Ladies and gentlemen, thank you for standing by. I'm Stuart, your chorus call operator. Welcome, and thank you for joining DEUTZ AG first half 2020 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 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.
Thank you, and welcome everybody to our conference call on the half-year 2020 results. My name is Leslie Iltgen, Head of Investor Relations and Corporate Communications here at DEUTZ. With us today are our CEO, Dr. Frank Hiller, and our CFO, Dr. Andreas Strecker. Mr. Hiller will give you a brief update on the business and point you to the key highlights of our half-year results. Following up, Mr. Strecker will then cover the financials in more depth. As always, both will be happy to answer any questions you may have in our Q&A session at the end of this call. Also, let me remind you that this call will be recorded, and a replay will be available on our Investor Relations website after this call. Before I hand over, please also 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 the results of the first half of 2020. I'm jumping on page four, overview. Overall, we have a sharp decline in sales figures as a result of the coronavirus. We have a double-digit percentage decrease in new orders, unit sales, and revenue. This ends up in a significant contraction of the EBIT margin to -8%, mainly due to scale effects. China strategy is well in place, and we increased the target for 2020 from EUR 500 million to EUR 800 million. We are here in the ramp-up phase, and this cannot compensate the negative effects of the coronavirus, which we have in this year, in the year 2020. Therefore, we have implemented a program, Transform for Growth, already at the beginning of the year, a global efficiency program.
The implementation of an extended action plan is initiated in order to boost efficiency and to ensure long-term growth. Annual cost savings of around EUR 100 million are expected from 2022 onwards. It is still not possible to give guidance for the year 2020, so we confirm our midterm targets despite the outbreak of the coronavirus pandemic. Going on the next page and give you a little bit more insight on our Transform for Growth program. We started that activity already in the beginning of the year, and we are in very intense discussion with the worker council. The target of this program is to achieve an efficiency cost reduction of EUR 100 million 2022 onwards. Main areas of actions are the optimization of the global production network.
It goes on automation, digitalization of operating and administration processes, and also group-wide streamlining of the organizational structure is in focus. This goes also on the operating cost, but the bulk of the savings are to be achieved by reducing staff costs, and this ends up in a reduction of 1,000 headcounts by the year 2022 in comparison to the end of 2019. In the first half year, we have already reduced 380 jobs by natural attrition and reduction of the number of temporary workers. We are right now in final discussions with the worker councils about a voluntary program in comparison to 350 jobs, and this is focused on Germany. In the next one and a half years, we want to also reduce another 270 jobs by natural attrition.
The focus of this program is really to reduce the operating and staff costs significantly by EUR 100 million. Going on the next page and have a little look on our China activity. This is running very well, the JV with Sany, which is the main activity in China of our new strategy, is running profitable since the beginning of the year. We expect to double the sales figures in 2020. This is still on a low level. We are talking about a number of around 20,000 engines by the year 2020. For the year 2022, we have increased our forecast of another EUR 300 million. This is because of new projects with Sany and gaining market share of volume, which is already existing in the market.
DEUTZ is positioning itself very well in the Chinese market, and it's the biggest market for our products in the world. Having a look at the sales figures on page seven, you see that new orders, we have a decline of nearly 35%. New orders is on a level of EUR 623 million. Unit sales dropped by more than 27%, and revenue even more by - 33%. This comes out of the negative product mix. Looking at Torqeedo, we have a number of more than 16,000 units. That's more than doubling the numbers of last year's orders on hand. It's due to this development by the coronavirus on a very low level of EUR 250 million in comparison to more than EUR 460 million last year.
Revenue by the regions, you see that Germany has a decline of more than 23%, and this is the market, I would say, which is the relevant market, which is the most stable so far. We have a very sharp decline in Americas. Here, the amplifications of the coronavirus is even stronger, and also the end customer structure is quite difficult right now because here we have a lot of rental companies in place who really reduce their orders dramatically. Asia Pacific, - 36%, here not included is all the activities with Sany because this is at equity consolidated, and you do not see it here in the revenue. Revenue by application segment, also related to the U.S., a sharp decline in material handling. This is very much an American business, - 60%. In construction equipment, we have a decline of nearly 33%. Agriculture machinery, - 42%.
