Good morning, ladies and gentlemen, and welcome to the DEUTZ AG conference call regarding the half-year 2019 results. 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 Iltgen.
Good morning, everybody. A warm welcome to our conference call on the first half-year 2019 results. My name is Leslie Iltgen, 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 then 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 following 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.
Dear ladies and gentlemen, I would like to welcome you all to our conference call marking the publication of our half-year results. Before I get into the details, I feel it's important for me to once again address the comments I made on July 8 during an interview with Bloomberg. On that day and on the days that followed, our share price fell significantly, and that was after I had merely commented on the situation in the market, namely that we find ourselves in an increasingly challenging market environment, which should be obvious to all market participants. I was and still am surprised by the magnitude of the reaction to my remarks. After all, one thing is clear: DEUTZ is sticking to its guidance for 2019. We grew again in the first half of the year and are making good progress with our strategy aimed at further improving margins.
DEUTZ of today is nothing like the DEUTZ of a few years ago. The action that has been taken is having the desired impact and has made the company much more robust. This is helping to ensure that the business can continue to operate successfully even in an increasingly challenging economic environment. As an introduction, I'm switching now to the highlights of the first half 2019 on page four. We had a positive revenue and earning development, a further increase in revenue, a plus of nearly 6%, plus 5.9%, generated across all regions and main application segments. We had strong growth in the Americas and Asia-Pacific. Both regions were above 15%. That's our clear intention: to grow the company much more international. We had further growth in our profitable service business. As mentioned in calls before, service business is very important for us.
It's important for the result of DEUTZ, and it's also important for the stability also in more difficult times. We grew the business by 7.9% to nearly EUR 180 million in the first half of 2019. This is a higher increase than the whole revenue increase of the company. New orders exceed revenue. This means we had a positive book-to-bill ratio in the first half, and this is also very important for us. Looking into the last year, 2018, we had a tremendous situation on the order intake. There were some months where we had a book-to-bill ratio which was nearly 150%. This was an outstanding situation, and we are coming back now to a normal situation. The operating profit before exceptional items grew up by 41.3% to EUR 47.2 million.
The EBIT margin before exceptional items increased from 3.8% in the 2018 first half to 5.1% in 2019. We confirm the group guidance for 2019. So far to the figures, and now about our strategic topics. There are mainly two topics. It's electrification, and it's our China strategy, which will be very important in the future for DEUTZ. On the electrification side, we are on plan, and the projects are running well. There will be seen the first market solutions at the end of 2020. The focus within the first half year in 2019 was really focused on our China strategy. The agreement with SANY on the joint venture was signed in June. DEUTZ will take over within the next months the existing engine production activities of SANY.
This has today a capacity of around 10,000 units and will build that up to a higher capacity of around 80,000 units. We will deliver the first DEUTZ engines in Q4 2020. Some of them will be still delivered out of Cologne to ramp up the cooperation. What we have already done is the first steps into localization of purchasing parts in China. This is running very well and has a big potential not only for our Chinese business, also for our European and German business to use Chinese sub-suppliers. The strategic alliance with Beinei is well on the way. There will be a new factory which will be built by Beinei in Tianjin. This will be completed in Q1 2020. Also here, we will have the first local products at the end of next year.
DEUTZ is aiming to generate revenue of around EUR 500 million in China in 2022. This will be consolidated at equity with the equity method. Going now on page five and having a closer look at the sales figures, new orders were below the first half of 2018. This was an exceptional first half year in 2018 with an order intake of nearly EUR 1.1 billion. We are back, I would say, on a normal level with more than EUR 950 million. Our target for this year on the revenue side is to stay above EUR 1.8 billion. Revenue outperforms unit sales because of positive mixed effects and increased prices. The revenue increase was by nearly 6%, 5.9%, and revenue was generated of nearly EUR 930 million. On the Torqeedo side, pure electric drives, we sold more than 6,000 units.
