Good morning, ladies and gentlemen, and welcome to the DEUTZ AG conference call regarding the Q1 results 2019. 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 Ms. Leslie Utkin.
Welcome to our conference call on the first quarter 2019 results. My name is Leslie Utkin, 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 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, a warm welcome to today's telephone conference and good morning. I'm jumping directly on page number four for the highlights. We had a successful start in the year 2019. On the key figures, that would be not a real surprise because we published our first quarter key figures already on April 23rd. We have an ongoing strong demand. Order intake for the first three months was on a level of EUR 515 million, and this was clearly above the quarter four figures 2018. Book-to-bill ratio is above 1.1, and yeah, this trend is ongoing. This was also the situation in April and in the first days now in May. We have a quite stable situation on the order intake, and that's a good perspective for the next months and for the whole year.
Revenue increased by more than 9% Year- over-Y ear, supported by growth in all regions and applications. The operating profit grew significantly by nearly 16% to more than EUR 25 million. EBIT margin is now at 5.5%, and we confirmed the full year guidance 2019. On the strategic side, we presented our modular kit at the trade fair Bauma in April, which gives our customers a lot of flexibility and scalability. I think that's really a very important topic because we want to be open on the technology side, offering our customers a wide range of different technical solutions, including combustion engines based on diesel and gas and also electrification. Also, a new topic, I would say, which would be important in the long run is hydrogen.
Here we signed a letter of intent together with Kiel, a startup company in Munich, to have a collaboration on hydrogen engines, means using hydrogen in combustion engines. This will be, I'm convinced, a real topic in the long term because electrification, there will be some shortages on the electrification net and the whole grid in the future, and hydrogen will be a solution in the long run, especially in Asia. A lot of programs are going into that direction. I think that's a very important perspective for the future. China, we are taking the next step. We are working closely together with our corporations, Far East Horizon and PNE already. With SANY, we expect the signing short term within the next weeks and days and also on the technical side.
Our engineers are working closely together with the SANY engineers and preparing everything for the China stage four emission legislation. On the service side, we see an ongoing expansion. The service business, as you will see later on, is developing very well, and we are strengthening our DEUTZ service network in the Middle East. Going on the next page, page five, as already mentioned, our DEUTZ strategy is gaining momentum here. You see some pictures from customer application and especially at the Bauma in Munich. You saw a lot of electrified products on the customer side. I think there is no customer in the construction industry who is not focusing on electrification. A real highlight was the presentation of the mini excavator of Kobelco. They presented this solution with the DEUTZ solution on their stand and booth, and there will be a market launch in 2021.
We are working on several programs. A lot of the programs are not published because customers want to have it on the confidentiality side. We see here a quite fast execution of our DEUTZ strategy. Coming to the sales figures, new orders, as already mentioned, EUR 515 million compared to quarter one 2018. This was a reduction of around 10%, but we have to take into mind that quarter one 2018 was driven by exceptional items here. We changed, or our customers changed the behavior of their orders. We had a lot of discussions in the first quarter 2018 about reliable delivery and the long-term perspective of orders. We forced more or less our customers within that time to increase the lead time and forced them for fixed orders. This was, I would say, exceptional in 2018.
In 2019 compared to last quarter, quarter four 2018, was a nice increase. Another topic is if you compare unit sales and revenue, you see that unit sales was a little bit down by around 2% compared to quarter one 2018. On the other side, revenue was up by more than 9%. There were two effects. First effect, positive mix effect by bigger engines, and the second effect was price improvement by the new emission legislation, also price increases, which we brought into the market. I would also like to mention that Torquido sold nearly 1,700 electric drive systems in Q1 2019. Going to the revenue by region on page seven, first of all, here you see a big shift from if you compare those figures with the last year figures from Europe to Asia-Pacific. In the past, Asia-Pacific had always a share of around 9%.