Some of the customers are in crisis areas of the coronavirus. They had to shut down their factories for several weeks. Here, also the amplification is quite high. What is quite positive is our activities on the service side. You see that service is quite stable even in these tough times. Here, just a decline of -4.5% means that all the activities and measures we have taken on the service side are running quite well, and this leads to a share of revenue now to 27%. An increase from 19.8% to 27%. Maybe so far from my side, and I'm handing now over to Andreas Strecker for the key financials in detail.
Good morning, everybody. I continue on page 11 of the presentation. The EBIT, before exceptional item, we came in at EUR 49.9 million negative, which is the return on sales of - 8%, driven by the sharp fall in revenue with the related diseconomies of scale due to the coronavirus crisis. Also included are payments made under continuation agreements with suppliers that are going through insolvency proceedings, EUR 10 million, that included companies like Gusswerke, Weber, and Zinn, as you've heard from Kafkaus. We have also demand-related impairment losses recognized on capitalized development projects with the amount of around EUR 5 million. On the positive side, we initiated severe cost-cutting measures and also had an extensive use of short-time work in the second quarter, and we continue to do so.
The Board of Management on top waves this one-year variable remuneration for 2020, and also the senior managers waved a substantial part of their variable remuneration for 2020. The reduction in net income goes in line with a decrease in EBIT. If you look at the segments, there you can see that compact engines were hit way, way harder, driven by the reduction in sales to the material handling business in North America, among others. New orders, - 41%, unit sales, - 40%, revenue, - 37%, and the EBIT took a big swing to the negative of EUR 49.8 million volume-related, but also the continuation agreements were recorded in that segment. Customized solutions fared a little bit better on the new orders with - 8%. Revenue was - 20%, but the segment remained in black figures with an EBIT of EUR 6.6 million.
If we look at segment others, there you can see that the unit sales more than doubled. Torqeedo was quite well underway with the new products. We've seen that also in the increase in revenue. EBIT is still negative but improved compared to last year, where we also had a negative effect through the consolidation of DAMSA in the first half of 2019. If we continue to R&D and capital expenditure, we did not stop important projects. Therefore, R&D spending with EUR 46.2 million was more or less on previous year's level. Due to the reduction of revenue, then the ratio went up to 7.5%. On the capital expenditure, same thing. We had further localization of engines in China, tooling costs, and other things. The expenditure is still sizable with EUR 38.9 million, but it's below first half of 2019.
On the working capital side, we see a reduction in absolute amount to EUR 309 million. The ratio is 20.2%. We had several occasions where we had to pull forward material with the corona crisis. We wanted to make sure that we get parts out of Italy, Spain, China to be able to produce. We ordered more than what we really needed. The same thing with the suppliers in insolvency. We pulled in enough parts to gain sufficient time to find a second source, which is working okay, but again, working capital is a little bit inflated by these effects. Based on that result and investment, we have a cash flow from operating activities from EUR 43.7 million. If you go to the next page, we have to include the investment, of course. We are at a free cash flow of EUR -85.7 million.
Net financial position is also driven by the free cash flow, the negative one that we had in the first half. If you look at equity ratio and funding, we are still close to 50% with EUR 596 million in equity. We had applied for and received an additional credit line of EUR 150 million. The total amount of lines stand at EUR 310 million. EUR 160 million of these are maturing in June 2024, and the EUR 150 million is maturing in November 2021. As of June 30th, we have drawn EUR 49 million of these lines. What we have to acknowledge is that the payment for the sale of property in Cologne will shift to 2021, as we are relying on the city of Cologne to get all the approvals, and that is expected now in the first half of 2021.
I would hand back now for the guidance to Frank Hiller.
