Good morning, ladies and gentlemen, and welcome to the DEUTZ AG conference call. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to Leslie Ilken.
Welcome to our conference call on the Q3 2019 results. My name is Leslie Ilken, Head of Investor Relations and Corporate Communications at DEUTZ. With us today is our CEO, Dr. Frank Hiller, and our CFO, Dr. Andreas Strecker. Mr. Hiller will give an overview of the key highlights and financials before handing over to our CFO, Dr. Strecker, who will cover the results in more detail. 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, Mr. Hiller. Please go ahead.
Yeah, ladies and gentlemen, warm welcome to our Q1 to Q3 2019 results. I would just right away jump to page four. Key figures for Q1 to Q3 2019 at a glance. We have growth in revenue and earnings. Revenue rises in all regions and major application segments. Consolidated revenue advanced by 6.4%. Revenue for the high-margin service business climbs by 7.3%. That's our strategy to grow in the service business because of the high profitability. We have also strong growth in the regions of the Americas, plus 14.8%, in Asia-Pacific, plus 16.3% also here. Our strategy is further internationalization of the DEUTZ Group. New orders have reflected a weakening of demand as a result of the economic climate. New orders are down by 15.1%, and we have to take into account the strong prior year period. We have a sharp increase in our operating profit.
Operating profit before exceptional items jumps by 50.8% to now EUR 69.2 million. EBIT margin before exceptional items improves from 3.5% to 5.0%. Revenue and earning guidance for 2019 is confirmed. We have also reached further milestones in the implementation of our growth strategy. That is our China strategy, but also on the EDEUTZ side, we made an acquisition of a small company, a very specialized company on battery technology, FORTAVIS. I will come to that later on. Now on page five. DEUTZ growth strategy in China. As mentioned, our China approach is running very well, and it is even more promising as we have saw it in the past. Having a look at the joint venture agreement with China's largest construction equipment manufacturer, SANY, at the end of 2019, the foundation stone was laid for the new high-performance engine assembly plant in the Chinese city of Changsha.
The province, Hunan, is contributing with $42 million in funding. From Q4 2020, DEUTZ will take over SANY's existing engine production activities and will begin to supply with DEUTZ engines. Steps for localization of procurement have already been initiated. There are very positive results. Here we see the potential of cost reduction not only for our China activity, also for our activities in Europe by supplying parts and components from China to Europe. Production of around 75,000 engines in 2020 is, out of today's perspective, a conservative scenario. Coming to the strategic alliance with BENE for local contract manufacturing, DEUTZ management teams will oversee the production of around 20,000 engines in 2020 for China and looking further ahead, other Asian countries. New factory in Tianjin to be completed in quarter one 2020. The ramp-up is planned with 5,000 engines in the year 2020.
Our third pillar for the strategy is the collaboration with Far East Horizon, the biggest construction equipment leasing company. Here we have already developed the first outlets, service outlets, and we are looking for a digital service offering. Joint web store is in planning. On the right side, you see a little bit the background of the story, which we have mentioned also before. China is really heavily forcing higher emission legislations, and there will be the emission legislations for off-road and also for on-road. On-road will start mid of next year. The off-road emission legislation will be in the end of 2020 or mid 2021. This is still not defined. Here is a high demand for high-technology engines, which is a real challenge for local engines manufacturers in China. Therefore, this gave us a good opportunity because we have already the technology in the pocket.
This was, I would say, the entry for our joint venture with SANY. Going on page six and talking a little bit about the acquisition of FORTAVIS, the battery specialist. FORTAVIS has extensive technical experience in electronic software, battery technology, and battery testing, and in matter of functional safety. FORTAVIS is focusing on the development of battery management systems and the production of battery management systems. This gives us the opportunity for the future to go deeper in the value chain with our EDEUTZ approach. In the past, it was planned to develop complete electronic systems for our customers and to assemble these systems with components which we purchased from suppliers. This gives us now the opportunity to really step into the value chain. The intention is to build in the future battery packs in the DEUTZ company for our customers.
