Thank you for standing by. I'm Stuart, your conference call operator. Welcome and thank you for joining DEUTZ's full-year 2019 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 Ilkin, Head of Investor Relations and Corporate Communications. Please go ahead.
Thank you and welcome everybody to our conference call today on full-year 2019 results. With us today is our CEO, Dr. Frank Hiller, and our CFO, Dr. Andreas Strecker. Mr. Hiller will give a short update on the business and point you to the key highlights of our full-year results. Mr. Strecker will then cover the financials in 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. 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, Dr. Hiller. Please go ahead.
Yeah, ladies and gentlemen, a warm welcome to our full-year figures 2019 conference. Yeah, the world is changing dramatically. Originally, we had planned to meet you in Frankfurt, but now we do it via phone conference. That's also the way how we work in DEUTZ internally via phone conference, Skype, and so on. I can tell you, for the moment right now, it's working quite well. I'm coming to the operational highlights on page four for the year 2019. DEUTZ meets its 2019 targets for revenue and EBIT margin. We increased our revenue by 3.5% to an absolute figure of EUR 1.84 billion. This is in line with our forecast, which said that it will be above EUR 1.8 billion.
We have strong growth in international countries, especially Americas and Asia Pacific, with Americas up nearly 11% and Asia Pacific nearly 8%. EBIT margin before exceptional items reaches 4.3%. This is also in line with our updated guidance of 4-5%. Further, we have strong growth in our profitable service business. This is developing very well, an increase of nearly 7% to more than EUR 350 million in 2019. This gives us the confidence that we will reach our target of the EUR 400 million turnover earlier than we expected. The plan in the past was to reach that number in 2022. Now we brought it forward to 2021. We have launched an efficiency program taking into account the down cooling of the market and for sure now also the coronavirus implications.
This program, efficiency program, is called Transform for Growth, and it's addressing all the functions worldwide: operation, R&D, overhead functions, as well as sales and service network. It's a cost reduction program which gives more stability for our future targets on business performance. We confirm our medium-term targets for 2022. We are confident that we will reach revenue above EUR 2 billion and an EBIT margin of 7-8%. Sorry, here I see there's a mistake in the presentation. We have to correct that. Coming to the strategic highlights, one of our major focus activities is the growth strategy in Asia and especially in China, with a target to reach more than around EUR 500 million turnover in 2022. This is good on the way. We signed the joint venture agreement with SANY.
We are expecting, and we are still expecting this, also taking the amplification of the coronavirus in China into account. We are expecting 75,000 engines in 2022. Also, the integration of the existing SANY engine plant in Kunshan into the DEUTZ production network is right now on the way. We are doing a lot of localization on the purchasing parts. This is running quite well. Even if we had some difficulties within the last weeks, the team was still working on that out of home offices and so on. Here we are very optimistic that there will be no different strategy, there will be no different or no implications on the strategy, maybe a short postponement, but this will not affect our 2022 targets. Another topic is the electrification strategy, which we started more than two years ago. In 2019, we made the acquisition of Futavis.
This gives us the possibility to go more into the battery technology and also to create more added value and come up with own battery packs in the future. There is a lot of interest, a lot of projects, prototype applications for our customer. The first product will be launched beginning of next year. Important for us is, as already mentioned, the service business, and here we go in a further expansion. Also in the last year, we made some acquisitions in Benelux. We made the acquisition of TPS Power Group. In the U.S., we established additional power centers to have the possibility to sell more parts and also hours on maintenance and give our customer emergency services for DEUTZ engines. Group-wide sustainability strategy has been implemented in 2019. This is called Taking Responsibility.
We have defined some tough targets for the DEUTZ sustainability vision in 2023. Having a closer look at our eDEUTZ activities on page six, the acquisition of Futavis in quarter four 2019, I think this will be an essential part of our strategy. This gives us the possibility to produce in the future battery packs for our customers which fit into their application. Futavis is a specialist in battery technology and battery testing. They are the experts for battery management systems. Also, what you see on the right side, that is our plan which we announced more than two years ago when we acquired Torqeedo. This is still in place and valid. In 2020, there will be the first marketable hybrid and all-electric products. We will start with serial production in 2021.
