Ladies and gentlemen, thank you for standing by. My name is Emma, your CORUS call operator. Welcome and thanks for joining the DEUTZ AG 9 Months 2020 results conference call. Throughout today's recorded presentation, all participants are in a listen-only mode. The presentation will be followed by a question-and-answer session. If you'd like to ask a question, you may press star followed by one on your touch-tone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Leslie Iltgen, Head of Investor Relations and Corporate Communications. Please go ahead.
Good morning, everybody, and welcome to our conference call on the nine-month results. With us today are CEO Dr. Frank Hiller and our CFO Dr. Andreas Strecker. Mr. Hiller will give a brief update on the business and point you to the key highlights of our nine-month results. Mr. Strecker will then cover the financials in more depth, as always. At the end of the call, we will be happy to answer any questions you may have in our Q&A session. Also, please let me remind you that this call will be recorded. A replay will be available on our Investor Relations website after this call. Before I hand over, also please pay attention to our usual disclaimer that you will find in the presentation. It is now my pleasure to hand over to our CEO, Mr. Hiller. Please go ahead.
Yeah, ladies and gentlemen, warm welcome to our Q3 results 2020. I'm jumping on the overview. What we can say for Q3 is that we have a significant improvement on operating profits compared to Q2 2020. We can definitely say that we have reached the lower end in Q2. Q3 was an improvement. Also for Q4, we see further improvement. The market trend is upwards. On the other side, I think it will take a little bit longer than we have expected to return to the pre-crisis level. Besides market, we are really focusing on our long-term strategy and also focusing on saving costs. On the strategy side, service is a focus, our profitable service business. Here we took further steps. We acquired DEUTZ Austria at the beginning of Q4.
This gives us now a direct market access to Austria, Czech Republic, Hungary, Slovakia, and Slovenia. You will see that later on that our service business is running well and is not that much affected by the crisis. Another important topic for sure is our China strategy. I will also update you on the China strategy. Q3 was also in the big focus of our Transform for Growth Efficiency Program. The improvements we did in Q3 are mainly caused by a consequent cost improvement versus market recovery. Going on the next page, page 5, to have a closer look on our efficiency program, the target you see on the right side is to reduce the annual costs from 2022 onwards by EUR 100 million yearly.
The main areas of actions are the optimization of our global production network, especially here taking our opportunities in China now into account and have also much more local production in China used this also for our European products. Also, automation and digitalization is in the focus, not only for the operating processes, also for the administrative process. All this ends in a group-wide streamlining of the organization to be more efficient. By doing all these measures, the consequence is to reduce the personal staff. Here, the focus is to reduce 1,000 positions worldwide by the year 2022. Within these two years now, this 1,000 positions should reduce for sure on a very social way. We have so far reduced by the first nine months in this year 490 positions by natural attrition and also reduction of temporary workers.
We have a voluntary program in place to reduce further another 350 people. This is running since two months, this program. We expect that this is running until March next year, and we are here on a good way. All these measures, and especially reduction of personnel, causes restructuring costs. Here we put this EUR 38 million restructuring cost into our Q3 results in 2020. The Transform for Growth Program will be an important basis for long-term competitiveness of DEUTZ in the future. Jumping on our China activities, as already mentioned, we took over an existing plant of SANY, a small engine plant in Kunshan. Capacity last year was 7,000 engines, and we are now upgrading this plant to a volume of 20,000 engines in the year 2020.
Besides this, our factory, which we are doing with Beinei, where we are producing the DEUTZ engines as a contract manufacturer by Beinei, this is in place. Production will start in 2021 for the engine models 2.9 and 6.1. Besides the small SANY plant, where we have now the volume of 20,000, we are starting the activities in Changsha for SANY. Why Changsha? Changsha is the headquarter of SANY, and here is also the production of the trucks which SANY launched last year. Therefore, this is out of logistic reasons, makes very much sense to have these new engine plants with a full capacity later on of 200,000 engines in Changsha. This will be ready in 2022. We'll have a demand of 80,000 engines in the year 2022.
