 75 million.
This means now we remain to have unused facilities totaling EUR 200 million available, summing up from the EUR 75 million bilateral lines as well as the existing EUR 160 million loan, which has to return until June 2024. You see here on the chart in the middle that currently out of that, some EUR 235 million available lines, we are utilizing only EUR 35 million. On the long-term bank loans, minor numbers in terms of repayment profile, EUR 10 million within 12 months, EUR 6 million within five years on top. Summing up, we are well positioned here. We have a very solid and healthy structure on both balance sheet and financing situation. In that sense, thanks for your attention. I would hand back to Frank Hiller for the outlook going forward.
Yeah, ladies and gentlemen, coming to our guidance for the year 2021 and also midterm targets 2023 and 2024. On September 13th, we raised our guidance to unit sales of 155,000-170,000, engine revenue of EUR 1.6 billion-EUR 1.7 billion, EBIT margin 2%-3%, and free cash flow breakeven. We are confirming this, and we are also confirming our midterm targets for 2023, 2024. Despite difficulties in supply chain, which we will see, and we are convinced we will see the challenges also next year, especially in the first half of next year and the temporary downturn in China. Maybe so far from our side, and we are open for your questions. Thank you.
Alright, yes, would you please open the line for questions? Thank you.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please lift the headset before making your selection. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from the line of Jorge González Sadornil from Hauck & Aufhäuser . Please go ahead.
Hello, thank you, Frank and Sebastian, for taking my question. I first would like to ask about the joint venture with Sany. The production target for the joint venture that was published in the Q4 was 80,000 in 2022, if I remember well. Can you please add that data on us on this estimate taking into account the current new environment? My second question will be also related to this. I have the impression that you have slightly adjusted the way you have given the EBIT contribution for this unit. Can you give us a reference for the adjusted EBIT that you expect coming from China this year and maybe from next year? Finally, I think that at this time, you are producing mostly engines for trucks.
The growth of production expected for next year was also coming from the front truck engine production, or you were also going to deploy lines for other types of engines? Thank you very much.
Yeah, thank you very much. Maybe I start with China. The situation right now is that we have reached in the GV 18,300 engines. So far, our joint venture activities with Sany is very much related to truck engines. Especially since October, we have really a sharp downturn because of the outages of power and also the stock level of old trucks with the old emission legislation. I think this will take maybe six months to come back on a demand level. We are right now in the phase of reviewing what this means on volume next year. The intention in the past with a stable market was to reach 80,000 next year, all with our activities. This will not happen right now, and we are reviewing the numbers.
The EBIT effect will be limited, and also the EBIT performance so far of the GV is above our expectations.
Yeah, I mean, if I may continue, and if I understood your question correctly, you also wanted to understand what is the EBIT contribution we have and if we changed our method of accounting for that. To the letter, the answer is no. We account for the Sany joint venture or for the joint venture with Sany according to the equity method. What we show in our accounts, and you saw it earlier on the presentation when Frank Hiller showed his outlook in China, in the first three quarters, the share of this joint venture, of this profit, of this equity accounted investment was EUR 1.5 million. It comes from the net income from the joint venture, so earnings after tax and then reduced by PPA effect in our accounting. EUR 1.5 million is the result we've seen in the last nine months.
Sebastian, sorry. For the previous quarter, you commented that the contribution was EUR 3 million, and now it is EUR 1 million. This is because of the PPA then. Can you give us a guidance of the PPA for the full year, please?
Yeah, the PPA is in the range of EUR 0.3 million per quarter. Full year, roughly EUR 1 million. A little more, a little more, but on the range. It is a small effect.
Mr. González, have you finished your question?
Yes, thank you very much.
The next question is from the line of Charlotte Friedrichs from Berenberg. Please go ahead.
Hello, thank you for taking my questions. Three, if I may, also starting with your China joint venture. Is it correct to look at it this way that you have maybe a run rate of 3,000 to 4,000 engines per quarter now for the next 6 to 12 months and then an improvement thereafter, but you're not quite sure about how big that improvement will be at the moment? The second question would be around the supply chain. Can you give us an update where you are now in terms of cumulative price increases and when you think that you will basically balance out with raw material price increases here? Thirdly, on cost savings, can you give us an update on where you are now as of nine months, 2021, what the expectation is for the full year this year and then the years after? Thank you.
