Ladies and gentlemen, thank you for standing by. I'm Moritz, your CorusCall operator. Welcome, and thank you for joining DEUTZ first half 2021 results conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Please press star key followed by zero for operator assistance. I would now like to turn the conference over to Christian Ludwig, Head of Investor Relations. Please go ahead.
Thank you very much, and 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. Mr. Hiller will walk you through the highlights of our H1, and then Mr. Schulte will say a couple of words on the numbers before we hand over to a Q&A. Please be aware of the disclosures at the beginning of the presentation, and also, I want to point out that the call will be recorded. Thank you so much so far, and now I'll hand over to Mr. Frank Hiller.
Yeah, ladies and gentlemen, warm welcome to the results for the first half of 2021. I will start with the operational and strategic highlights. We had a significant new order growth. Orders on hand are up of around 110% year on year. For sure, we have some extraordinary effects by price increases and also by stopping some engine models, which caused a pull-forward effect. I think the order increase is really a positive, a very positive sign. Double-digit percentage increase in unit sales and revenue, and this in nearly all segments. Exception is the stationary equipment, which is a small segment. We have a significant improvement in operating profit, for sure, based on cost savings through our efficiency program, which we started 18 months ago, Transform for Growth. We are confirming the raised full-year guidance for 2021, despite the difficulties in the supply chain.
For sure, this will be also a topic for us for the second half. Supply chain issues are really challenging the organization, and for sure, if those topics would not be on the desk, even a higher turnover and margin could be possible. Further on, some strategic highlights after the reporting period. It is a new strategic partnership with AGCO and ASCO, which is very important for us. Also on the technical side, the hydrogen engine is ready for the market. I will come to that later on. First, on our global Transform for Growth efficiency program, this is on track, and we are focusing on a total saving achievement in the year 2021 of nearly EUR 40 million. The target of our program is to save costs on the staff side and also reduction in operational costs and warranty costs.
We started a voluntary reduction program last year. This was taken by 361 employees. Until the end of the first half of 2021, 109 employees have already left the company. Until the end of the year, the number will raise up to 171 people. In total, the workforce is reduced by 275 people compared to the end of 2019. This results out of the Transform for Growth program, but also on the fixed-term contracts coming to an end and neutral attrition. The program is delivering according to plan and gives a good basis for securing the long-term competitiveness of the company. Having a look at our activities in China, also this is on track in the first half year. The unit sales was around 15,000 engines, revenue nearly EUR 125 million, and the EBIT contribution for DEUTZ around EUR 3 million.
You see this is in a ramp-up phase and developing very nicely with an EBIT margin in the joint venture of 4%-5% EBIT ratio. For this year, we have planned a unit sales of 35,000-40,000 engines. Next year, 2022, the target is 80,000 engines, and the capacity we are installing is 200,000 engines. We assume that we will reach this number within the next year shortly because the demand is very high in China. You see some pictures here from the new location in China. This is developing very nicely. Another topic which is important for us and for our performance is our service business. Looking back into the last year, 2020, the crisis year, also in this year, service performed very well.
We stayed in the crisis flat on the revenue compared to competitors which had a reduction of around 10%. You see that our measures in the service business are performing. Now in this year, with a much better market environment, the revenue is racing up nearly to 15%. New orders even higher, nearly 20%, and orders on hand is more than 60% higher than last year. A lot of measures are taken here. For example, lifetime parts warranty and lifecycle solutions are just some examples. Since Q3 2021, the service business is marketed independently under the S-DEUTZ brand. Having a look on the customer side, a very important relationship also coming out of the past is the relationship with AGCO, especially with the Fendt brand. We are delivering since years our 4.1 L and 6.1 L engine to Fendt.