It is a company existing out of 30 people, very highly specialized. The company has a turnover this year of around EUR 5 million, highly profitable, growing more than 100% this year. The intention of the former owner, Mr. Bockstedt, was to scale up the business. We have an agreement with him for long-term engagement in the company and joining DEUTZ. I think this will really boost our EDEUTZ activities in the future. Okay. So far, going on page seven, sales figures. As already mentioned, new orders down minus 15%. Right now, out of a lot of discussion with our customers, we see the economical development more as a dip than a long-term depression. On the unit sales, we are now more or less equal to last year with nearly 156,000 engines. Revenue is up by 6.4%, EUR 1.379 billion.
Also, a good news is coming from Tokyo. The unit sales jumped up by more than 40% by their new small line, which they have introduced this year. They have already delivered nearly 13,000 electric systems in the marine business. On page eight, you see the revenue by region. What is important here is the growth rate, especially in Asia-Pacific and Americas. In Asia-Pacific, the increase of more than 16% comes mainly out of exports. Besides our activities with SANY, BENE, and Far East Horizon, we are also pushing the export. The internationalization strategy of DEUTZ works in the right direction. On page nine, you see revenue by application segments. Here, important is the increase on the service business with 7.3%. Service business in total makes now 19% of the turnover. Our biggest segment, construction equipment, is on a level of 30%.
The increase is here just 2.8%. Here you see a little downturn in the demand. Looking at the agricultural machinery, this is now picking up. Last year was not that strong a market here. We see a better situation. Material handling is growing over the years. Now we have here an increase of 11.3%. This is now our second biggest product segment. Maybe so far from my side. Now I will hand over to Andreas Strecker for the key financials in detail.
Good morning, everybody. We continue on page 11. We have a significant year-on-year increase on EBIT and EBIT margin even before exceptional items. EBIT stands now at EUR 78.5 million in the first three quarters. This compares to EUR 45.9 million in the period before.
If we exclude EUR 9 million from the sale of land, we still have a significant increase in the EBIT margin to 5% coming from 3.5%. We had some non-recurring effects in the first three quarters of 2019, the deconsolidation of the Argentinian joint venture in the first quarter. We had a provision at Torqeedo for a recall in June of EUR 2.5 million. If we exclude these items, the EBIT margin would be at 5.3%. As we can see further on page 12, the improvement of EBIT also showed in the EBITDA margin. That stands now at 10% and 9.3% before exceptional items. DNA is comparable to last year. What we can see on the net financial income with the EUR 11.1 million, this includes a partial write-down of a loan that we gave the owners of Gusswerke.
As we all know, the Gusswerke in Saarbrücken and Leipzig filed for insolvency. Therefore, we took a precaution and wrote down these loans. The taxes increased, especially due to the sale of the land. In the end, we record a net income of EUR 54.7 million. On page 13, DEUTZ compact engines. We still have to keep in mind that we moved the 2011 engine series to Ulm. Therefore, in the segment of DEUTZ customized solution. Nevertheless, we can see that revenue and profitability developed favorably. As a reminder, in the first three months of 2018, we had a write-down of EUR 14.1 million because of the joint venture in Dalian that we sold. If we look on page 14, customized solution, you see a strong increase, of course, in the unit sales, also driven or influenced by the 2011 engine series that moved over.
We have a strong revenue growth, still also on the service side, with a strong increase of exchange products. Accordingly, the EBIT for the segment is further improving. We are quite optimistic for this segment going forward. If we look on page 15, you can see that the R&D expenditure was increasing. That is according to plan. We have projects regarding EDEUTZ, China 4, and stage 5. The same on the capital expenditure, which is also increasing according to plan. This also includes a portion of IFRS 16 regulation, where the leasing is now recorded as capital expenditure. On page 16, we have to record a higher working capital. It is mainly due to the rise in inventories. We took precautions regarding inventories of casting parts from Gusswerke, Saarbrücken, and Leipzig. We are increasing our inventory.