Guidance for 2020 for this year and midterm target, it's still very difficult to predict the market development. Also, order intake in these days is very much influenced by the seasonal holiday. It's not feasible right now to give a guidance for this year. What we see for the next three months, quarter three for this year is also this quarter will be a challenging quarter, affected heavily by the coronavirus. I think we have reached now in the second quarter a bottom line so that there will be an improvement. The outlook for 2022, we are convinced that we can stick to our targets, EUR 2 billion revenue and EBIT margin, 7-8%. China activities will pay off, also our E-DEUTZ activities, and there will be also the effects out of our efficiency program Transform for Growth.
Hopefully, the market situation in 2022 is better than this year. We are still convinced that our outlook for 2022 is valid and in place. Maybe so far from our side, and we are now open for your 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 their touchstone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. First question comes from the line of Richard Schramm from HSBC. Please go ahead.
Yes. Good morning, gentlemen. Two questions, if I may, just on this outlook statement you gave. Does this mean that Q3 will definitely be less worse, to put it that way, in respect of sales and EBIT than Q2, also in absolute terms? Should we still be prepared for the usual seasonal pattern, which calls for Q3 being the weakest one in a year? Thus, in absolute terms, Q3 runs the risk of being even below the Q2 development here. That would be my first question.
The second question concerns the other segment, where you mentioned that the reduced EBIT would be mainly a result of this deconsolidation effect from DAMSA in the first half last year, which at first glance looks a bit disappointing to me, as I would have expected that the growth in Torqeedo should also have made a clear contribution to the reduced loss here. Can you comment a bit why this obviously did not happen here? Thanks.
Yeah. Hello, Mr. Schramm. Maybe on Q3. There will be still heavy effects by the coronavirus in Q3. To be honest, it's for us very difficult to predict on the top line side. What is now, I would say, much better and better in place are our cost reduction measures. We expect that the loss in Q3, and I'm talking about a loss, will be less than in Q2. As you mentioned, it's difficult to predict.
When it comes to the other segment, you said correctly that in the first half, the improvement in EBIT is mainly driven by the effects that did not happen at DAMSA this year. Nevertheless, Torqeedo is doing much better now after a very difficult first quarter. We see now order intake and revenue going up. The last two months in June and July looked pretty good. What we see on the Futabe side is that now some delayed orders are coming to fruition. We will see an improvement in the other segment in the second half. That is going quite in the right direction.
Would that mean that we can hope to see a reduction in this segment compared to the 2019 level where we had, I think, EUR -22 million?
Yeah, yeah. Absolutely. Yeah. Sure.
Okay. Thank you.
As a reminder, if you'd like to ask a question, please press star followed by one on your touchstone telephone. The next question comes from the line of Frederik Bitter from Hauck & Aufhäuser. Please go ahead.
Thank you. Good morning, gentlemen. Allow me to ask a few questions. The first one would be if you could indicate and talk a bit about the monthly order intake from April to, well, say, early August, just to get we get a better feeling of how demand has really developed in the last couple of months?
Yeah. You see the order intake of the second quarter, Mr. Bitter. This is now, I would say, ongoing on the same level. It is difficult to evaluate if this is now a recovery or not because right now, nearly all our customers are in summer holiday. I think in September, you will have different effects. You will have some effects by not ordering in August. I think to be really, yeah, to have the first visible months again about order intake and how the market is developing, that will be October, I think. Right now, it is more or less on the same low level, which we have seen in quarter two.
Okay. Thank you. That's helpful already. The second one I had is on your, let's call it, restructuring program or efficiency program. Just if you could provide a bit more details as to where you see the associated cost with that program, say, consultancy, say, lawyers, etc., etc., and perhaps the one or the other extra cost, obviously, on the personnel side. How does those costs compare to the cost savings you are targeting? Obviously, you say it's EUR 100 million from 2022 onward. How is that split, the cost and also the savings in 2020, 2021, and 2022? Could you give a bit more of a breakdown? That would be helpful.
Yeah. The situation is such that we are on the tail end of negotiating with the workers' council that will take place in the next two or three weeks. Then we know what the program looks like, and then we'll be able to evaluate better. For the time being, we estimate the one-time was between EUR 40 million-EUR 50 million. Depending on the program, who signs what and when, it's only then dependent on what savings we see in 2021. The full effect, we should see then in 2022. That means that all measures need to be implemented by the end of 2021 to have the full impact in 2022.