This is now increased by 17%, and this comes mainly by a change of the regional assignment. This has to be explained because in the past, our biggest customer, Volvo, all the revenue to Volvo was more or less allocated to Europe. We changed this because Volvo is doing a lot of their turnover by their Asian organization, SDLG. We changed that allocation because we think it's much clearer. Now talking about these figures and comparing apples with apples, you see that we have a nice increase in Asia-Pacific by more than 18%. America was also an increase by more than 23%. In general, this means we are growing very much outside of Germany and Europe, and that's the clear intention and strategy for DEUTZ. Going to the revenue by applications on page eight, you see that we have a positive development in all applications.
Agriculture, this was quite nice, was recovering quite a lot, a plus of 16% Year- over-Y ear. Also, construction equipment and material handling went up by more than 6% or 8%. Also our service business increased by more than 9%, which is really in line with top-line growth of the turnover of the company, which shows that our measures in service business are bearing fruit. More or less so far from my side, and for more details on the key financials, I'm handing over to Andreas Strecker.
Good morning, ladies and gentlemen. From my side, I'm Andreas Strecker, CFO. If we jump to page 10, we can see on the right-hand side of the slide that the EBITDA came in at EUR 44.9 million, which is EUR 4 million more than in the first quarter of 2018.
On the EBIT side, EUR 25.1 million, which is a good increase compared to the first quarter in 2018. Also then, that fell through to the net income, where we ended up with EUR 20.9 million, which is 14.8% higher than the same period of last year. Net interest expense remains low. On the income tax side, we will benefit from the losses carried forward that we have in our balance sheet. The tax rate is quite low. If you go on page 11, you see the profitability by segments. We've seen growth on the engine side, the customized solution with a very good increase to EUR 12.8 million, driven by a good exchange business and service business. Also the compact engines could improve from EUR 17 million to EUR 18.5 million. If you look at the gray bar in the segment other, you find here minus EUR 6.2 million.
A loss there is included a EUR 2.9 million effect of the deconsolidation of the joint venture in Argentina. The company is dormant since March 31st and we recorded a foreign exchange loss that we shifted from other comprehensive income and then into the P&L. If you go to page 12 on the compact engine side, you can see here new orders minus 17%. That needs some explanation. As we told you earlier, we are shifting the engine line 2011 from Cologne to Ulm. Therefore, the 2011 is no longer in the compact engines. It went over to the customized solution. If you exclude that effect, then the unit sales would be more or less plus minus 0 and not minus 12%. The EBIT margin on compact engines is now at 5.2%, which is a good increase compared to the period of last year.
On page 13, you can see here on the customized solution that the unit sales went up. That is driven by the move of the 2011. The ramp-up in Ulm is fully according to plan. Therefore, we also see a good EBIT improvement to EUR 12.8 million compared to EUR 7.7 million the year before. Also driven by increasing service and exchange business. That is according to our plans. If we look to page 14, R&D expenditure remains high. We capitalized EUR 5.4 million in the period 2018. It was EUR 4.3 million. We are executing our DEUTZ strategy with a modular product kit and also working on other engine projects. The ratio is at 5.2%, which is for a high-tech company like DEUTZ in a good ratio. If we look at capital expenditure, also there are DEUTZ investments and also the infrastructure investments in Cologne.
Capital expenditure EUR 18.8 million, sorry, is according to our budget. If you look on page 15, working capital increase. We have a quite tight supply chain at the moment. There is a lot of inventory on the ship going to Asia and to America. We expect that that will normalize over the next months. Based on that, of course, then the strain on the cash flow, we are slightly negative. Again, expect that will normalize over the next month. On page 16, net financial position that needs some explaining. With IFRS 16, we are obliged to record leases as a liability because in the lease payments, there is an interest portion in it, and therefore we have to deduct that position from our net financial position. The effect is close to EUR 40 million.
If you would like to have a real comparison, we have to add these EUR 40 million to the EUR 21 million that are recorded on the slide. On page 17, given the positive net income, of course, our equity further increased now to EUR 640 million. The equity ratio is extremely healthy with 48.5%. When it comes to funding, we are paying back some loans from the European Investment Bank. The short-term debt is only EUR 20 million. We have a credit line of EUR 160 million that is undrawn as we speak, but we can utilize that line until the year 2023. I would now hand back to Frank Tilo for the outlook.