That's more or less on the same level like last year. Revenue by region, you see this on page six, and you see that we have now a share of around 40% in the two regions, Asia-Pacific and Americas. Both regions grow by more than 15%. Looking at EMEA existing out of Africa, Middle East, Europe, and Germany, we have a slight increase of around 1%. Also here, our strategy to grow the company internationally works out very well. Page seven, revenue by application segments. First, what I want to mention is that our service business now is taking a share of around 19%, and we increased it by 7.9%. These actions were taken already two years ago to achieve our target 2022 with a total turnover of EUR 400 million on the service side.
Also on material handling and agricultural machinery, we had a nice increase with 8.8% revenue increase. Construction equipment, the market was very strong in 2018. Also here, it was possible to increase slightly by 1.5%. Maybe so far from my side, and now I'm handing over to Andreas Strecker for the key financials in detail.
Good morning, ladies and gentlemen. I would like to lead you through the financial details. On the EBITDA side, we were able to improve the numbers by 29% to EUR 85.8 million. The EBIT showed a strong increase to now EUR 47.2 million compared to EUR 33.4 million last year. We had a positive one-time impact of EUR 9.3 million from the sale of the land in Köln-Deutz. Also, the net interest expense and income taxes remained on a low level, so net income increased by 79% to EUR 45.3 million. If we look on the EBIT margin in more detail, we can see that we had some non-recurring effects in the first half of the year. These were the deconsolidation of the Argentinian joint venture that happened in Q1.
We had a one-time provision at Torqeedo, and also we had a slight reversal of an incumbent loss on engine series. Overall, the EBIT margin would be at 5.5% without the non-recurring effects. The results improved both on the compact engine side as well as on the customized solution. The other segment is negative. As I mentioned before, Argentina was EUR 2.9 million, and the provision at Torqeedo is EUR 2.5 million. If you look at the DEUTZ compact engine segment, you will notice a steeper drop on the unit sales to 81,900 units. That is because we moved the 2011 series from Cologne to Ulm, and it will be recorded now on the segment customized solution. Overall, EBIT margin improved to 4.8%.
As you certainly remember, in the first half of 2018, we had the one-time effect at the joint venture in the CDE where we recorded a loss of EUR 14.1 million, and that was recorded in the segment compact engine. If you look on the customized solution, here you have again the effect of the 2011. Unit sales increased some 10,000 of that was based on the 2011. Business performance remained very strong. EBIT margin remained in the double digit based on the strong after-sales revenue and profit margin that we generate in that segment. On the R&D side, you see an increase on the spending from EUR 37 million to EUR 47 million. That is according to plan with the E-DEUTZ strategy in full swing, and we continue to have new engine projects. On the capital expenditure, you see also a strong increase, which was planned for E-DEUTZ test stands.
Also, we ordered a second set of toolings for forging parts as we have announced late last year. We would like to reduce the single-source dependability on the forging parts. On the working capital side, you can notice an increase to EUR 336 million. We have higher inventory levels based on Brexit, for example, and we just wanted to make sure that we can fulfill all customer orders. We have now additional efforts to reduce working capital back to more regular levels. On the cash flow for operating activities, sure, you see the impact on the increased working capital. Also, we had early in January a repayment of factoring liabilities. Based on that all, on the free cash flow side, you see that impact.
The net financial position there we have to keep in mind that through IFRS 16, we had to record EUR 41 million in leasing liabilities as a liability. That's a method change. Apples to apples, you would have to increase the minus EUR 17.8 million by EUR 41 million. The drop is not that steep as it's shown on the paper. The equity ratio is very strong with 49%. On the funding side, we extended the credit line of EUR 160 million into the year 2024. On the funding side, we are extremely healthy and have enough firepower if we need money to spend. For the outlook, I would hand back to Frank Hiller.