In the meantime, we are building up a brownfield plant in an existing building of SANY with the equipment of the new factory. This will also be able to produce another 20,000 engines already next year. As you know, we raised our target to EUR 800 million turnover in 2022. China is really running very well. I think if the corona crisis would have come one or two years later, maybe we had the possibility to compensate all the downturn in Europe and in the U.S. by our upcoming China business. Right now, the volume is still very low, but it will pay off in the future. Going on the next page and showing you a little bit some pictures of what is going on. I start on the right side bottom.
Here you see the existing Kunshan plant where we have now the capacity of these 20,000 engines. On the left side, the activities are going on with the brownfield plant in Changsha and also setting up the new building for the new engine plant in Changsha. On the right side, on the top, you see Tianjin in China. This is our cooperation with Beinei. The factory is more or less ready, and we are ramping up the production and will start at the beginning of 2021 with the 2.9 L and 6.1 L engine. You look at the sales figures. Here you see the negative effects of the crisis we have. Comparing the nine months in 2020 to last year, new orders were down by -29%. Unit sales -30.3% in revenue, even more by -30.7%. Main effect was the coronavirus for sure.
is also a reluctance in investment on our customer side. There is, I would say, a limited effect by the pre-buy engines. This will go out now, but the main effect is the coronavirus. You see that revenue is more down than unit sales. This is caused by a negative product mix. You have to take into account that also here the Torpedo products are in this chart. We raised the unit sales on the Torpedo side more or less dramatically, nearly double the figures, up to 24,000 electric engines. Taking out these electric engines by Torpedo on the unit sales and just have a look at the DEUTZ engines, the effect will be even more dramatic. We have here a negative effect of around -40%. It means that we are really hit quite hard by the corona crisis. That is a bad thing.
The good thing for sure is that the fleets of construction equipment and also on the agricultural side, these fleets, they will have a higher age in the future. This business will come back, and there will be also a postponing effect. For the next years, we see a recovery and having back these more or less lost engines. On the hand, we are on a level of EUR 250 million compared to last year September. The level was on EUR 375 million. You see here that we also have a quite big decrease on the orders on hand. Sales figures now for Q3 year on year. Sorry. Sales figures Q3, if we compare Q3 to Q2, here you see a good improvement. New orders were up from Q2 to Q3 by 16.1%. Unit sales plus of 2.7% in revenue, plus of 10%.
Here, we see a significant improvement to Q3. This is more or less related to all the segments and all the markets. This you can also see on the next page, revenue on the key regions. America was hit very hard by the crisis. For the nine months comparison, it is a minus of more or less nearly 50%. Africa and Middle East, 37.4%. Europe was -30.2%, which is in line with the overall company revenue reduction. Germany and Asia-Pacific are better than the average. Looking into comparison with Q2, we see in all regions an improvement. For revenue, with the focus on the application segment, you see that material handling is hit quite hardly by more or less more than 60%. The background is that this is very much related, this business, to the US.
Rental companies are the customer here behind, and they have changed their investment policy completely. They are very cautious and stopped more or less investing in new equipment. I think if the market clears up, that will go completely into the other direction. Agricultural machinery also down nearly -39%. This is also related to some customers being active in the focus of corona areas and being hardly affected by that. Construction equipment -29%. Stationary equipment is a little bit better. Here you see our service business, which is quite stable, also caused by the measures we have taken, just a downturn of -3.3% in comparison to last year. Also comparing Q3 to Q2 on the application segments, we see an increase in more or less all segments: service, agricultural machinery, material handling, and machine liners. Yeah.
This is so far from the market side and about strategy. I am handing now over to Andrea Strecker for the key financials in detail.
Good morning, everybody. As you can see on page 13 on the left-hand side, we cut the losses in Q3 more than enough, 59% improvement to EUR -15.7 million. That is before exceptional items. In the first nine months, we recorded an EBIT of EUR -65.6 million with a return on sales of -7.1%. Main reasons is a sharp fall in revenue. This economies of scale due to COVID-19. We also had EUR 10 million payments for continuation agreements with suppliers that went through intervention proceedings. Yeah, it cost EUR 10 million, but we could maintain production and had time to relocate to other suppliers. We had demand-related impairment losses recognized on development projects of EUR 5 million included in the Q3 total numbers.