This supply agreement is now prolonged until the end of the decade. Furthermore, we discussed collaboration on future technologies. Here, especially our E-DEUTZ activities are in focus and sub 150 horsepowers. In the past, AGCO was producing these engines completely by themselves. Here, we are checking the possibility of a closer collaboration, and this is, I would say, a normal trend which you see in the industry because the combustion engine is coming more under pressure. The players in this field are more open to team up, and this gives us also in the future a good opportunity. Not only in our segment, in the off-road segment, also discussions are going along in the truck environment. I can say the industry is very open for collaboration, and this gives us an additional possibility to win additional business. Another topic is the supply agreement with ASCO.
ASCO is a completely new customer to us. We have a supply agreement delivering engines out of our existing plants to ASCO. ASCO is relevant for all our segments. They are producing engines in the agricultural environment, also construction equipment, and for logistic applications. In the next years, there is also the opportunity to build up a local JV with ASCO. We have to see how this develops, but it is a first step to be a supplier to ASCO. Also, we want to use the ASCO network on the service side to be more present in service in Turkey than before. On the technical side, a real highlight is our hydrogen engine, which is now ready for the market.
This is based on the 7.8 L diesel engine and works completely with 100% hydrogen gas and meets all the criteria which are set by the EU for zero emission or zero CO2 emission engine. Yeah, we see here a big potential. Also, in connection with applications for fuel cells, we do not see the hydrogen engine as a substitute for fuel cells. We think both technologies have their opportunity in different environments. We will start with this engine in stationary equipment. A corporation or a first pilot application is already planned for the next year together with the regional utility partner here near around Cologne. The engine is scheduled to go into full production in 2024. Maybe so far from my side, and I hand over to my colleague, Sebastian Schulte, for the numbers.
Thanks, Frank. Also from my side, good morning to all of you for today's investors and analysts call for the first half of 2021. Looking at the top line of what we achieved in the past six months, as Dr. Hiller already said, we have a significant increase in new orders amounting now to roughly more than EUR 1 billion in the first six months, up by a sharp 65% from the previous comparable period. We need to mention one thing: some EUR 100 million out of that, representing roughly 15,000 engines, are sort of an extraordinary effect coming mainly from June when some customers brought some orders forward in response to price adjustments. We reacted on the market situation, increased prices on the 1st of July, and some customers secured some orders on the old prices, which was expected.
Also, with a particular one customer, we agreed on a new order procedure with longer lead times. As part of our scanning through the portfolio of engines, we decided to discontinue an old engine series. As you usually do, you give the customers the opportunity to place a last order. That is what they did, and that explains that 15,000 engines or EUR 100 million orders intake being brought forward. In terms of unit sales, we sold 93,000 units, including 19,000 units from our Torqeedo business. That leaves 75,000 DEUTZ engines, a significant increase compared to the previous year's period, translating also then into a book-to-bill ratio of 1.34 for the first half.
However, if we were to look at the June numbers, that book-to-bill ratio would even be significantly higher, particularly in the regions of the Americas and Asia where our order backlog now represents quite a long period of time, more than six months. We have a solid order pipeline ahead of us. In terms of revenue, we increased from EUR 620 million to EUR 770 million half year over half year, 25% up. That's again slightly lagging behind the new orders. If you go look on the revenue in a bit more detail, on the left-hand side, we see the regional breakdown. What we see here is pretty much proportional growth across all regions. Obviously, particularly in Europe and in Germany, quite a strong recovery if we compare to the 2020 numbers. These regions were hit more significantly by COVID than, for example, Asia, but also in Asia-Pacific as well as Americas.
We grew significantly, as I said, across all regions. If you look at the breakdown by application segment, we have only one exception which did not grow; that was the stationary equipment segment. All the other applications, we grew. The biggest relative growth rate was in material handling with plus some 50%. The biggest absolute growth was in construction equipment. We grew by more than EUR 50 million in terms of revenue. Also quite, I think, solid for us is that in the service business, as Frank Hiller pointed out earlier, we closed the first six months with EUR 195 million revenue. It is in so far very important because, first of all, service was not hit that badly last year due to COVID. Growing 50% is good. Also, we have here particularly attractive margins which back up our profitability in the medium and long term.