Yeah. Last but not least, I would like to confirm our group guidance 2019 with a revenue of more than EUR 1.8 billion, EBIT margin of 5% or higher, and R&D expenditure EUR 85 million-EUR 90 million and CapEx excluding R&D EUR 85 million-EUR 95 million. Maybe so far the presentation from our side, and we are open now for your questions.
Ladies and gentlemen, if you would like to ask a question, please press nine and the star key on your telephone keypad. In case you wish to withdraw your question, please press nine and star again. Please press nine and star to state your questions. The first question comes from Richard Trump from HSBC.
Yes. Good morning, gentlemen. I have one question concerning your outlook, namely as far as I see that you have left your key forecast for regions and customer segments unchanged, although, yeah, we know that the environment has become more difficult over the recent months. Yeah, what's behind this confidence that you might still see all in all a slightly positive growing market environment here, especially for Europe? I'm also a bit surprised that's still 0%-5% here across all segments. The second question concerning the development at Torqeedo where the units declined by 3% in the first half, which, yeah, looks to me a bit disappointing as I assume that this would be a real growth market for the years to come with solid double-digit growth from a low level.
What has prevented here this business from growing in the first half, and should we be more careful also for the full year? What does this mean for your expectations here for this business? Thank you.
Yeah. Yeah, Mr. Trump, thank you for the question. I would start with the market outlook. Right now, I think it's really quite difficult to see the real end market. There are a lot of influences right now, especially these weeks and months. We have the holiday season where normally order intake is quite low. If we compare that with the last year, it was on a high level also during the holiday season. Now, I would say all the customers are a little bit cautious, like we also are cautious, and everybody is reducing stock. It is not really clear or foreseeable what is coming from reducing stock on the customer side, what is coming from the end market. That was the reason why we kept our outlook, and we will adjust that within the next weeks and months if we have a clearer picture on that.
We are looking very carefully in our order intakes, and I can tell you that last month the order intakes were on a stable level. It was very much stability. That order intakes was more or less on the same level like revenue. It is not really clear what is going on right now in the market, but I think we will have a clearer picture within the next weeks.
Okay, Mr. Trump, then I would talk to you about Torqeedo. The Torqeedo reason is relatively straightforward. We have a new high-volume product where the presentation into the market was slightly delayed by two main customers. That has taken place right now, and the order intake for that new product is exceeding expectations. In Q3, you will see a good growth as you may have expected already. It was customer-driven, but the products are on track and are successful in the marketplace.
Okay. Thank you very much.
Next up is Charlotte Friedrichs from Berenberg.
Hello. Good morning. Thank you for taking my question. I think the first one you already started talking about a little bit. I was interested in current trading and how the order intake has been developing over the last month. You said that you are pretty much at a book-to-bill ratio of one over the last weeks, correct?
Yes, Ms. [Mulupets], that's correct. Maybe some other comments on this. If we are looking at our main customers, customers which are also listed with their shares and public their results, you see in many cases that the end market is still working quite well even if those customers are reducing their orders. That gives us a little bit the feeling that there are some programs going on on reducing the stock. It is not really clear if this is a real effect on the end market.
When you look at your order intake right now, is there anything that you see in terms of particular regions getting stronger or weaker or any particular end markets where maybe the composition of the order intake has been changing over the last month?
We see some markets weaker in Europe, and we also see a little bit of, I would say, challenge in the U.S. In Asia, I would say this is not really in our situation, this is not the market development, it's not really relevant because we are on the way, especially in China, with a completely new management team, winning new orders, having our new strategy together with the partners. This is all about winning market share, and the effect of a +5% or -5% on the market development is not really relevant for us today.
Okay. Understood. My last question would be around the EBIT margin in the compact engine segment that was a little bit weaker in the second quarter than in the first. Could you maybe talk a little bit about why that is the case?
What we see is in the first quarter, we still produced units of the 2011 in Cologne. We had better fixed cost utilization than with the move to volume in Cologne went down a little bit. It is about fixed cost utilization.