The target, and this is also a target of our sustainability strategy, is to have 5-10% revenue share of electrified products in 2022. Having a closer look at our service activities, we started a lot of measures within the last years. 2019 was an important year on the service side. We implemented new sales channels. An important topic is to have a higher density of the existing network by improving external partners, but also going into more investment with own workshops. Digitalization is a big topic where we also want to reach the end customer and have direct access to the end customer. Expansion of the product portfolio, especially on the service parts, and new service concepts. Also, for example, maintenance and repair for third-party motors and complete devices. That is a topic, and this pays off.
You see here the growth rate within the last years on the right side. We have a yearly growth rate of more than 6%. Right now, we are at more than EUR 350 million, and this target of the EUR 400 million will be brought forward to the year 2021. Far on the service side, and then some words about our sustainability program, Taking Responsibility. Our objective is to strive for commercial success while fulfilling our corporate, social, and environmental responsibilities. This goes into the direction of corporate citizenship, environmental and climate protection, supplier management, corporate governance and compliance for sure, occupational health and safety, personal development, and also product compliance. It is an important program for us, and we have defined tough targets for the year 2023, which you will see in our annual report.
Having a look at the sales figures, you see we are down on the new orders in 2019, a minus of more than 15%. This started in the second half of 2019. For sure, we had some implication by this lower order intake in quarter four. Order intake overall was EUR 1.65 billion. On the unit sales, this was also a little bit lower, minus 1.4%. In total, more than 211,000 engines. Here we have to take into account that nearly 21,000 engines or products were included by Torqeedo by electrical motor solution. They had a quite good market development in 2019. They had an increase of more than 100% on their products and on their unit sales. Revenue went up 3.5%. This comes out of a very positive product mix, which gave us in the end this revenue, which is above EUR 1.8 billion.
Revenue by region on page 10. You will see here that we are still strong in Europe and in Germany, but our intention is to grow further in Asia Pacific with plus 7.6% in Americas with a plus of 10.7%. Especially Asia Pacific will develop very much stronger within the next years by our China strategy. The revenue by application segments on page 11, biggest application segment for sure is construction equipment. We had here quite a challenging year in 2019, coming from a very strong year 2018. A minus of minus 1.8%. Second biggest segment is material handling. This is a growing business, increasing by nearly 7%. Our service business, I talked already about that. Agricultural machinery developed quite well, coming out of a weak 2018, and the market has developed quite well in 2019 with a plus of more than 12%.
So far from my side, and I'm handing over now to Andreas Strecker for the key financials in detail.
Yes. Good morning from my side as well. If you look at page 13, we can see that the EBIT increased from EUR 82 million to EUR 88 million. This includes a EUR 9 million gain of the sale of the property. If you look before exceptional items, we reached an EBIT of EUR 78.8 million and a return on sales of 4.3%. If we eliminate certain items like the provision for Torqeedo and the deconsolidation of the joint venture in Argentina, we would have reached an EBIT margin of 5.1%. If you look on the next pages to the segment results, we need to consider that the series 2011 engines moved from Cologne to Ulm, and there they also switched then the segment from compact engines to customized solutions.
We see that on page 14, on the operating profit and net income, the EBITDA was EUR 166.2 million before exceptional items, was higher than the year 2018. We had slightly higher D&A than we find again with EUR 78.8 million and the exceptional items. On the net financial expense, you notice an increase to EUR 13 million. That is the result of the depreciation of a loan that we gave to the supplier. The income taxes increased to EUR 22.8 million, but that is not the physical amount. We had reduced the loss carry forward for the year 2020. Again, that is only on paper. Net income then came in at EUR 52.3 million. On page 15, if you look at compact engines, you can notice that the unit sales were down, but again, major factor here was that the 2011 engine is not included in the segment anymore.