We had, of course, big efforts in cost-cutting measures. We used short-time work. We waived one-year variable bonuses for 2020 in the Board of Management. Senior managers waived a substantial part of variable bonuses for 2020. We recorded in Q3 EUR 37.8 million for restructuring costs related to Transform for Growth. We think that these EUR 37.8 million are sufficient to do all the restructuring that we planned. The net loss of EUR 104 million also, of course, is driven by the decline in EBIT. If you look at page 14, how did the business segments perform? Compact engines was hit quite hard as we could see with utilization of engines in various applications. Unit sales -42.2%, reduction to 71,000 units. The revenue went down by EUR 38 million, and we recorded a loss of EUR 67.6 million before exceptional items.
That translates to return on sales of -10.1%. ECS customized solutions fared quite better in new orders with -10%. Of course, the pre-buy effects were smaller from previous years. Revenue -18%. Still a positive EBIT of 4.8% in the segment driven by strong service business. If you look at the segment others on page 15, there you can see that Torpedo and Futavi's were doing well. We have a positive order intake. Unit sales driven by the trolling engines in Torpedo up 85%. Revenue up 35%. We reduced the losses to EUR -9 million. That is driven by operational improvements, but also in previous year, we had the deconsolidation of the Argentine business in the first half of 2019. On page 16, R&D spending and capital expenditure.
Of course, we are saving, but we continue on the R&D side to invest in future products like E-DEUTZ, in products for China, bi-fuel engines, CNG engines. The investment to secure the future continues. On the capital expenditure side, we reduced expenses by 8% to EUR 55.8 million. This includes EUR 17.4 million resulting from leases. If you look at the cash flow from operating activities in Q1 to Q3, we are minus EUR 19.4 million. We were positive in Q3, which is a good thing. Also on the working capital side, we can see here that we have a major reduction in working capital. We have weekly meetings to reduce all inventory, and we are on a good way here. If you look at free cash flow, then with EUR -78.8 million, certainly driven by the negative EBIT. The same is true for the net financial position.
In the EUR -111.6 million, we secured IFRS 16 positions. Without that, the net financial position would be at EUR -65 million. When we look at equity ratio and funding, we still have a very healthy balance sheet with an equity ratio of almost 46%. On the funding side, we increased our lines by EUR 150 million earlier in the year. We have lines available now for EUR 310 million. Of that, EUR 160 million mature in June 2024 and EUR 150 million in November 2021. Currently, we have drawn EUR 65 million of that. There is sufficient liquidity available in the years to come. From that segment, in the funding side, we are very flexible to do what we have to do, and there's no concern on the liquidity. That's all the financials. We would be waiting for your questions then.
Ladies and gentlemen, at this time, we will begin the question and answer session. If you'd like to ask a question, please press star followed by one on your touch-tone telephone. To remove yourself from the question queue, you may press star followed by two. If you have a question, please press star followed by one at this time. One moment for the first question, please. First question comes from line of Charlotte Friederichs with Berenberg. Please go ahead.
Hello. Thank you for taking my question. The first one would be on current trading now in the fourth quarter. Can you give us a bit of an idea of how the order intake has developed now that we see the second wave in Europe and a number of other regions becoming more meaningful? Is there any impact on your supply chain so far?
The second question would be on your comments that you think it's going to take a longer period of time to get back to pre-crisis level. I know this is probably a long shot, but what's your best guess? Sort of three, four years, or what kind of level are you thinking about? And then thirdly, on the exposure to rental companies, in a normal year, what percentage of your revenues usually goes towards rental customers? Thank you.
Okay. Ms. Friedrichs, I would start. Current trading. I think the trend we have seen in Q3, this will go on. Looking at the regions, really China and Asia, especially China, is on a pre-crisis level. In the U.S., that's still very difficult, but we had really a very tough time in Q2. This also starts to be a little bit more normal. In Europe, it's in between.