Okay. Understood. Could you remind us again when exactly did you move around the 2011 series? Was that towards the middle of Q1 or?
It was middle of Q1, yes.
Okay. Good. Thank you.
Yep.
The next question comes from Yasmin Steil from Commerzbank.
Yeah. Thanks very much for taking my question. I got a question on your CapEx development. To what extent does Q1 CapEx already reflect expansion CapEx in China? Could you please give us a split of the CapEx increase of around EUR 80 million year- over- year related to new engine projects and which is related to E-DEUTZ? What kind of level of CapEx requirement for China and E-DEUTZ should we pencil in going forward? Thanks very much.
Good. China is not included there in relevant stages. There is a double-digit expense for tooling, for second sets of toolings for forging parts as we have announced in the fourth quarter. There is middle million digit for E-DEUTZ, and the rest is upgrades in component factories in Spain and in Herschbach and a little bit in Cologne. Plus also some things in Ulm for the movement of the 2011. It is a mixed bag, but according to plan.
Going forward, I mean, what should we pencil in?
Good. We provided the guidance, and we will stay in that guidance. There is no everything is according to plan.
Maybe about China, investments in China will be done by the JV.
By the JV. Okay. That's still a tech, so.
We are also in deep discussions with our partner, SANY, because there are now things going on about subsidies and so on. This could be very much supported by the Chinese government. Here we also see some potential for the joint venture to receive subsidies. This is exactly right now under discussion.
Okay. Perfect. Thanks for the clarification.
Next up is Jasko Terzic from Metzler.
Yes. My first question is maybe again on current trading, just to get it right or to that I didn't misunderstand you. Is it right that you said your book-to-bill for current trading July is at least one, and it was also the fact for June? Is it right?
We are talking about July. These are the latest figures, and they are just completed this morning. This was on a level around 1.0.
Okay. For Q2, just to get a feeling for the sequential development there, I think there was a tremendous decline from April to June. What makes you really confident that July could be a first signal that it is stabilizing?
Yeah. There are still some uncertainties because I mentioned you always have the holiday season, and it was always in the past that you have to wait until September and see how this develops. Last year was completely different. Very interesting for us is really the thing I mentioned to see big customers of ours, what they are communicating on their order intake, and how they behave on orders on our side. This is sometimes really in a big difference. If we see their market outlook in some cases, I think that could be an indicator that the situation is really stabilizing.
Okay. In the past, if I recall it correctly, your visibility on orders from customers was in the range of two to six weeks. You are not nervous due to the fact that it could also quickly become even more worse?
No. We don't see that for 2019 because also now looking into quarter three and quarter four, we know that quarter four will be an extremely challenging quarter on the production side. There are a lot of engines on the prebuy side. I think the visibility for 2019 is really very good. 2020, it's really too far down the road. The important thing for us, and that's part of our strategy, we know out of the past that DEUTZ was always seen as a very volatile company, and we did a lot of measures also to compensate to a certain degree a downturn. What will happen if the market is going down, we have new orders on hand. There are some big orders which will start in 2020. We have our China strategy.
This might be all things which compensate also in a downturning market and which makes DEUTZ quite robust. I think also in a downturning market, DEUTZ will perform better than the competition.
Okay. Good to hear. Maybe also getting to your reference to those new ramp-up customers, maybe first on KION and then also for China, are there any, let's say, minimum threshold levels that the customers must have to order, or is it purely driven by their demand?
It's always driven by their demand, but the price level we agreed is always on a basis of volume. If this will not come, we can talk to our customers about the pricing. For China, we are right now in the phase of bringing all the data together. There will be an effect in 2020 by the new strategy. That's for sure. Right now, we are figuring out what will be the effect to our production in Cologne, what will be in a first step delivered out of Cologne, what will be done locally. These are things we are now looking into.