In terms of profitability, what we see here is a significant jump, particularly from Q1 to Q2. Q1, we closed more or less break even, 0.2%. Now, in the second quarter, we secured EUR 16 million EBIT, 3.7%. Step by step, moving further ahead to our target profitability margins. If we accumulate that over the first half, we come up to EUR 16.8 million or, in relative terms, a margin of 2.2%, coming significantly higher than the negatively or heavily impacted H1 2020 of - 8%. The main reason for this jump is, on the one hand, obviously the growth and volume of our business with economies of scale going back to a more healthy level of production.
Also, I think that's even more importantly that we see the cost savings coming from the implementation of our Transform for Growth program now, hitting more and more of the bottom line and the P&L. Also, one special effect we had in the first half last year, we had a particular one supplier which went through an insolvency proceedings. In order to secure our supply, we had to back them up with payments. That was a situation which does not affect us this year anymore. That also contributed to that sharp rise in profitability. If we look at some other key figures here in terms of R&D, the overall expenditure was slightly lower than the prior year period, EUR 46 million down to now EUR 39 million.
R&D ratio down to 5.1%, impacted by, on the one hand, the reduction in spending, but also the increase in turnover for that period. In terms of capital expenditure, on a first glance, down from EUR 89 million to EUR 33.6 million. If you see there, we're showing separately the effects from IFRS 16. We take them out because that was a particular special situation last year by the extension of some leases and the replacement of expired leases, which then under IFRS 16, also we need to show in capital expenditures. We take these situations out. We're more or less stable in terms of CapEx. Working capital, the ratio decreased. We showed you the ratio always considering the last 12 months. It decreased from 18% to 17%.
We see that in the last six months, we built up working capital by EUR 10 million, definitely much, much more underproportional to what we grew in revenue. We will come later to the cash flow. That is one of the reasons why the cash flow was slightly more positive than what we initially expected. I would also like to say that if we consider here the revenue of the last three months and annualize that, our ratio would be significantly lower on the range of 14%-15% now. Here, as you write on that slide, our much more rigorous management of working capital across the group, particularly when it comes to receivables and payables, starts to pay off working capital ratios as well as free cash flow. That is the key point for the next slide here, cash flow and net financial position.
Had a sharp increase in cash flow from operations by almost EUR 90 million, now to EUR 45 million in H1. Where does it come from? Obviously, from the EBITDA development operational business, as explained before, and that we are now on a much more favorable level of working capital. This translates then also directly into the free cash flow. We have achieved a positive free cash flow with EUR 9.7 million after six months, influenced by, as I said, cash flow from operations, but also by the slight reduction in investing activities. That is certainly positive news that we can, in a growing business environment here, show that we are well in control of our free cash flow and thus also the net financial position, which increased slightly from December 31 to now June 30, mainly because of a slight increase of lease liabilities. Take them out.
We have further reduced our net financial position without leasing now to some EUR 23 million debt. Here also, solid development when it comes to the liquidity. Coming to the equity and funding numbers. First of all, we have grown our equity position by some EUR 20 million. The ratio has gone down slightly by 1%, but still to a very, very healthy 44% ratio. The balance sheet sum grew a little bit simply because net working capital increase on asset and liability side lifted up here. The balance sheet a little bit, but again, I think with more than 40%, we are at least in the current business environment on a very, very healthy level above our target figure of 40%. When we talk about the financing situation, there is no update here. As you know, we do have two major facilities.
On the one hand, the syndicated loan facilities of EUR 160 million. You see here in the right part of the chart, EUR 160 million, of which we are utilizing currently EUR 65 million. On the other hand, the rather short-term KfW-backed facility of EUR 150 million, which we have not utilized and we also do not intend to utilize in the coming months. Long-term bank loans, repayment profile up to one year, EUR 10.3 million. One to five year, EUR 8.4 million. You see here also no impacts expected on our or no major impacts expected on our cash flow position. Yeah, to sum up, good development and profitability, promising development and cash flow, and still a very, very solid balance sheet and financing ratios. Having said that, I would like to hand over back to Frank Hiller. Thank you.