We see also now, after summer break, that there is a certain recovery. We are optimistic for Q4 that this will go on. That is more or less the first question. Recovery period will take longer. That is the second question. How do we see that? This is more or less a short-term perspective which we have. We do not know exactly how the problems with the crisis are going on. Right now, second mild shutdown, I would say, is not affecting us so much and our customers, but we have a lot of inefficiencies because we are sending people home in quarantine and so on to be really sure that we do not have to shut down the factory. I think this is very much depending on how the corona crisis goes on and what will be the measures, especially the countermeasures.
We are right now in the phase of doing our planning for next year and also the midterm planning. We will have to see how this works on. I think at the beginning of the crisis, we thought maybe it would be a sharp downturn, and then we will have an upturn, and maybe 2021 will be already near to normal. I think this will be also from the market side, still a challenging year. We will have to see how long this will affect us. The immediate question is if it will be 2022 or 2023 to be more or less on a normal level. Third question, in a normal year, I think in a normal year, how big is the dependency on rental? I would say it is around 20%-25%. It is very much related to our segment material handling.
It is very much related to the US market. I think in the long term, this will change because also the Chinese market, they are putting more focus on rental companies and also on the segment of material handling. I think this will go on, the development to shift more towards rental company on the customer side.
Perfect. Thank you very much.
Looking at supply chain, we are monitoring very, very closely. So far, we were able to manage throughout the year, to be honest, and also going forward in Q4, we managed to bring the material in that we need to bring in.
Okay. Perfect. Also on the casing side, the onboarding of the new suppliers has been smooth so far?
Yeah.
I mean, to bring new suppliers on the casting side in is always a process that takes some time, but we are making very, very good progress there. We also have no more business dealings with Gusswerke, so we have sufficient inventory. And it's going as well as expected.
Okay. Thank you.
Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad. The next question comes from Richard Schramm with HSBC. Please go ahead.
Yes. Good morning. A couple of quick ones from my side. First, you mentioned this 50 headcount reduction on a voluntary basis until March next year, which quite obviously then covers most of your restructuring charge. Where do you stand here? How many of the contracts necessary here are fixed?
Because I could assume that at the moment, people are quite reluctant to take voluntarily this opportunity and might prefer to stick to their working place here. What happens if you will not be able to achieve this as planned? Should we then prepare for an additional restructuring measure in 2021? Second question, you mentioned that this pre-buy engine effect would have been very limited so far and would fade out now. I thought we would see also something like this spilling over to 2021. Is this no longer the case? Is 2021 free from this negative effect then? Thank you.
Maybe about our voluntary program. We started this more or less two months ago, and for sure, there are a lot of discussions going on in between HR and potential interested employees of DEUTZ to take this voluntary program.
Here we are really, I would say, in line with our planning. We are confident that we see and we find these 350 people by the end of March. That is the plan, and here we are on a good way. If this will not happen, there is already a social plan in place. Restructuring costs, which we have put into Q3 as it was planned and announced, covers more or less these 350 people, not depending on is it voluntary program, is the leave out of the voluntary program, or out of the later on, or for potential social plan. More or less, this covers these 350 people. Pre-buy effect, that was the second question from your side.
We think, and it's not easy to have real transparency on that because it's in the stock of our customers, and this only goes by having a lot of discussion with our customers. We think that it is a number of around 5,000-10,000 units on the customer side. That means overall, the effect was around 35,000 engines. We are now more or less in the last third of this engine volume, and I think this will fade out now.
Okay. Thank you. Just a clarification. This social plan you mentioned, this will then definitely bring no additional costs. More or less, the EUR 38 million we saw now in Q3 will cover this complete program, either be it voluntarily or not.
No additional costs, no additional restructuring costs.
It more or less goes into the other direction because the conditions of the social plan are less interesting for the employees than the voluntary program. This was the design of the social plan also to convince the people to go in that voluntary program.
Okay. Thank you.