Okay. Finally, KION, could you give us maybe the ramp-up figure in terms of units for the second half this year and next year? What do you think of that they are also guiding somewhat more cautiously regarding their demand, especially for ICE trucks?
Yeah. KION today is already an existing customer, and we have now this big contract taking mainly over the VW volumes, and this will really start with high figures end of this year. The positive effect will be there 2020. The ramp-up phase will take around two years. I do not want to mention now the concrete figures now for 2020, but there will be a significant effect in 2020.
They haven't changed their orders so far, although they become a bit more cautious for the industrial truck business?
Not so far.
Okay. Thank you.
At the moment, there seem to be no further questions. For any additional questions, please press nine and the star key. The next question comes from Peter Rothenaicher from Baader Bank.
Yes. Hello, gentlemen. Could you give us an explanation if I take a purely operating result? And this means also the correction of last year's DDE effect. Then we had in the second quarter a decline in the operating margin despite higher sales volume and also the solution in the purchasing area. What is the reason for this margin decline?
Good. We had some one-timers like the Torqeedo provision for the recall. We had slightly lower production volume. Now it's getting quite technical as we had an increase in inventory. We had a negative impact on the internal profit elimination and the consolidation, which was higher than it was last year. With these three items, that's the main explanation. The underlying purchasing savings are online, but sure, when you only have three months and then you have non-recurring items, the impact is obviously to be felt. Yeah. That's the main explanation.
Yeah. Technical question. Why did you not correct in Q2 last year this DDE effect in the operating result? Last year in Q2 reporting, it was adjusted, and this time not. I think this made it not easy to have a direct view on your profitability and the development in Q2 this year.
It was an operating item. We have written it in the comments. Yeah. I understand the point.
On Torqeedo, you mentioned the development that you had obviously slight delay in the presentation of new engines. What is your current view on profitability Torqeedo in 2019? I think comments before were that the company is achieving better results in 2018, that we are gradually approaching break-even.
Good. 2019 will be better than 2018 from what we see. We had that accrual, which we would like to or are confident to reverse in the second half of the year because the reason for the recall was for products that were made before we bought the company. There is some activities going on to reverse it. With the increased volume, we will see better results in 2019. The company is moving in the right direction. Absolutely.
Could you give us already a range what we can expect for Torqeedo?
Good. It will be still negative. As expected, not yet break-even in 2019. We will see that in 2021 as expected. The company is moving in a direction where we expected to do.
Okay. Perhaps last question in terms of order intake for the second quarter. We were aware in April at the Bauma Trade Show, the sentiment was still very good. You mentioned April order intake looked very good. To what extent do you think the decline in the order intake had to do with the reduction of inventories from your customer side and to what extent with the market impact?
Yeah. Frank Hiller, Mr. Rothenaicher, this is really difficult to judge on. As you mentioned, after the Baumar, there was before the Baumar, a lot of analysts and customers were a little bit nervous, I would say, because the cycle was very long for the construction industry. The Baumar brought a very positive impact. We had a very strong order intake in April, also beginning of May. It turned a little bit in the other direction. I think it's both. In some cases, it's really on the end market side. Some of the end customers are also rental companies. They also react quite strict in some cases. It's reducing of inventory on the OEM side. I would say it's both, maybe half-half. We'll find that out within the next weeks and months, especially after the holiday season. We will see how this goes along.
Yeah, perhaps one aspect regarding holiday season last year, we had a problem with the shortage in components. This is not the case. Is it fair to assume then in the third quarter that we should see here a significant increase in production and therefore also in sales versus last year?
Yeah. Looking ahead, I think the Q4 will be a very challenging quarter for the production and the output. Talking about shortages, yes, we had last year the topic with the casting company Halberg Guss, there was a shortage, and this was, I would say, communicated in a clear and open way because you can read it in the newspapers. For sure. Also this year, in the first half, there were some challenges with some suppliers, smaller issues, but the supply chain was also a challenge in the first half year of 2019. I think this could be also a positive effect for the second half that here the challenges are much lower.