Yeah, thank you. Coming to the group guidance for this year, we are confirming the raised full-year guidance for 2021. This, despite the challenging supply situation, unit sales will be on a level of 140,000-155,000 DEUTZ engines. The revenue in between EUR 1.5 billion-EUR 1.6 billion and EBIT margin before exceptional items, 1%-2%. On the free cash flow, we have a change. We increased it to a negative low double-digit million euro amount. Previously, it was a low to mid double-digit million euro amount. I think this is a really good message because in the old guidance, there was the sale of the Cologne DEUTZ site. The installment of the purchase price was included for this year. Now, this will be postponed until next year. This is a number of around plus minus EUR 60 million.
We really have a very good improvement on the free cash flow side. Talking about the final installment of the purchase price for this Cologne DEUTZ site, unfortunately, the negotiations between the owner of the site now and the city take a little bit longer, but there is no risk on this topic. We will have the benefits out of this payment then in the next year. Good so far. Now going to the midterm targets for 2023 and 2024. We are on a good way to achieve our targets. See it very positive. Revenue above EUR 2 billion, EBIT margin 7%-8%. What are the important topics to be technology neutral on the technology approach side and also expand our high-margin service business? Implementation of the regional growth initiatives is in focus, especially Asia and China.
For sure, the systematic implementation of our efficiency program, Transform for Growth, adjusting costs on the SEF side, operating costs and optimizing of the global production network, and reducing complexity, especially in the product portfolio. The share we are focusing on our EDEUTZ activities on the midterm target is 5%-10%. As said, I would say, we are on a very good and promising track. Coming to my last page, and this is an important page. It is a save the date for Capital Markets Day, which we are planning at November 17, 2021 in Stockstadt am Rhein. This is near to Frankfurt in a location, Köln. This is, I would say, a technology and experience world for construction equipment. Here you can see our new products and services in live performance. I think that could be very interesting for you.
For sure, we will also provide you with the latest data and business development. It would be a pleasure to meet you there November 17th. Please save the date. Maybe so far from our side on the presentation side. Now we are open for your questions. Thank you very much.
Yes, thank you, Frank. Operator, please open the line for questions.
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 the 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 handset 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 comes from Charlotte Friedrich from Berenberg. Please go ahead.
Hello. Thank you for taking my questions. I'll do them one by one. Can we talk a little bit about the order intake, please? Do you have an idea of the sort of level of aggressiveness of the orders that you're getting in, for instance, from rental chains at the moment, double orders, and perhaps also a first look at current trading? For instance, is your book-to-bill in the third quarter so far above one or rather a touch below, maybe?
Yeah, thanks for the question. First of all, in terms of aggressiveness, obviously, and I tried to explain that also in the presentation earlier, I mean, 1.3. If we look at June number, as said, it is an even higher number. That is not sustainable in the long run until we begin to double our business. We do expect a decrease in the book-to-bill. Currently, I would not say we are expecting a number very soon going below one, but certainly going more towards the one. In terms of sustainability or aggressiveness, we do not expect double bookings here because whenever we book something, it is order intake, it is a binding order. It is our full expectation that everything the customer has booked from us, we will deliver and they will accept.
In that sense, yeah, going on current numbers, we're not able to make statements here, but would obviously continue to report on the development in Q3 then as the time comes.
Perfect. Thank you. The second question would be on China and the momentum that you're seeing there. Do you have a feel that perhaps the recovery is slowing down to some extent?
Yeah, especially on the truck market, we see some market decrease because out of the China VI legislation. A lot of trucks with the old emission legislation were produced and they are on stock. Here we see right now a little dip, and let's see how long this will take. I think some months. Overall, especially on our off-road segment, order intake is stable and it's according to plan.
Yeah, maybe let me add one thing rather towards the short term. We have a particular, when it comes to the Asian region, very high book-to-bill ratio, and our order backlog covers here roughly six months. We need to observe for the next months, but we do not see here a short-term impact.
Understood. The final question would be on price increases. Can you give us an update on how much you've passed so far in terms of price increases and what your plans are going forward?