We had nevertheless very good revenue development even without the 2011 engine. Also on the EBIT side, slight reduction because the volume was lower, and we also allocated some cost of insolvency proceedings to the segment compact engines. If you look at page 16, it's the other way around. The unit sales increased heavily through the 2011 engine. That's the same thing for revenue. The EBIT was increasing because we had a very strong development on the after-sales side. There, especially the exchange business, where we retrofit engines, developed very well. The EBIT margin in % is slightly lower because the 2011 engine has a lower margin profile than the service business. On page 17, you can see the R&D expenditure that was increasing as planned by EUR 10 million. We had new engine projects. We had China for emission development. We had eDEUTZ.
That all went according to plan. The R&D growth of 5.2% is good for a technology company like DEUTZ. On the capital expenditure, you see the increase from EUR 59 million to EUR 86 million. That was also planned. We have moved the 2011 to Ulm. We have invested in a new line. We have a new assembly line in Cologne. We also started to invest in China and in test stands for eDEUTZ for instance. That is the explanation behind the increase, but again, that was planned. On page 18, you can notice that the working capital ratio increased slightly. The reason is we increased the inventory for casting parts and other parts where we saw insolvency is coming to make sure that we do not get hit by shortages.
Also, the decrease in trade liabilities is another factor because we paid to certain suppliers directly on delivery and not 60 days later like we usually do. The cash flow from operating activity is better than last year because the working capital development was better compared to 2018. On page 19, on the free cash flow, you notice the minus EUR 36.6 million. We had originally planned that we receive some EUR 50 million for the property sale in Cologne, but that did not come to reality because the final plan, how many square meters will be built on the property, was not finalized by the city of Cologne, but that is going to happen in 2020. In the minus EUR 36 million also is included the close to EUR 50 million capital increase for the joint venture in China and the acquisitions of Futavis and Blue Star Power Systems in Netherlands.
If you look at the net financial position, we have a method change with the IFRS 16 leases. We have to account EUR 41.9 million in lease liabilities that were not in that position in 2018. It is a method change, again, of EUR 42 million. If you look on page 20, equity ratio is very healthy. The equity at EUR 650 million is rock solid. On the funding side, we are in good shape. We have basically nothing drawn on the line as we speak. Also, with the ongoing working capital optimization, we are liquidity-wise in good shape. How is the outlook for this year? Mr. Schulte will tell you that.
Yeah. Thank you. First, on our dividend proposal. Our proposal for the year 2019 is EUR 0.15, which we will propose to the annual general meeting.
The intention is to have continuation in a consistent dividend policy. Our objective is for a payout ratio of around 30% of net income over a multi-year period. This dividend yield based on the year 2019 end stock price is 2.7%. I am coming to the group forecast for 2020 on page 23. This is based on our information, which we sent out more or less two weeks ago. Coming from a revenue of this little bit more than EUR 1.8 billion, we see for the year 2020, a low double-digit % decline compared to 2019. On the EBIT margin, we see a mid-double-digit % decline compared to 2019 and compared to the 4.3%. R&D expenditure on CapEx in 2019 came out with nearly EUR 96 million, and on the CapEx side with nearly EUR 87 million here.
We see for both figures a corridor of EUR 80-90 million. We have to see what will come out of the coronavirus and the economical climate. That is quite unpredictable right now, but still this is our forecast, which we see for the year 2020. Having a short look on the forecast for the key and customer markets in 2020, these figures are based on sources from February 2020. We see quite a challenging situation in China. North America at that time was even more stable and also a declining situation in Europe. We see the construction equipment in our segments quite under pressure because it is coming from a very high level in the past. Material handling and agricultural machinery is a little bit more stable. We have to see how this develops within the next days.
I want to spend some words on our midterm target 2022. This you see on page 25. We announced that target in the beginning of 2017. The clear target was to grow the company, to have a growth story behind, and also to increase our profitability. We started to that time on a revenue level of EUR 1.2 billion and an EBIT margin a little bit below 2%. Now I think we are more or less on the halfway, on the halfway concerning the time period and also concerning fulfilling our targets on the revenue side. We have to go another EUR 150 million. I think that could be easily done also by our China strategy. Also, the eDEUTZ strategy will deliver here revenue within the next two years. On the EBIT margin also, I think we are halfway to our target.