Therefore, production in Q3. Last year, we had the closure of your current DEUTZ plants, I think, for one or two weeks. Therefore, some positive impact here.
That is to be expected. I think August will run higher than last year. That's what we see right now. I see also the good order intake we saw last year's summer is because everybody could read about the delivery issues, and everybody wanted to make sure they get enough. This year, in the summer, there are no shortages around anymore in the industry. As we reduce our inventory, as I said, so do others. I think that's a good portion of the current situation. I think production will be quite good, yeah.
Thank you.
The next question comes from Franz Schall from Warburg Research.
Yeah. Good morning. Thanks for taking my question. I have one on your inventory level. You mentioned that Brexit was one of the reasons why your inventory level was that high. Can you give us more color on that, please?
Yeah. Oh, sorry. English. We increased inventory for U.K. supplies quite strongly, as did the rest of the industry. That is why you had seen the peak in U.K. production so early. Now we are now in the process to reduce that somewhat. There will still be a safety stock for U.K. here, but I think not as high as we anticipated in March, where we really had for many weeks inventory on hand. Now we have a couple of weeks less, but we still think that even in the case of an uncontrolled Brexit, we have enough safety cushion.
Can you give us a rough number just to get a better feeling?
It's in the neighborhood of EUR 7 million-EUR 8 million surplus inventory.
Okay. Thank you. Regarding profitability in H2, taking all those one-offs into account, and you mentioned the 5.5% margin on a clean level in H1. Is it fair to assume that you can reach such a margin in H2 also?
I mean, we confirm our guidance of 5%+ . Looking at the performance in the half year, there may be some things in the second half. Something always happens, but I think we are on a good way, and that's why we confirm the guidance.
Thanks a lot.
Now we're coming to the next questioner. It is Frederik Bitter from Hauck & Aufhäuser.
Good morning. Thank you very much. A few ahead, please. The first one would be, how do you compare July order intake this year to July order intake last year on an underlying basis? That means excluding Halberg and also pre-buy effect.
It's a very difficult question. In last year, we had this challenge with Halberg, and all the customers were aware of this. In some cases, they were also affected by the shortage by themselves, receiving or not receiving enough casting parts. Also, order intake to that time could be higher as it really was because they are building up stock. This to that time did not reflect the market demand. It is not a comparable situation. Also, looking into last year, the holiday season was outstanding. We had more or less an order intake, which was on a level like having no holiday. This was in contrary to all the years before and also in contrary to this year. It is really not feasible to comment on that really in a quantity way, I would say.
Yeah. It's tough to compare. Okay. Thank you. Thanks anyway. The next one, it remains a bit technical, and also had to do with pre-buy effects. I was just wondering if you could talk a bit about the effect we've seen actually in the first half of 2018. I mean, your orders there, you had about EUR 1.1 billion of orders. That's obviously the base you were facing this year. I was wondering how much do we need to take out for engine pre-buy and also Halberg again? Do you have an idea how much that was round about the EUR 1.1 billion? I have the numbers a bit better.
Yeah. On the pre-buy effect, we calculated that with around 30,000 engines over the whole period, and the period was spread over two years. There was a positive effect of around 15,000 last year, which is missing now already now in 2019. In 2019, we have another 15,000, which will be already out of the year 2020. This is in our calculation. Pre-buy effect, I would say, is half that big as it was four or five years ago when we had the switch from or the switch to TFO final.
About 15,000 engines in 2018, year of five pre-buy. And then how much was Halberg then actually?
Halberg, nobody told us whether they bought things because Halberg may not be able to deliver. That is the case.
The late.
Yeah. That really nobody can put any analysis to it. We only know if somebody has a delivery issue, you increase orders. That is exactly what we did with a couple of suppliers that were limping. You increase to make sure that you get something, yeah? It normalizes. I think that is what we are seeing now.