We are good to go for the coming months with that inventory to produce. Also, with the always moving Brexit, we could not reduce the Brexit inventory as we planned. We wanted to make sure that we can produce even if some unexpected things should happen there. Therefore, the cash flow from operating activities was reduced. We had in the beginning of the year some payments to factoring companies that reduced our cash flow. If we look on page 17, we can see that the free cash flow is negative. We made the first payment to the SANY joint venture. That way, the money is in escrow for the time being. As we said, all the payments will be a capital increase for the joint venture. The first portion we put into escrow.
Also, then the IFRS 16 leases increased the liabilities by EUR 43 million. That's a massive change that contributed that the net financial position is slightly negative. If we look on page 18, the balance sheet is still in very good shape with an equity ratio of more than 50%. If we look at funding, we have a repayment of a loan by middle of next year of close to EUR 20 million. Otherwise, our credit lines are untouched for the time being. The financial situation of the company is in very good shape. I would now hand over to Frank Hiller for the outlook.
Yeah. Group forecast for 2019, we confirm our guidance. The revenue will be north of EUR 1.8 billion, EBIT margin 4-5%, R&D expenditure EUR 85-90 million, and CAPEX EUR 85-95 million. Two important remarks.
First, on the final installment of the purchasing price for the sales of the Cologne DEUTZ site, there will be a postponement. We have planned that for 2019. This will now go into 2020 because of a delay in the formal approval development plan. This is according to the processes in the administration. The good news will be that the amount will be not as planned, EUR 50 million. It will be in the region of EUR 60 million. Another topic is, as already mentioned from Andreas Strecker, depending on the timing of the closing with SANY, there will be a second payment. We have paid so far in the escrow around EUR 15 million. Second payment will be around EUR 35 million. If that will be in 2019, then we will have the situation that the free cash flow will fall into negative territory.
I think this is only a question of the timing of the closing. Maybe so far for the group forecast. I am now going on the last page, forecast for key and customer markets in 2019. This is very much in line with 2018. Material handling is positive in all regions. We have adjusted the construction equipment application segment in Europe. This was previously 0-5%. Now this is revised to -5-0%. As mentioned before, out of the discussion with our customers, we see so far a dip, but not a long-term depression. Maybe so far from our side. We are now open for your questions.
Ladies and gentlemen, if you would like to ask a question, please press 9 and star on your telephone keypad. In case you want to cancel your question, press 9 and star again.
Please press 9 and star to state your question. The first question comes from Charlotte Friedrich Berenberg. Please go ahead with your question.
Hello. Good morning. Thank you for taking my question. The first one would be on the order intake. If you could give us a bit more of an idea in terms of the end markets, are there any particular end markets where you're seeing a stronger decline than others? Would you say the decline is there across the board? When you say that your customers are seeing a dip rather than a prolonged recession, can you give us a bit more of an idea? Is it more of an inventory issue, or what are your customers telling you?
Okay. Difficult question because there are a lot of influences.
First, I would say, especially our bigger and maybe in some cases also the more professional customers, they have started to reduce inventory already some months ago. We have also the situation of the pre-mine engines, which is not that significant than in former changes of the emission regulation, but which is also influencing the order intake. Looking at the different segments, customer segments, we see a bigger dip in the construction equipment machinery, material handling, and also agriculture is quite stable. ASWsMaybe so far.
Okay. Understood. In terms of current trading, what you're seeing so far in October and maybe also the first week of November, would you say that is similar to the level that you saw in Q3, or where is the momentum going?
No, we see a little bit of improvement.
This also comes out of the fact that Q3 is always negatively influenced by the summer break. This was totally different last year in 2018. There was no dip by the summer break. Order intake was really stable over all the time, which was, I would say, unusual for the normal yearly cycle. Now we see really some improvements within the last months.
Okay. Understood. Finally, on the supply situation with Gusswerke, can you give us maybe an idea of firstly, you talked about elevated inventory levels for casings. What sort of magnitude are we talking about? In general, if you're looking into next year, can you give us an idea, casings and especially casings with Gusswerke?
I know you can't probably give too much detail, but can you give us an idea of how much that could be and how much that could impact your profitability?
Yeah. This is Sebastian Schulte speaking. Inventory situation is such that we are good to go this year and the early months of next year. So inventory is solid. We continue with second source. Therefore, we don't see any issues with regards to supply chains when it comes to castings.