The margin of 4.3%—we have to take into account that there was a lot of spending and ramp-up costs covered already in 2019 for our China strategy, for eDEUTZ, and also Torqeedo. Taking this out, we have to talk about around 2% EBIT margin, which will turn around within the next two years and will not be just neutral. Also, these activities—China, eDEUTZ, and Torqeedo—they will deliver profit in 2022. We are convinced that we will fulfill our targets in 2022. 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 touch-tone 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 a 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. First question is from the line of Frederick Bitter from Hauck & Aufhäuser. Please go ahead.
Thank you. Good morning, all. I would have a few questions, and I'd like to start with if you could quantify the pre-buy reversal effect in 2021 on your sales guidance. Obviously, I know there's a big difference or there's a significant difference between the underlying performance of your end markets and also obviously what you imply in your sales guidance. Just if you could quantify that for us so we get a bit of better understanding about those effects.
Yeah, Mr. Bitter. Overall, the effect of pre-buy was around EUR 200 million.
This was more or less shared EUR 100 million in 2018 and 2019, another EUR 100 million. Now the situation is that our customers, they have the possibility to bring that engines into market within the next 18 months. This means the pre-buy engines, which we have sold 2018, they will have an amplification until mid of this year. The other EUR 100 million, which was sold in 2019, they will have an amplification until the mid of 2021.
Okay, that's helpful. Thank you very much. The next one I had is on your new group-wide efficiency program. Could you talk a bit about costs that are involved for the implementation and the execution of this program? I guess also very importantly, of course, savings you want to target. It'd be like on a basis point of central sales or an absolute number.
It would be very helpful.
Yeah. Yeah. For numbers, it's too early. We started that program two months ago. We also took a lot of actions, I would say, mid of last year. For example, if we had fluctuation in some departments, we did not come up with replacements and things like that. Two months ago, we started a big benchmarking, a worldwide benchmarking to all our costs, to all our costs in the company. Here we see some opportunities. Right now, we are working together also with an external consultant to define the measures. This has started two weeks ago. This phase will now take around three months in total, so another two and a half months. Then we will come up with the savings, also the costs which we will have.
This program really goes over all functions worldwide to give you a little bit of feeling what we are doing. It is consolidating functions in the worldwide setup. For example, looking into a function like purchasing, you have a lot of buyers filling out functions in other departments. Here we see a potential to more or less consolidate that and have a worldwide approach to even go for stronger metrics, organizational metrics approach. What the amplifications on headcount will be, that is also a question which we can answer within the next two and a half months.
Understood. Thank you very much. I am looking forward to the update then. Also, something perhaps slightly relating to that is, what were your supplier-related extra costs in 2019 and what you are budgeting for 2020, in fact?
Andreas, can you say something?
Yes.
There is, of course, a bundle of impacts that you have to consider. One is to eliminate the losses at the supplier because if the company is in insolvency, then they cannot produce losses. The second is you have to buy a second toolset. If you look for second source, you have to order more inventory to make possible that the second supplier comes online. If you look at all these activities as a bundle, then you talk overall between 2019 and 2020 together, double-digit millions that we had to invest there. For 2020, we still have some after-effects of that. It's declining. We have things under control. They go as planned. These things cost money overall. It's double-digit millions that we had to spend there between 2019 and 2020.
Okay. Thank you.
I mean, the numbers I had sort of on top of my head were around EUR 15-20 million.
Yeah, that's about right. Yeah.
Yeah. That would be the total impact in that sense. Yes. Yeah.
Okay. Rather, how does it split between the two years? I'm not sure if I still have it on top of my head. It's like the majority more in 2019 or it's half-half even.
I think majority was in 2019, with two-thirds, one-third, roughly.
Okay. I understand. Thank you very much. The last one I had was on what kind of contribution have the acquisitions of dealers and service partners contributed to your aftermarket revenue in 2019? I think the total was EUR 352 million, which is an increase of about EUR 23 million or so year on year. How much of that is coming from acquisitions and how much is organic?