The EUR 40 million-50 million one, of course, would you say that this is something that will be mostly booked in the second half of this year, or will there something will shift also into next year?
Good. I mean, when we know what the program can look, then we have an idea. And then once then people are signing off, then we will build the reserves accordingly. I assume that for the most part, this will happen in 2020.
Okay. Fair enough. Yeah. You expect something at the end of 2022, EUR 100 million in savings. Is it fair to assume that basically the savings this year will be fairly limited? You have reduced some of the headcount already, as you mentioned. I would assume that the bulk of savings will be from 2022 and maybe some, let's say, a third or so maybe in 2021. Is that the right thinking, or am I way off?
Yeah, I think that's feasible. Yeah.
Yeah. Okay. That makes sense. Perfect. Thank you very much. Just two on the guidance, one for CapEx and one for working capital this year. What are your expectations? What's your planning for this year?
Good. As we said, at the moment, we are very, very conservative. We will be below the initial guidance that we put out. On the working capital, we have now reached the top of the pre-buys, so to speak, of inventory. We do not get anything anymore from Goodstock, for example. We will consume now the material that we have in our warehouses now. For the second half, we will certainly be aggressive in reducing the inventories. I would think there is another at least 10% that we can come down in working capital. Also on the R&D side, of course, all the important projects remain in place. Nevertheless, also there, we have some short-time work, so we will be below the initial plan.
Yeah. Absolutely understood. I mean, obviously, you have a guidance in terms of CapEx, if I just can follow up on this one. Looking at what you spent so far in H1, I mean, it's something around, let's say, EUR 40 million, rounded up. Is it fair to assume that you spent another EUR 40 million in the second half? We end up with something around EUR 80 million-85 million?
No.
Would it increase much more?
It will be less.
It will be less. Okay. In fact, you're going to reduce a bit more in Q3 and perhaps also in Q4, of course, then?
Correct. Yes. Because the first half was driven by tooling for China localization.
Okay. Fair enough. We end up, say, something around EUR 70 million-EUR 75 million mark or even lower?
Yeah. I think that sounds accurate. Yeah.
Yeah. Okay. Perfect. Thank you very much to both of you.
Yeah.
We have a follow-up question from the line of Richard Schramm from HSBC. Please go ahead.
Yes. I would be interested in this strong decline you mentioned in material handling. I attribute it especially to the U.S. and the rental business there. Has there been also a structural change in this business? I could imagine that maybe one or the other of your customers might also face insolvency risk and might drop out of the market. Is there the risk that the customer base will be eroding through this crisis, or is this just really a cyclical issue and you would expect this to be able to recover over the next two to three years or so?
No. Mr. Schramm, these products, these are aerial work platforms, and this product is becoming overall more and more popular, especially now also in Asia. I think this is a product which has developed within the last years very well and will also go on in the future. We are not losing market share. This is a very strong product for the U.S. market. Here we have the situation that the construction companies, they do not own this equipment by themselves. The aerial work platforms, they normally have it through or leasing it through rental companies. Those rental companies, they are now really stopping new orders completely. This ends up, for example, that some of our customers who produce these aerial work platforms, they close until the end of the year.
We have one of the customers who has already taken the decision to close completely the factory until the end of the year. I think this business will come back even stronger, but this is very volatile through, I would say, through the sales channel of the rental companies.
Okay. Thank you. It was mentioned in the report that you got a certain boost in the small business area of railway. Is this really a one-time thing we have seen here in the first half, or is there more to come for you? Is this a general trend which might also drive the business forward in the years ahead?
Yeah. This is ongoing. To be honest, this is a small segment in our business. The railway business is running more or less without effects to the corona crisis. Also, new solutions are coming up. All the things like, for example, hydrogen engines, these are topics now which are coming up in the railway business. This business is stable. Unfortunately, it is just a small amount of our business. A lot of project business, long-term project business, stable business.
Thank you. Next question is from the line of Peter Rothenecker from Baader Bank AG. Please go ahead.