Maybe I start with Sany, the activities. Right now, you have to assume that the factory in Sany, the truck production, is completely shut down by these power outages. This is more or less the situation which you find in the whole industry. In some cases, they really have reduced the power distribution by 100%. Yeah, they completely shut down the activities. Right now, it's difficult to say how long this will last and what will be the effect on the figures. We are right now in the phase of re-evaluating this. In an overall view, we are absolutely convinced that this will come back then later on even stronger because our addressable market with our products is 40% of this is China.
The second topic you raised, supply chain, I think also here China helps us because this gives us the opportunity for second source. For sure, we have increases on the cost side on the supply chain. Right now, it is also the time to pass this to our customers. For sure, nobody wants to have higher prices and higher costs, but there is a clear understanding also of our customers that additional raw material prices and other effects have to be passed through.
Following up with your third question regarding the progress of the efficiency program, Charlotte, you know that in 2020, we had the range of EUR 12 million-EUR 15 million first bucket of cost savings. In 2021, in the full year, we are pitching somewhere between EUR 35 million-EUR 40 million right now. After nine months, we are in the high 20s of what we have achieved. The majority of that effect relates to staff costs. On the one hand, that was the reduction in particular overhead due to this voluntary redundancy program where we reported in the past that we have achieved our target numbers. This also includes financial effects across the operations, across the company in Germany, at least due to the agreements we had reached between company, the works council, and the unions regarding the collective bargaining agreement.
There were some voluntary contributions by the employees which we're utilizing and obviously which are contributing to the numbers. We are on track towards that EUR 35 million-EUR 40 million for the full year in the high 20s, what we achieved so far.
Understood. Thank you. One follow-up on the supply chain and pricing situation. If you add together all of the price increases that you've passed so far, where are you now, and are you planning any additional ones?
Yeah, we are in permanent discussions. For sure, looking at our contracts, there are some regulations inside. If there are extraordinary effects, we have to discuss it. We are in permanent discussions with our customers. This is not only a discussion of price increases by higher costs. This is also a discussion of the volume they need. For sure, the whole industry is short. I would say there is a good lever for us. We can only serve our customers in a good way if we have prices on a level which cover the additional costs on the supply chain side. The ongoing discussion, and I can tell you sales colleagues, they are really very busy with customers about the supply situation, about price situation. This goes hand in hand.
Okay, thank you.
Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone. The next question is from the line of Richard Schramm from HSBC. Please go ahead.
Yes, hello, gentlemen. I have to come back to this last topic, the increasing prices to compensate the higher costs you have. If I understood you correctly, there is no automatism in your contracts that you can pass on at least a certain portion of material prices to your customers as some other companies can do, obviously, as a kind of price escalation clause. You have to negotiate, obviously, your contracts one by one. Is that correct? Do you have a certain kind of list price increase which you apply for, let's say, next quarter or so, which is then generally valid for all customers? Can you explain a bit how this process runs? Thanks.
Good morning. It's not really that there is no automatism at all. It's a mixed picture. We do have certain contracts which do have price escalation formulas, but there are other contracts which are not completely modeled through. In the end, it's, as Frank said, it's a combination of, on the one hand, applying these formulas where they exist, but on the other hand, also taking account for extraordinary effects coming from the supply chain at the moment. That's why it's really not an automatism for the entire portfolio, but a combination of automated application of formulas as well as discussions and negotiations on top.
Okay. This suggests that there is quite obviously then a time lag you have to bear until you have compensation by higher prices from your customers, right? Can you give us an idea how big this gap is you have to bridge for the current year?
It's correct, there is a gap. There is a gap on the customer side. There's also a gap on the supply side because we have similar structures in place with our suppliers. If you remember our statements on the book to bill and on the order coverage, you obviously see also different gaps with different customers in different regions. What we can see, what we can certainly see is we did a major initiative around the first half of the year, and we're beginning to see the effects now on both sides, supply as well as on the customer side in our P&L. It's not the same, let's say, three months or five months across the board. You'll have some going earlier, and you have some going later. Mr. Schramm, we know, I think, this circumstance is quite well out of the past.
We are starting discussions with our customers also in times when prices on the supply chain side are still on the same level, but we see that price increases are upcoming. We do quite a front loading on this also in the discussion with our customers. The time lag in between, I think, will not be that significant.
Okay, thank you.