Can you continue? The Dutch dealer, the closing of the transaction was in 30th of December. There we haven't seen anything, of course, in 2019, but we see a sizable impact in 2020. The same is true for the expansion in the United States that we also see the major impact in 2020. For the most part, the revenue increase that we've seen on the service side in 2019 was organic.
Okay. Perfect. That's quite reassuring. That's obviously a very nice improvement. Just the last one, and then I'll stop asking so many questions. The last one is really also relating to that. What's the impact then in 2020 on the aftermarket revenue? Not on obviously fully consolidating, at least the two acquisitions?
On the revenue side, it will be double-digits million if you put everything into account.
The service business is profitable, and that is really important for us to stabilize the overall numbers when the market for new equipment is weakening.
Yeah. I understand. Thank you.
Next question is from the line of Charlotte Friedrichs from Berenberg. Please go ahead.
Hello. Good morning. I had one question about the EBIT bridge that you showed on page 25 of your presentation. The two percentage points margin drag from the China strategy, eDEUTZ, etc. What is your expectation here for 2020?
We will cut the losses by Torqeedo by half, more or less. On the eDEUTZ side, this is also a reduction, and the majority will come out of our China strategy. This will, in 2020, stay more or less on the same level, but the amplifications will mainly come by the ramp-up cost of China.
Okay. Understood.
In terms of operations, if you look around your supply chain, obviously with the insolvency of your one supplier, aside from that, are you seeing any impact on supply from the coronavirus?
To be honest, I think we learned quite a lot out of the trouble we had with the casting company. We improved and increased also our stock. I think from the inbound, we are quite stable. Challenging is more the question of the outbound. Maybe some of our customers, they will shut down their factory. This could have some amplifications for us. Also, production here right now is running very stable. We have taken a lot of measures to make it safe for our people.
If a corona case comes up, which we have, luckily, not now, if such a situation will come up, we have separated the teams so that it will be feasible to keep up our production. The question will be what will be decided by government and so on. It is their daily news. So far, I can say we are quite stable. It is not a headache on the inbound side from suppliers. It is more, I would say, on the outbound side.
Okay. In terms of book-to-bill, could you give us a feel for where you are now with sort of ending the first quarter? I am guessing you are below one?
Yeah. I think the book-to-bill ratio will be not that bad. Yeah. It is always a question where you are.
Looking into the last months, we have a book-to-bill ratio, which is more or less near to, yeah, 1.0. The situation will be now we cannot foresee the amplifications of the coronavirus. I think it will stay on the same level than Q4.
Okay. Thank you very much.
As a reminder, if you'd like to ask a question, please press star followed by one on your touchstone telephone. Next question is from the line of Richard Schramm from HSBC. Please go ahead.
Yes. Good morning. Just one follow-up on this additional cost from the supplier side to incurred last year and obviously also this year. It's really just to make sure this known issue with the casting companies in Stuttgart and Leipzig. There is no new other supplier issue popped up here where you see a problem.
Second point I would like to know is this, yeah, impairment or write-down of development costs you mentioned. What is behind this? Is there obviously further risk of such a step in the current year? Thanks.
Yeah. Yeah. I can answer that. When it comes to insolvencies, I think we have these items under control. We had in 2019 quite a number of many of those you could read in the newspaper, but we came out of that strong. At the moment, there is no further thing on the horizon that we are concerned about. When it comes to R&D write-downs, these were mainly older lines where we just had to revise the market outlook. We do that on a regular basis, of course. That is nothing of a big concern.
The R&D cost that we have on the balance sheet for the bigger values for the four-liter engine for example, they have lots of headroom. I do not foresee any issue there.
What was the volume of this impairment?
The impairment is zero. Yeah. What we have on the balance sheet is EUR 120 million of accrued R&D cost.
I am a bit puzzled now. You mentioned that you would have made a correction here to the value. Or was it neutral and did not touch your P&L?
Yeah. It did touch the P&L. It did touch the P&L for an older engine line.
Yeah. We wrote that down close to zero. All the other engine lines where we have accrued R&D cost on the balance sheet in the amount of EUR 120 million, there we see no risk of further impairment.