Yeah, ladies and gentlemen, we confirm our full year guidance, a revenue of more than EUR 1.8 billion. EBIT margin should be on a level of 5.0% or more.
R&D expenditure and CapEx, EUR 85 million to EUR 90 or EUR 95 million in the case of CapEx. We see a supportive market environment and also strong ongoing demand. In general, we expect a positive exceptional item in 2019. The second part of the payment for our side in current DEUTZ, which will be around EUR 50 million. Maybe so far the presentation, and we are open for your questions now.
Ladies and gentlemen, if you would like to ask a question, please press 9 and star on your telephone keypad. In case you wish to cancel your question, press 9 and star again. Please press now 9 and star to state your questions. The first question comes from Richard Ham, HSBC. Please go ahead with your question.
Yes, good morning. Two questions, please, from my side.
One concerning the outlook you give on your end customer markets, which looks unchanged, I think, versus the last presentation. While I have in mind that Volvo, for example, in its outlook statement after the Q1 results showed a bit more optimism. I think it was especially for China and the building machinery segment there. Would you comment a bit on this trend here and maybe also what Bauma could bring in the following months? I know that this trade fair is not a trade fair for making business, but maybe it is still a positive catalyst for the demand side in the coming quarters. Maybe you can shed a bit more light on this. Second question concerning the shift between the segments you mentioned from this engine series 2011. You indicated already that the unit numbers would have been fairly stable in customized solutions without this shift.
How does this apply to sales and especially EBIT? Can you give a bit of guidance here? What EBIT portion went from one segment to the other with this change? Thank you.
Okay, Mr. Schramm, I will start with the outlook and customer markets. First of all, the Bauma fair, I think, was very successful, very successful for DEUTZ, but also the whole environment was very positive. I think also this helps also for the next months and for the future. On the outlook on the construction equipment side, especially in Asia-China, we see in our forecast, and this is more or less unchanged, increase up to 5%. To be honest, really in China, it's not for us a topic of the market development in the first row. It's more or less our corporations and to win market share.
Here we see the biggest potentials by winning market share. To be honest, today we are very, very low on the market share side in China. With our new setup with the three corporations, on the one side the JV, but also the more or less customer-supplier relationships between Far East Horizon and Bene, we see a big potential to increase market share. I would say, yes, China from the market, it's positive, but what is more important for us is the potential to win market share by our new setup. If I go back to your question of the 2011, at the moment, it is hard to quantify what impact the 2011 had in the first three months as we were on the ramp-up phase.
In general, as I outlined in earlier calls, you will, of course, have a better fixed cost allocation in Ulm with the additional volume. That will certainly contribute to the result of the customized solution. In Cologne, of course, in the first quarter, we have, and in the second quarter, of course, also we have no production of the 2011, but the other engines that we produce in Cologne picked up volume. We can balance that out. Especially then in the third and fourth quarter, when the 2.2 liter will ramp up more, the overall volume in Cologne will be back to previous levels, while in Ulm we will produce more. There will be an overall positive impact.
I think in the third and fourth quarter, we will have a better picture of how much really profit has been added to the customized solution segment due to the movement of the 2011.
Thank you. Just for clarification, due to this shift and also the product ramp-up you mentioned, will the usual, let's say, quarterly pattern be then different in sales and earnings with the segments this year, or can we more or less stick to the previous year pattern we have seen here that especially, I think, then Q3 & Q4 should be the strongest ones or should.
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Okay, when it comes to patterns, I think that Q3 will be stronger than usual as we are pretty full. As we can see on the working capital side, there is a lot of inventory on the boat as we speak. That will materialize in sales in Q3. We expect a good Q3 & Q4 should be in line with previous patterns.
Maybe to add, Q3 was in the last year very negatively affected by the situation with Heidelberg. There will be, out of this reason, an increase in this year. The shift of the 2011 was more or less done completely in the first quarter. We expect some good quarters ahead.
The next question comes from Frederick Bitter. Hallo, Herr Schulte, please go ahead with your question.
Thank you very much. Good morning, gentlemen, and Mrs. Schulte.