Yeah. Maybe to add, the supply chain is absolutely stable. There will be no negative effects for our customers. For sure, we will have higher costs. This was also the reason for adjusting our outlook some weeks ago. For sure, we will have some negative influences on the working capital because we are now renting a lot of places where we can store casting parts.
Okay. Understood. Thank you.
At the moment, there are no further questions. I would like to repeat, if you would like to ask a question, please press 9 and star on your telephone keypad. There is one further question from Richard Schramm, HSBC. Please go ahead with your question.
Yes, good morning. I have a question concerning your broadly unchanged market outlook, which looks a bit surprising to me as I saw the outlook statement from Volvo for its building equipment business. This was, to some extent, clearly more cautious for 2020. How do you see this? Is still the risk more on the downside? What makes you so optimistic that you should see a stable market environment here going into 2020? Thank you.
This is what you see on page 21.
You have to take into account this is more or less machines or engines into market. It's not order intake. It's comparing 2019 to 2018. If you see our figures that we are just 0.5% down on the units to last year, this is really in line. What maybe you compare on the Volvo side is the order intake. That's different from this picture here.
Okay. Just to follow up on this issue with ABECUS, could you quantify somewhere the extra cost you have to swallow in the current year? Will this be also a burden for next year, or is there a chance that all extra costs will be swallowed with the current year and there is no spillover effect here?
There is some burden that I cannot quantify for confidentiality reasons. Overall, it's manageable. It's a lot of work.
As Frank Hiller said, with additional warehouses, etc., we have to incur extra expenses. At the moment, we are not in a position to quantify it. You also have to take into account that I would say in the second half of 2020, we have more or less for all parts a second source in place. We can switch if the need is there. This second source would not be for 100% of the volume you need, right? You are still running on. No, we are good. With Schramm, we are good to go there. All the moving of tooling and parts and testing is underway according to plan. This was already launched, these activities, more than one year ago. Yeah.
Okay.
Even if the worst case were to happen with Gusswerke supporting or Gusswerke-Leipzig, you should then be on the safe side if the second supplier is fully established, right?
Correct.
Yes. Okay. Just final thing on this. You have booked about EUR 9 million or written off in the financial result for this. This is quite obviously not the full amount. There remains some risk still of a few millions. Is this everything we should expect here in respect of one-off burden for the current year?
There is some left, yeah, true. We also were able to secure some of the securities that we had. The loan was secured. There were some monies that we could capture. Therefore, there was no need to write it down completely.
Okay. Thank you very much.
Yep.
No further questions. Once again, if you would like to ask a question, please press 9 and star. The next question, Friedrich Bitter, Hauck Aufhäuser. Please go ahead with your question.
Good morning. I was wondering if you could talk a bit about your Q3 order intake decline of 20% year on year. I would like to understand a bit more what is perhaps, if you can get a feeling from all your discussions with customers, etc., what could be driven by their inventory management being a bit more careful given a macro outlook? What is really underlying market development? Could you provide a bit of sense on this one, please?
Yeah. Okay. That's quite difficult because there are no real hard figures. We have for sure some hard figures for the order intake in Q3.
As mentioned, the construction industry is affected heavily compared to the other segments. We are talking to the customers, and we are already taking the discussions about planning for the first and second quarter of next year because we have to, depending on the order intake, we have to adjust our capacities. They see it not that negative for the, I would say, for the whole year 2020. There, I would see also some light at the end of the tunnel. We will see, especially in quarter four, how this will further develop. I have mentioned some months ago, I think four or five months ago, that we have reached the peak in order intake. We have taken already to this point of time our measures.
I would say I maybe see the trend on the other side that we have reached maybe bottom line.
Okay. Thank you. That's very encouraging, actually. Obviously, that's underlying what you said earlier that you see some sort of a small improvement in the last few months. I would like to follow up on this one. Just if you look at perhaps at Q4 last year, we've seen orders of about EUR 407 million. Now, basically, in 2019, we've seen order intake declining sequentially on a quarter-on-quarter basis from EUR 550 million and then around EUR 440 million, now EUR 370 million. How do you think, based on your order intake in the last few weeks, and we're already in November now, how do you think about the order intake perhaps in Q4? How would it compare, say, to Q4 last year?