Okay.
Then question concerning your midterm outlook. I mean, if we see now real serious dip in the current year, which will give you then a pretty low basis to start from and to recover from for 2021 and 2022, yeah, do you really think that there is no risk of having to push out the targets here?
Excuse me. About the midterm target 2022? Yes. Yeah. Here we are. This is based on, I would say, a normal market. When 2022 will come up a situation like coronavirus and completely downturn of the market, this will be challenging. Taking into account it is a normal year. All these investments which we are doing now and covering in our result, in the result of this EBIT margin of 4.3%, they will turn around not only to be neutral. They will really contribute to our EBIT margin.
This will be the case, especially in China, but also for eDEUTZ and Torqeedo. 7-8% we see very much realistic. What we are now doing to have even some protection by rough market conditions is our efficiency program Transform for Growth. That will also, I would say, give security on the 7-8%.
Okay. Thank you.
Next question comes from the line of Roland Koenen from Value- Holdings Capital. Please go ahead.
Yes. Good morning. Also from my side, just one question is left from my side. It concerns China and SANY joint venture. How much additional cash outflow we will see in 2020 for the joint venture and also for the other China strategy investments? The investment which we take in the JV, they will not affect our balance sheet.
On the cost we will have, this will be around, depending also on the period, will be around, yeah, EUR 15-20 million for next year.
Okay. Many thanks.
As a reminder, if you'd like to ask a question, please press star followed by one on your touchstone telephone. We have a follow-up question from the line of Richard Schramm from HSBC. Please go ahead.
Yeah. Just coming back also to your outlook for the current year where you said that you are not so concerned about your supply side and your production, but more to, yeah, the side of your customers and that they are prepared to take your products. What is your visibility in this respect? I could imagine that there are already signs that customers are more cautious on their planning and that you see this in their plan.
Also, what they call for the next weeks or months in orders. Is there a certain change over the last weeks compared to the situation we had at the beginning of the year?
Mr. Schramm, this is really difficult to predict. We have for sure already some customers based in Italy. They have shut down their factory. There are some other customers they put in even higher order numbers than two weeks ago, maybe to increase stock. It is really difficult to predict how this is really coming from the end market. What we see right now in our figures, order intake is still a stable situation. As I mentioned before, this is on a level which we have seen in Q4 and the first two months in 2020. It can change really, I would say, right now every day. It is not really predictable.
Thank you.
Next question comes from the line of Peter Rothenaicher from Baader Bank. Please go ahead.
Yes. Hello, gentlemen. Regarding the lower order backlog and your production will likely be significant down in the first quarter and then definitely also in the second quarter. Are you running already short-time work in your plants? Is this something you are currently planning?
No. We are not doing this right now. This could be a measure which will come up maybe in the future. Right now, we are still reducing temporary and, yeah, temporary workers. We have taken out all the workers, the temporary guys. Now we have still some potential with, yeah, limited contracts, which has a potential also in the future to reduce. The next step will be short-term work. Second question with regard to your procurement costs.
What is the general view you currently have on prices for components? Is there already some price decrease or what is your general assumption here?
I can take that. The overall activities we had on the purchasing side over the last years was we were always able to reduce the material cost.
Yeah. We have a more international supply base. We localize parts in China now for our activities there. We see a negative development, positive for us. I mean, price reduction. Sure, if you buy less, if the volume goes down, then somebody would say, "Well, now you have to pay more." We were able to avoid these impacts. Overall, the material costs will go down further in 2020 compared to 2019.
Thank you.
There are no further questions at this time, and I would like to hand back to Leslie Ilkin for closing comments.
Please go ahead. All right. Thank you, everybody then, for joining the call today for your interest in our company. Should there be any follow-up questions after this call, do not hesitate to contact us at Investor Relations. We are happy to answer any questions you may still have. Other than that, I wish you a good remainder of the day. Stay healthy. Cheers and goodbye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for watching. Thank you very much. And have a pleasant day. Thank you. Goodbye. You too. Thank you very much.