We are trying to pass over as much as possible or even more if possible on cost increases to the customers. Again, we need to keep in mind here that with a lot of customers, we do also have long-term contracts, which is certainly a good thing in the long run. Most of these long-term contracts do include clauses, contract clauses, which include also an adjustment for price increases. Some of the price increases we do expect will have a slight lag in time. We will really foresee the first measurable impact on the P&L. I expect the end of Q3, beginning of Q4, but the full impact we expect rather in 2022.
Okay, thank you. I'll go back to the queue.
Next question comes from Richard Schramm from HSBC. Please go ahead.
Yes, good morning, gentlemen. My first question refers to the development in compact engines on the operating side. How would you estimate your incremental margin in this segment here if we look to the quarterly developments in Q1 and Q2? Hello?
Just a second, please.
Oh, sorry.
No problem. You're referring to the development in our appendix where we came in compact engines from - 49 to + 0.3. Is that correct?
Yes. In fact, I look between Q1 and Q2. In Q1, we had - 6. In Q2, we had a plus of 6.
Okay. Sorry. Yeah, got you.
The delta was some 53. That is, I think, the closest development, which should reflect your actual cost position, I assume. If I calculate correctly, the incremental margin would be around 23-24%, but I just wanted to check. What do you think about the sustainability of this figure here?
Yeah, I mean, that is what comes out of the calculation. Obviously, the main reason for that between that period of time, this is why I was asking back in order to better understand where you come from here. The main reason here is the further ramp-up in production, mainly scale effects, particularly between Q1 and Q2. We do need to see impacts or sizable impacts on price increases or on cost increases. It is mainly due to scale effects. On a first glance, your number, which you calculated here, makes sense to me.
Okay. The further development, I mean, if we assume kind of normal season pattern that Q3 is likely to be weaker again during the summer holidays, then it's fair to assume that also the risk is there that you slip again below the break-even line in that quarter here on the operating side.
Regarding the small engine, sure, the risk is there. This is, as you said, the summer quarter now is affected due to seasonal reasons on our side and some of our operations, but also our regional companies. We do have outages due to vacation. The same applies to the customers and, quite frankly, particularly to some major customers in that small segment. There is a slight risk that we go below that current level. This is also why we are still, as Frank said earlier, remaining on the rather cautious outlook for the rest of the year for exactly that reason.
Thank you. Concerning the other segment, I was positively surprised to see that you have achieved a break-even result here in Q2. I wanted to check if this is also purely operating-driven and should be now a sustainable level here going forward, or was there some special effect which helped here with improvement?
In Q2, as you said, we are in Q2, as you said, we're pretty much break-even now in the other segment. As you know, Mr. Schramm, that is from the development in Torqeedo here, where particularly the June was quite a good month. Also not completely unexpected, as the Torqeedo business does have a seasonable factor in that. In Q2, there was no special effect here in that sense. Yeah, that's correct.
Okay. Thank you.
Thank you.
Final question concerning your R&D spend, where we have seen an absolute decline. I mean, the decline in margin is no wonder, but I would have expected that the level would remain absolute. Is this only a temporary issue, or is there a kind of structural effect behind that?
Mr. Schramm, I think this is now an effect which we have in the first half. This will be on a level of the last years, for sure. The focus is completely different. When we, in the last years, invested a lot into combustion engines and new engines, this is quite limited. We do only development in combustion engines together with partners or on the basis of existing engines where we do further development. The main goes into, I would say, alternative solutions or either its activities and for sure also the hydrogen engine.
Yeah, that's what I expected, that there are some fields where you have to spend clearly more than in the past year to drive forward your innovative products then. Okay. Thanks a lot.
There are no further questions at this time. I hand back to Christian Ludwig for closing comments.
Thank you very much for your questions. I wish you a happy day, and I hope very much that we'll not only speak for our Q2 results, but also see each other at our Capital Market Day in November. The save the date will go out to you all, and we'll follow up round about in September with a detailed invitation. Until then, all the best and have a week. Bye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day.