The next question comes from the line of Frederik Bitter with Hauck & Aufhäuser. Please go ahead.
Thank you very much. Good morning, all. There are a few questions from my side. I mean, the first one I will really start with is the elephant in the room, which are your 2022 targets. Obviously, I hear your commentary. I see what you're writing in the report. Obviously, the longer recovery post-corona is obviously noticed.
If you were to postpone the sales target, say, by one to two years, which, for instance, Wacker Neuson, one of your customers, has done recently, would you still be able, thanks to restructuring measures, to achieve the 7%-8% margin target? I know it's obviously very, very much theoretical discussion now because you still have those targets, but I'm just thinking hypothetically.
Yeah. Mr. Witter. When we announced the target, more or less, this was, yeah, two years ago, and we said, "Okay, within the next five years, if we take the right defined measures, we will bring the company on a level to 7%-8% EBIT margin." I think there's no question this is absolutely valid.
The second thing we said, it has to be it takes five years because all the measures, they have to take place, and they have to bring all the benefits. The second thing we said is it has to be in the year 2022, it has to be a normal business environment. It has not to be a booming year, but it has not to be a crisis year. We are still confident 7%-8%. The measures are delivering the right results. China at that time, I would say, was not expected to be that much successful. Also, now the additional benefits to the program, Transform for Growth, was not really included. It was also not included the extraordinary business and market environment.
What we are doing right now is to do our planning for next year's budget and also the midterm planning for the next five years. We will see how the market conditions out of today's perspective will be for the year 2022, how our people on the sales side see the market. Yeah, that's more or less the answer. There is no question to bring that company with the measures we have in place on the 7%-8% EBIT margin.
Yeah, that's a very good reminder that obviously those targets are pre the upgrade of China guidance and also obviously pre-restructuring measures announced now. That's well understood. That brings me nicely to the second question because when I think about all this, I mean, there's a lot of discussion now in the market, a lot of news flow on alternative drive technology.
You still have this 5%-10% share of sales. Also, I think it's for 2022. I was wondering if you could give us an update on how demand has developed there. Is it like if the crisis is now a facilitator for this trajectory into alternative drive systems, or is it holding back investments a bit because everybody's trying to save cash and looking at CapEx, etc., more tightly? Just some thinking around that would be very helpful, I think.
Yeah. It's more or less in the same direction. We announced this 5%-10%, and there was a dramatic interest in the past in these new technologies, and this is still existing. All our customers, more or less, have the same problems like we have, and they are still interested, but in some cases, they are postponing the programs.
In our case, we said, "Okay, this electrification and also what we are doing on hydrogen with the hydrogen combustion engine, that will be the top priority in the future, and this business will come back maybe even stronger." We said, "We will not make any compromises on this new technology, on this strategy." Thanks to our sound balance sheet, we have not to make any compromises here. We are really going on with our development and engineering activities. As you more or less expected, some of the customers, they are now postponing the programs. There is no canceling of the programs because everybody sees and knows that if the virus is over, there will be still a CO2 problem, and this will come back. In some cases, they are postponing right now the programs.
This will be an outcome of our midterm planning, what we are doing right now to see how this could lead to a postponement of this target of 5%-10%, which we have announced.
Okay. Understood. Thank you, Mr. Hiller. The last one I had is for Mr. Strecker, just on the guidance for working capital and also CapEx for 2020. Just a bit of housekeeping here. Thank you.
With the working capital, in Q4, we will see further reductions from the level that we see right now. When it comes to investments, I think it will be in the EUR 70 million range when all is said and done in 2020.
Yeah. Okay. I was expecting something along that line on the CapEx front, definitely. That makes sense. Something around working capital, around maybe EUR 250 million or something, is that?
Yeah.
In that neighborhood. Yeah. Yeah.
Perfect. Yeah. That's great. Thank you very much.
Yep. Thanks.
Thank you.
We have a follow-up question from Richard Schramm , HSBC. Please go ahead.