We have a follow-up.
Maybe to make it clear, these discussions about cost and price increases have already started at the beginning of this year.
Okay, thank you. Just a quick follow-up on the order side. I think we discussed this already last time, the visibility there if there are double bookings in orders or not because customers might fear that there is a shortage of supplies and they might order in excess of what they actually need. Do you think there is some activity like this going on there, or can you rule that out?
Yeah, good point. We are very cautious. We are very cautious here. The orders on hand could be much higher than what we are showing right now, taking all possible orders in. The limitation right now is more or less our capacity. We do not think that there are double bookings inside so far. We will see how this goes on. Right now, we are convinced that the whole next year will be a year where the market will not be a problem, where more or less limitation on the capacity side, especially on the supplier side, will be the challenge. We do not see really restrictions also for next year, not from the market side, challenges on the supply chain side.
Okay, thank you very much.
We have a follow-up question from Jorge González Sadornil. Please go ahead.
Thank you for taking my follow-up. I would like to ask again, and sorry about that, the joint venture with Sany. Can you give us an indication of the EBIT contribution that you expect from this joint venture, taking into account the production? You are now estimating for this year the 22,000. Regarding this year, although you have already commented that you are evaluating the situation, can you confirm if you still plan to deploy new lines for producing engines for off-highway type of machinery, or if you are also thinking about this and reevaluating the plan also in this sense? Thank you.
We are doing in this plant engines for on as well as for off-highway. I can tell you that the collaboration with Sany is very strong, and they are putting more and more orders to the joint venture, also more which was planned in the past. Talking about the EBIT development, for this year, more or less, it was planned in the original business planning to have a neutral EBIT margin, more or less a break-even result. This is so far still better, and also last year we performed much better. In the long run, the EBIT margin for China is also planned on this level of our company target of 7-8%.
The target is to, or the original planning was to reach this in 2023, 2024, and we are still convinced that will work because now the downturn, we see this really just for limited time. This is such a sharp downturn that we are convinced that there will be within some months also a sharp upturn.
Okay, thank you.
We have a follow-up question from Charlotte Friedrichs. Please go ahead.
Thank you. Two questions. The first one on the supply chain. Are you seeing any indications that the supply situation is starting to get better already, or is it rather the case that it's still hard to tell, no clear signs in any particular direction?
September was a very, very challenging month for us. October went much, much better. I would say it's still not really stable, and the biggest impact comes from semiconductors for sure. We are here convinced that this will be also a shortage going into the next half year or first half year of 2022. What we have seen now in October is that it has become much more better, but it's too early to say if this will go in this direction because it's still a little bit unstable. We are with a lot of suppliers, especially on the electronic side, in daily discussions about the logistic chain and so on. It's still not really stable.
Understood. The second question is a bit more general. If you look at your non-DEUTZ portfolio, with the current setup that you had, where would you like to strengthen that, for instance, through further M&A or partnerships? Are you happy with what you have at the moment, or are there still perhaps some white spots that you want to fill?
I think the general development will go very much into CO2-neutral applications. What we really focus on is our hydrogen activities. You have seen the minority share acquisition of Blue World Technology and also electrification. We have next week our capital market day. I hope to see you all there. You will see that there will be a real focus on, I would say, green technology because we are convinced that this will even more speed up in the future and that we are really in a leading role there. Looking just at the hydrogen engine, I think the feedback from the market was enormous. I am really happy to see that also other companies are taking now this direction. This helps us to also generate a good supply base for hydrogen engines.
The good thing is for this hydrogen engine, we have already capacities here, but there have to be some new development on the supplier side for injection systems and so on. It is much more interesting for the supply base. It is not only one company is following this way; other companies are also going in this direction. Talking about acquisition and where we spend our money on R&D in the future, it is more or less all goes into the direction of sustainable drives. For sure, we have also to make the existing classical, I would say, classical drive trains and combustion engines also in the future cleaner. This will be also a topic, but it is very much related to technology.
Thank you very much.
Thank you very much. There are no more questions at this time. I hand back to Christian Ludwig for closing comments.
Thank you very much for your participation and your questions. If there should be any questions left open, please contact myself or the IR department. As Mr. Hiller said, we hope to see as many of you as possible next week at our capital market days. If we do not see you there, we will talk to you at the latest with our full year results in March next year.
Thank you so much and goodbye.