Okay. Sure. Thank you. Then on Torqeedo, the provision for the product recall, it would be interesting to learn a bit more about the background of that. Obviously, you booked EUR 2.5 million now in Q2. Is that it, or would you think there is some residual risk so we might see another provision maybe in Q3 now or Q4 even?
No. The 2.5 is a solid calculation. It's a production item where some seals were not applied consistently. Again, it goes back to the time before we bought Torqeedo, and we are in discussion now to talk to previous owners that they take over the cost of the recall. It's an ongoing process, but the 2.5 million are solid.
Okay. That obviously would be the EUR 2.5 million would be for a complete recall, refitting, send the product out again to the customer, etc. So an all-in number.
Yes.
Okay. Perfect. Thank you. You were mentioning earlier there was an elimination effect in Q2, which has also negatively impacted EBIT. How much was that? Could you quantify that?
Yeah. It's in the neighborhood of between 3 and 4 million.
Okay. Only in Q2?
For the first half.
Oh, okay. How much in that? How much was Q1, and how much then in Q2? Or was it all?
The majority was in Q2.
Okay. That's quite significant, actually. Okay. The last one I had also on the free cash flow, obviously at EUR -46 million as of H1. What's the expectation for the second half or respectively the full year in the end?
Good. We said it will be positive, and we stick to that. We will reduce the blocking capital back to normal levels. We are now some EUR 30 million-EUR 40 million higher than we would like to be. That will go down, and we expect positive cash flow by the end of the year as planned.
Yeah. Okay. Thank you very much to both of you.
Yep. Thank you.
Next up is Patrick Speck from Montega.
Yes. Good morning, gentlemen. Thank you for taking my question as well. I'm referring to the construction industry. Your revenue increase with construction equipment was rather weak compared to other applications. From my point of view, the construction industry is one which is still running quite well and with good perspectives. Could you please share with us some details for the development in this specific sector, also with regards to different regions?
Yeah. Overall, we have this plus 1.5%, taking into account that last year already construction industry was running very well on a high level compared to, for example, agricultural industry. This was, I would say, always on a very normal or lower level. This is the reason why you see now this big increase on the agricultural side. On construction side, we see not really that we have some tremendous downturns in some markets. There are always some markets, some products, some customers behind who are reducing their stock level. I would say it's not that we can say there's a market or a region really completely going down.
You would quantify it more as a base effect because of the strong previous quarter?
Yeah. Yeah.
All right. Thank you.
You're welcome.
There is a follow-up question from Richard Trump from HSBC.
Yes. Just a quick one. Coming back to this supplier issue, you mentioned that you have increased investments here to build up a second source, especially for the forging part. Where do you stand here, and when do you think these new suppliers will be fully up and running so that you have here a more stable basis? Thank you.
We have numerous parts, as you can imagine. It goes gradually. I think everybody is fully online in Q3 of next year. Some suppliers will be ready in Q1, and then it is staged until Q3. We also have to say that from the Gusswerk that bought Halberg, we have zero supply issues as we speak. That is not an operational problem right now. It is just a precaution that we announced last year already that we go more into second source for main components.
Okay. Thank you.
The next question comes from Gordon Schnell from Bankhaus Lampe.
Yes. Good morning. Also on that supply issue, Halberg Guss was again negatively in the press end of June. There was an article saying that Halberg again faces liquidity issues. Can you give us an update on the situation? You obviously see no risk related to Halberg, but what does it mean for you? Do you have to put additional money on the table? Can you give us an update, please?
Good. I think the restructuring plan, as far as we can see, at the Gusswerk is progressing. I think they have a good agreement with the unions. They will line up the funding from the Saarland and Saxony. That is coming forward. We help, so do others in between with liquidity. So far, things are progressing in the right direction. Yeah. Everybody's committed as far as we know. I mean, we cannot talk directly to the other customers for uninterested reasons, but as far as we hear, everybody's supporting.