Yes. Two questions, please. One just concerning this R&D topic you mentioned, this impairment of EUR 5 million you mentioned on development project. Is this an example where a customer delayed such a development? If so, isn't there a chance that this, as you just mentioned, will come back? Why this impairment then? Was there another background behind this? Maybe you can shed a bit of light on this item. Second question concerning this material handling segment. Just to be clear, I mean, when you speak about rental customers, it's always these aerial work platforms. Is that correct? What is included here?
Because material handling is a wide range of possible equipment, and I thought that also forklift trucks would see an increasing part of this in your product portfolio, but maybe that's not the case. Maybe you can also give a bit more background to this one. Thank you.
Okay. Mr. Schramm, I would start with the impairment. We have some under EUR 10 million, roughly, in R&D value in the balance sheet. Of course, there are regular depreciations, but also we have to have regular impairment tests on each and every one of these items. These are roughly 30 different products that are there on the balance sheet.
It happened that in two of these, we decided to eliminate all the value that we had on the books because we were not so certain from the recovery of the market whether these products can keep their value. That is a normal process. In line with the uncertainty when the market will come back, we decided with the auditors to wipe the slate clean, so to speak, and reduce risk going forward.
On the material handling, Mr. Schramm, this is covering aerial work platforms, but also forklifts. In our case, the segment material handling is the majority today is aerial work platforms. There is a difference in the way how rental company or how rental business works. Also for forklifts, for sure, a lot of the equipment is rental equipment.
In this case, a lot of the producers of forklifts, they have their own rental company looking more into the business of aerial work platforms. This is different. In this field, the rental companies are mainly independent companies. You also find that rental companies also for construction equipment, and I would say as more simple the product is and as more standardized, it has a good fit to rental companies. All the standardized products are in focus of rental companies.
Okay. Just to give a rough figure, let's say you are split, how much is these aerial work platforms and how much is forklift trucks in your segment here?
I would say right now it's maybe 80%/20%. 80% aerial work platforms because forklift business is a niche business, with the exception of the customer Kion, which is a big customer and will be a big customer in the future.
Here we are in the ramp-up phase. Yeah, I would say ratio is 80 % to 20%.
Okay. Thank you.
Next question comes from the line of Mr. Heimbürger, Kepler Cheuvreux. Please go ahead.
Yeah. Good morning, Dr. Hiller. Good morning, Dr. Strecker. I have three short questions, if I may. First of all, has pricing pressure recently intensified in the last two quarters? Do you see that customers are delaying services? Is there some kind of pent-up demand? Thirdly, very quickly, I know that you do not give the guidance for 2020, but the consensus currently assumes Q4 sales of EUR 360 million and an EBIT loss of EUR -5 million. Assuming that things are not getting worse from here regarding lockdowns, do you feel comfortable with these numbers? Thank you very much.
Okay. Maybe start with the question, and Andreas, you can add something.
On price pressure, I think right now there is the normal price pressure we have. It's not an additional price pressure which we see. On the service side, delaying services, the crisis also, this is always a measure which you can take. The interesting thing is that a lot of our customers in the construction industry, they are doing quite well. They still have a lot of business, and the outlook is not predictable. They are on the cautious side. They are not buying new equipment. On the service side, we don't see that they are really dramatically postponing service activities. Q4, I think, yes, we are in that corridor. It will be for sure an improvement to Q3, and I think it will be our best quarter in this year. If it will be possible, that will be a question.
I think that would be quite ambitious. Looking back in quarter three, the last month, September, was the best month in this year and giving us a good perspective for Q4, I think, with the guidance, more or less, which you have mentioned. That could be in line, yeah.
Many thanks.
If I had to say, if the sky is not falling, what you said, if nothing extraordinary happens, I think we feel quite okay with that consensus.
Many thanks.
Yep.
There are no further questions registered at this time. I would like to hand back to Leslie Irsgen for closing comments.
Thank you, everybody, for joining the call today. Should there be any follow-up questions after this call, then do not hesitate to contact us at the Investor Relations Department. We will be happy to answer any questions you may still have.
Other than that, I wish you a good remainder of the day and a successful week. Cheers and goodbye.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.