Was that a very strong quarter in the end, or would you think? Yeah. Mr. Bitter, that's really too early. Looking at just the last week, order intake was quite good. We really have to wait. It would not be serious to have a judgment on that for quarter four.
Yeah. You could confirm that in the last few months, meaning, say, from September after the summer break, order intake has basically stabilized already? Is that the message, or is it how should I think about it?
Yeah. To some extent, it really has stabilized. As mentioned, discussions with our customers for next year are not that negative. That's what I can say. You can be sure that order intake is a hot topic for me and my colleagues every morning, discussing with the salespeople how that developed.
Yeah, we'll keep you updated on this.
Okay. Thank you very much. Perhaps on supply chain issues or Hauberg-related, what can you expect in Q4 still to come? Obviously, we've seen a write-down now for credit line of EUR 9 million. That's the Q3 impact. Just talking about Q4 and then getting obviously towards your 4.5-5% margin target for the year, just in terms of what are your sort of what's your latest thinking on Q4 really in terms of those extra costs?
Again, as I said, on the supply chain, there is not much left in the books for the loans. I think when it comes to Gusswerke-Leipzig, again, we are good to go on both locations. There are other suppliers that are in insolvency, as you can see in the newspapers. Also there, we have things under control.
From that regard, I don't expect major impacts. There could be some euro here or there, but nothing major.
Okay. Thank you very much.
Next question, Hans-Heim Burger, Kepler. Please go ahead with your question.
Yeah. Good afternoon. Good morning. Very quick question from my side. First of all, can you give us an indication on your current capacity utilization? Do you consider for next year already short-term work? Secondly, let's assume for next year a worst-case scenario, just as a scenario, when do you think you would be still break-even? What level of sales would you need to be break-even on the EBIT side? Thank you very much.
Okay. Okay, Mr. Haimburger. Thank you for the question.
What we have done really, I would say, six months ago, we really have addressed all possible levers which we can do to ramp down the capacity if a long-term depression comes. We have a lot of temporary workers in the company, still in the company. We have a lot of agreements with our workforce for limited time. If break-even, it would be easily in a field, I would say, plus minus 150,000 engines, also depending a little bit on what kind of engines. A lot of measures are in place. Yeah, I think we are here really on the safe side.
Okay. Thank you.
Next question, Roland Köhn, Value Holdings. Please go ahead with your question.
Yes. Good morning from my side. One question to your Torqeedo business.
We saw a nice increase in unit and also in sales, but the earnings are still in the negative territory. I have in my mind that your break-even was scheduled for 2020. Is it still valid, or where is the break-even level for Torqeedo? The second question on Torqeedo is on the provisions you built in the first half. I have also in my mind that you were optimistic to get back some of these provisions from the former owner of the company. Is it still valid?
Yeah. Maybe on break-even with Torqeedo. When we acquired Torqeedo, the plan was to have break-even in 2020, as you mentioned. We have already informed several months ago that this will be postponed one year. This will take us in the year 2021. Now, by all this CO2 discussion, we really see a lot of upside coming from the market.
Also, if you are looking at big ferries and Gusswerke-Leipzig, what's that? Vessels. Vessels, yeah. They are all now coming up with having some actions, for example, for the smaller boats to go onto electrification. There is now really a very good market situation for Torqeedo on the provision. Yes, we are in discussion with the former owner. What we have to do is to finalize the callback, and then we have to make a settlement with him. In the end, we also have a very good legal position. This could be an upside for the following years. This will not be a situation which we solved already in 2019.
Okay. Thanks. Maybe an add-on question on the break-even question. In 2020, we will see an improvement in the negative earnings.
Absolutely. Okay.
Okay. Thanks a lot.
One more time, if you would like to ask a question, please press 9 and star on your telephone keypad. Mrs. Ilken, there are no further questions.
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 the Investor Relations Department, as always. We are happy to answer any questions you may still have. Other than that, I wish you a good remainder of the day. Cheers and goodbye.