Yes. Hello, gentlemen. Firstly, on potential restructuring charges you have included in the first half of the year, you mentioned you have reduced the number of employees already. Was there some kind of one-off expenses for restructuring charges?
No. No. There wasn't.
Not so far.
What we've done on the reduction side is temporary workers and then natural attrition. We had not any restructuring charges because we haven't signed any agreements yet. No, nothing in there.
Okay. Then you mentioned that the income from the property sales will be shifted to 2021, but you did not repeat the EUR 60 million potential income. Is this still an amount you are calculating with, or do we have to expect that this amount will be, let's say, considerably lower or perhaps even higher?
No. The EUR 60 million is still the number we expect.
Okay. Could you please comment on the contribution of your E-DEUTZ strategy? Did you already include here some sales, or do you now expect here first the significant sales contributions?
In general, we really stick to the E-DEUTZ strategy because also this will now be boosted by some programs of the government. Now in the crisis, and that is normally normal for new technologies, everybody is saving money. A lot of the E-DEUTZ activities goes into ground support for airports, for example. They are now quite restrictive in investing in new equipment. My expectation is that we will have a certain drop of the demand on E-DEUTZ and also a drop of demand in interest because nobody will now afford to go into new technology. After the crisis, this will come back even stronger because of the need of being CO2 neutral and on the other side, government programs and so on. This is a clear strategy within E-DEUTZ to go on with these activities.
Also, the reduction of personnel is not related to our E-DEUTZ activities and our staff in E-DEUTZ.
Housekeeping again with the pre-buy machines. Clearly, this affected your business considerably in the first half of the year. Do you expect here some lower negative impact already in the second half this year? In 2021, it should be now over.
Yeah. This is difficult now to mention. There is for sure a negative effect by the pre-buy engines. It is now really difficult to find out. We have a lot of discussions with our customers how many engines they still have on stock. There is now also an initiative ongoing that they can prolong to build in these engines, which will also have some, I would say, some negative effects. I think this will be mainly related to the year 2020. Twenty twenty-one will be a limited influence of the effect of pre-buy engines.
Okay. My last question is on your guidance for 2022. To be honest, I'm a little bit surprised that you are still confident to reach these margin targets despite this corona crisis and the big drop in volume you have seen now in 2020. Perhaps this new guidance or this guidance for 2022 includes the sales volume of more than EUR 2 billion. To reach this 7%-8% margin, what sales volume do you need excluding your Chinese business? Because this is a major driver for your sales.
I would say it this way. If we would achieve this 7%-8% with the 2 million sales volume, what's now contributing additionally is our China activities. This was not really included when we set up this strategy more or less three years ago. There was no China business included. Also now the efficiency program, which gives us a cost reduction of EUR 100 million. This will affect mainly our break-even point. I think break-even point with this reduction of EUR 100 million on the cost side will be somewhere in between 110,000 and 120,000 engines, where we are today on a level of 150,000.
Let's come back to my question exactly. Let's assume you come out this year with a sales volume of somewhere between EUR 1.2 billion-EUR 1.3 billion. Did I understand it correctly that your margin guidance of 7%-8% then would really be, let's say, close to EUR 2 billion excluding this China activity, which means that you would have from your current activities then an improvement in sales of, say, EUR 700 million?
This EUR 2 billion was never including our China activity. If you think we will come out with EUR 1.2 billion on top line this year, I can tell you we expect that this will recover within the next two years. We will not stay on this EUR 1.2 billion because all the engines we are not producing right now, there will be also something like an effect for the future. If we will achieve 200,000 engines within the year 2022, which was always, I would say, a target to achieve this EUR 2 billion turnover, I do not know. On the other side, we are reducing dramatically now our cost structure by this EUR 100 million, which is around a reduction of 15% on the cost side.
To be clear, this break-even volume of engines, EUR 110 million-EUR 120 million, EUR 110,000-EUR 120,000 for your potential target of EUR 200,000, this is not including Tortillo?
No, of course not. No. No. No.
Okay. Okay. Thank you.