I would like to ask you three questions, please, and probably it's best to do them one by one. The first one would be on the joint venture contract with SANY you're still working on. Just wanted to get to know a bit more, a better feeling about the main challenges you have there. What are the main discussion points? I remember that sort of the final signing was expected in a few weeks' time, a few weeks ago. We are basically at the same stage. I just wanted to get to know a bit more what are the challenges there, what still needs to be discussed. If you could share some more insights, that would be very helpful. Thank you.
Okay, maybe I start with the SANY contract. We are in deeply discussions, and it's not only taking over an existing engine plant.
What we are doing now, we are qualifying those engines for the China 4 emission legislations. There are a lot of discussions about exclusivity and things like that. This has to be explained from both sides. We are on a very good way. For sure, you can assume that we are also replacing a lot of our competitors. Also here, a lot of discussions are going on with SANY with existing competitors of us today who are their delivery source today. This is all going in a good way, in a smooth way. More or less, yeah, we are already in the phase where all the contracts are negotiated, and we are right now in the approval process on both sides, on the DEUTZ side and on the SANY side. I really expect that within the next weeks.
Okay, great. Thank you very much.
Now, I clearly understand that obviously that's a very complex situation you're dealing with. I am very, very happy to be able to.
To be honest, in some cases, it's important to have the time and to take the time to explain to the partner the background of some demands and things like that. That's important for the Chinese side and also for our side to have a deep understanding of what the intention of the partners are. These are running really in well-conditions, these discussions.
Great. That's good to hear. Thank you very much. The second question I would have is on working capital and perhaps more importantly, free cash flow development. How do you see that developing in the next couple of quarters?
Maybe if I can answer that. As I said, there's inventory on the boat, and that will gear up.
The overall guidance for the year that we have cash flow in the middle double millions is confirmed. We see that as a temporary thing. The good news is as we put engines on the boat, we do not have to fly them like in the past. That is a bit of a cost saving. Again, it is working capital as we speak, but that will normalize.
Okay, great. Thank you. The last question I have, and then I will finish up, is what are your profitability expectations for the others segment going forward now that obviously the joint venture in Argentina is de-consolidated?
The EUR 2.9 million was a one-timer. That will not happen, clear. Only the other other is Torquido.
There we see in the next couple of years they will reach break-even. There will be also an improvement compared to last year when it comes to Torquido.
Okay, great. Thank you very much to both of you.
The next question comes from Yasko Terzik, Bankhaus Metzler. Please go ahead with your question.
Yes, good morning. My first question is regarding the Engine 2011. Can you give us the exact figure of engines that have been moved?
Yeah, in the first quarter was slightly above 5,000.
5,000. The run rate should be relatively equal over the quarters going forward.
Yeah, the 2011 had a rebuy effect in 2018, so the number will be there lower, but that was to be expected. The run rate, we think of the 2011, will be in the range of 20,000.
Okay, thank you. That's helpful. You made some comments regarding a good book-to-bill of above 1.1. You also referred to a good development also in April and May.
Was that referring to the 1.1 book-to-bill ratio?
Yeah, yeah. This book-to-bill ratio, we had this book-to-bill ratio above 1.1 in the first quarter, and this is ongoing. This was the situation in April. So far here in May, order intake in the first phase is absolutely stable and solid and on this level, 1.1. Your backlog visibility should at least be secured until the end of Q3. Your visibility is pretty strong for the running year currently.
Yeah, more or less. On the order backlog, we have more or less €500,000,000. This was increased within the last weeks and months again. Now, to be honest, taking new orders in is more or less not really feasible until November-December. We are more or less full up to October.
Okay.
Against this backlight of a strong demand, and you also mentioned pricing has improved, could you give us an indication what price increases you expect on average in the backlog compared to last year?
We have discussed here, I do not want to go into detail, but we have discussed these price increases with our customers at the end of last year. This was driven by price increases on the supplier side, especially costings by the situation of Heidelberg. I would say there was, in general, it is always difficult to talk about price increases with the customers. I would say, in general, there was an understanding that there is a need to do something. We achieved, I would say, we achieved our goals.
Okay. We are talking about a single-digit figure here.
Yeah, yeah, yeah. Definitely.