Okay. Thank you.
The next question comes from Peter Rothenaicher from Baader Bank.
Yes. Regarding the pricing environment, in the weaker market, do you experience here some more pressure in pricing, which might weigh on your margins in the next year or so?
No. From a pricing, we have a positive price development. We do not see price reductions overall. In average, we have a positive pricing situation.
Okay. Then regarding the one-off profit from the sale of the DEUTZ property, you had now EUR 9 million profit in. When do you expect the remainder to come?
Good. The overall situation, what will be built on that property in DEUTZ gears up. It's now in the public domain. We will see how quickly final decisions will be made. It's a nail-biter, whether it's in the end of this year or whether it moves on, but it's positive.
We are still planning for end of this year, Q4, probably that the second portion will come.
Good. The EUR 9 million, maybe just to add, is over and above the EUR 50 million that we project. The portion of it is in addition.
Just something on top. Okay.
Yes.
My last question, you mentioned with your China activities for 2021, approximately EUR 500 million additional sales. Is it then all really on pure equity accounting, so not consolidated in European L in terms of sales?
On these EUR 500 million, just to talk in rough numbers, 80% of these EUR 500 million will come out of the joint venture with SANY, and this will be consolidated at equity. Means you will not see it in the sales. The other 20%, talking roughly about EUR 100 million, this you will see in our sales figures because this is a business which comes mainly out of the cooperation with Bene, and also a little bit will come out of the activities with Far East Horizon, the partner for the service activities. This you will see in our sales figures.
Okay. Thank you.
At the moment, there are no further questions. For any additional questions, please press nine and star. We have another question from Frederik Bitter from Hauck & Aufhäuser.
Yeah. Thank you. Sorry. Follow-up. Actually, on what you said earlier, you were mentioning that there will be some engine deliveries from Germany to China in Q4. I was just wondering if you could explain a bit how you will account for those. Will it be obviously sales and also earnings booked into, I suppose, DCE, or will it be how will it be accounted for on the joint venture line? Also, if you ship those engines to China, will you be able to expense delivery cost, etc., or will there be an additional, let's call it, ramp-up cost that you have to carry in Q4 on your P&L?
Yeah. This is right now under discussion with the joint venture. We will have in the middle of 2020, we will have the new emission legislation for on-road engines. Together with SANY, we will step into the on-road engine business again, providing engines for their trucks. That will be at the mid of 2020. Those engines are mainly SANY-designed engines, which will be produced in China. We will have at the end of 2020, so this is at 31 of December, the new emission legislation for off-road, China 4B. This means that in 2021, all the engines have to be according to the new emission legislation, and this needs some pre-production. Here we are right now in the phase of investigating what we can do to that time already in China, what has to be done here in Cologne.
This will be a positive effect for Cologne. We will also discuss the prices right now with the partner. That is ongoing right now.
Yeah. Okay. Thank you. When I look at here, it's again a follow-up basically on this topic. Also, obviously, we see now the expenses increasing quite a bit year on year, also in terms of percentage of sales. You were talking about new engine projects. Are those the on-highway engines in China? Will that be R&D expenses for you on your P&L, or will it be something that will be booked also in the other equity line accordingly then?
That will be also paid by the joint venture. To be honest, those engines are more or less already developed. This was done by SANY in the past together with external engineering partners, and we are now doing some upgrade work on these engines for the new emission legislation, which was now defined. This is, I would say, this is overseeable. That's not that much business, but in the end, this will be paid by the joint venture.
Yep. Got it. Okay. Thank you very much.
There are no further questions.
Okay. Thank you, everybody, for joining our call today. Should there be any follow-up questions following this call, don't hesitate to contact us here at DEUTZ. We're happy to answer any questions you may still have. Other than that, I wish you a good remainder of the day. Cheers and goodbye.