Next question is from the line of Gordon Schönell from Bankhaus Lampe KG. Please go ahead.
Jeff, good morning together. Just one question left from my side. In the first half of the year, you had non-recurring items of EUR 15 million. Can you remind us how the split between Q1 and Q2 was? Thank you.
It's roughly half-half. As we had the continuation payments in the first and second quarter, we had the impairment of R&D was in the second half. Maybe the second quarter was a little bit higher than the first one when it came to the non-recurring items.
Okay. Great. Thank you.
As a reminder, if you'd like to ask a question, please press star followed by one on your touch-tone telephone. We have another follow-up question from the line of Richard Schramm from HSBC. Please go ahead.
I'm back to what my colleague just asked about this 2022 margin target. I mean, if you are including in your E-DEUTZ definition the equity result, right? I mean, so far, the contribution from the Chinese joint venture would be in your E-DEUTZ. Therefore, I wonder if this is not included in the 7%-8% margin target.
Mr. Schramm, this is included. E-DEUTZ, what comes out of our Chinese activities is included. That's at equity. The top line revenue is not included. It is EUR 2 billion.
Okay. I mean, at the end of the day, we are comparing here a bit to apple peers, right? I mean, you include China in your E-DEUTZ, but you exclude it from your sales.
Yeah. To be honest, main target is to improve the performance of E-DEUTZ. That was always our intention. Going back into the year 2016, this was on a level of 2%. Now the target was to bring it to 7%-8%. Also, China will play an important role to that. Of course, when we report results, going forward, there's always a possibility we have proforma revenues and proforma E-DEUTZs that you understand it better. We always said that the China business can't be worse than the regular business.
Yeah. I mean, it's your decision to include at equity in E-DEUTZ or not. I mean, some companies do, others don't. I think it would be a fair treatment to exclude it and put it below the E-DEUTZ line. As I said, that's up to you. Thanks for the clarification.
That is how it works. Also in the past, when we had the JV with FAW, DDE, also the result was the E-DEUTZ was included in the result, and you did not see the turnover of the JV. This is more or less in line with the former reporting we had the years before.
Maybe one additional remark, Mr. Schramm. You cannot pick and choose. It was an ongoing analysis with auditors. I can have an opinion, but in the end, they have to approve how to report things. There is nothing Mr. Hiller or I can do what we like. They have a number of parameters where they decide what to put where.
Okay. I mean, as I say, some companies do it, others don't. I would say it's never too late to improve. I really wonder if you never get out of this, but it's up to you. Thanks a lot.
Next question is from the line of Roland Könen from Value -Holdings. Please go ahead.
Yes. Good morning from my side. Two additional questions. First one is also on the China JV. Can you give a rough number for sales in 2020 with Sany? As you mentioned, you will double the engines to 20,000 this year. Also, could you give us unit sales? Do you expect in 2022 to reach the EUR 800 million sales in China? The second question would be on your payments under the confirmation agreements with the suppliers in insolvency. I have in mind that these payments should stop end of May. Could you confirm that in the second half, there will be no further payment, or was it just with regard to the Gusswerke that these payments will end in the end of May? Thanks.
May I start with Gusswerke? The Gusswerke is done in Leipzig. It is in Saarbrücken. We are out of both locations.
Okay.
Maybe on the China JV, this year will be a revenue of plus minus EUR 100 million, and it will be around 20,000 engines.
Okay. Can we calculate how many engines do you need for reaching the EUR 800 million sales in 2022?
Yeah. I have to be definitely careful there. Because there's major mixed effects. At the moment, they are producing many more smaller engines, the five and seven liters, and the new 12 and 14 liters are coming online early next year. These have completely different revenue numbers per engine. Mixed effects will play a significant role there.
Okay. Many thanks for clarification.
There are no further questions at this time, and I would like to hand back to Leslie Iltgen for closing comments. Please go ahead.
All right. Thank you, everybody, for joining the call today. Should there be any follow-up questions after this call, 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 is now concluded, and you may disconnect your telephone. Thank you for joining. Have a pleasant day. Goodbye.