Okay. Maybe also on SANY, one question.
You said that you were close to conclude those negotiations. First question is, are you progressing quicker than expected? Because if I remember correctly, you were pointing towards the conclusion until the end of this year.
No, what we said at the end of the year, we are expecting the closing. Signing more or less is in line with our former planning. The contract is very complex, and a lot of topics on the technical side have to be clarified. A lot of topics on testing engines on the test rigs because we are taking also over some engines from the SANY side. This was more or less planned. The MOU we signed in December last year was also very detailed. For sure, it was clear that we will have some additional round and to go more into detail.
I would say signing is expected within the next weeks, and this is according to plan.
The conclusion or the consolidation effects, etc., will not be seen before the end of this year or more towards the end of the year then?
The first effects on, yeah, in our balance sheet and on the turnover side on the SANY joint venture, you will see, yeah, really not really in 2019. This will be very much at the end of the year, the closing.
Okay.
There are some ramp-up costs, of course, that we have included in our planning. That is clear. The decision, full consolidation at equity is going on as we speak.
Okay. And ramp-up costs already this year then?
Yeah, sure. People have to travel. You have to analyze certain things. You have to do due diligence, of course.
Yeah, that will be.
This will be, I would say, a mid-single-digit million number. This is in our plans, yeah.
Okay. Thank you. Very helpful.
At the moment, there seem to be no further questions. If you would like to ask a question, please press 9 and star on your telephone keypad. We have one more question coming from Peter Ruttenicher, Baader Bank Munich. Please go ahead with your question.
Yes, hello, gentlemen. One question regarding your regional split. You mentioned the growth is coming mainly from Asia and North America, Europe only a slight increase. Is this something you expect also for the remainder of the year? Is it that Europe is largely stable or do you see here further growth potential? On the other hand, do you see here some risk of an upcoming downswing in the European business, which might hurt you perhaps in 2020?
No, no.
I see that ongoing. For Asia, we are doing a lot more activities. Besides the joint venture with SANY, the cooperation with Far East Horizon and with Benet, we are much more active on our export business. The team is doing here really a very good job. This is also related to performance and winning market share. It is less related to the market developing that much. In the U.S., we have the situation that in America, a lot of our business is related to material handling, to, for example, aerial work platforms. This business field is really growing very fast. Here we have a very big market share, which is on a level of around 70%. Here we are mainly growing with the market, yeah.
In Europe, do you see here some risk coming up?
No, not that much.
No, we do not see a risk, but we see more potentials in the U.S. and in Asia by better performance and especially in the U.S. by the segment of material handling, which is growing. Not a risk, not a risk for Europe.
Okay. My second question is on the supply chain. The Heidelberg problem has been solved. I think with castings, you are doing fine now. Do you see here some other problems in your supply chain, or is meanwhile everything working smoothly?
In general, I would say there are always challenges on the supply chain. We are talking we have a lot of suppliers under, I would say, special control. For sure, if there would be no restrictions on the supply chain, also turnover could have been higher in quarter one.
We are always fighting on the supply chain topics, but there is not, I would say, a completely extraordinary thing like last year, the Heidelberg topic, yeah.
On the other hand, on the cost side, what is your view on the cost position of component supply? Do you see here some headwinds, or has this been less severe now in recent months with some weakening of the economy?
I think from the raw material side, I think we have things under control. We will further work. We are working on a reduction of the overall material costs like always. We are looking in connection also with a joint venture in China where we can localize more things that we may use back in Germany. On that end, the outlook for 2019 is quite okay.
Okay.
On your tax ratio, you had in the first quarter slightly below 15% tax rate. Is this something you're expecting for the entire year as well?
If you look over the years past, we were always in that area. We expect it to stay that way. As we said, we have, fortunately or unfortunately, big losses carried forward north of EUR 700 million. The tax rate will remain rather low for the next coming years.
Thank you very much.
There are no further questions from the audience. Thank you, everybody, for joining the call today. Should there be any follow-up questions after this call, do not hesitate to contact us at Investor Relations. We are happy to answer any questions you may still have. Other than that, I wish you a great remainder of the day. Cheers and goodbye.