Morning, ladies and gentlemen, and welcome to the DEUTZ AG conference call regarding H1 Results 2018. 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 your host, Mr. Christian Krupp.
Ladies and gentlemen, good morning, and thank you for joining the conference call on the DEUTZ interim report for the first half of 2018. In this call, we will present you the full set of the final H1 figures after we have published preliminary figures already on the 11th of July. With the invitation, you receive also a web link. You can follow the presentation during this conference call by using this web link. Alternatively, you will find the presentation on our website, deutz.com, under Investor Relations, Presentations, Financial Year 2018, Conference Call, First Half 2018. You may download the presentation as you wish. After the presentation, you will have the opportunity to ask questions. With these remarks, I shall hand over to our CEO, Dr. Frank Hiller. Thank you.
Good morning, ladies and gentlemen. A warm welcome to our today's analyst and investor conference on the first half of 2018. Andreas Schraeder and I will give you a presentation on the latest deals, and I will start with the key messages on page three. We had a successful start. The first half of 2018 was successful, substantial revenue increase, more than 19% year on year. Measures introduced to improve earnings are showing effect. On the one side, top line growth in sales and service, and on the other side, cost reduction and efficiency improvements on the bottom line. Second topic, China. DEUTZ set a course for the future growth in China, withdrawal from the 50% joint venture with FAW, which was focused on automotive applications. Also, the joint venture never fulfilled the expectation in the important Chinese market.
In April, we recorded about a necessary write-down, which impacts the financial statement. Today, the valuation adjustments at DEUTZ Dalian have been finalized. Largely, prior years are effective. Disposal proceeds and positive foreign exchange differences will compensate negative effects on earnings from DDE in the first half of 2018. So far, to the past. For the future, our intention is to be more successful in China. The time is right for a new setup in China. Emission standard China 4 creates new market opportunities in the Chinese off-highway market. Talks on new alliances with major local partners in the construction equipment and agricultural machinery industries are in an advanced stage. We are aiming on two partnerships: one on the agri side, another on the construction equipment side. Both partners are identified. We are in deep discussion.
With the partner on the agri side, we have already signed a memorandum of understanding. From today's perspective, we need another two to three months to finalize the new setup in China, and we will keep you updated on this. Third topic on the key messages is higher birth. The positive business development is clouded by the strike at supplier Heilberg Guss in Q3. The impact of this strike is a loss of around 12,000 engines for 2018. Nevertheless, it was possible to raise our profit forecast for 2018. I will come to that later on. Now let's go to the financials on page five, the key figures. New orders. In the first half of 2018, we achieved new orders on a level of EUR 1.1 billion. This is an increase year on year of more than 35%.
Revenue went up to nearly EUR 880 million, a plus of around 20% year on year. Adjusted EBITDA, EUR 47.5 million, plus of over 100%. If you are looking at the Q2 figures of 2018, there are no major changes. This means the trend is ongoing. EBITDA before exceptional items. Andreas Schraeder will explain you that later because this is very much related to our topics in China. Net income in the first half of 2018, EUR 25.3 million, also here an increase of more than 30%. In Q2, 2018, EUR 7.1 million, plus of more than 100%. The free cash flow is negative in the first half of the year, minus 12.1%. This is caused by the increase of working capital due to higher business volume and planned measures to keep the supply chain stable and running. This is more or less a temporary situation.
Looking at the sales figures on page six, already mentioned the new orders on the unit sales in the first half. It's on a level of 105,000 units, a plus of more than 30%. Here you also find more than 6,300 electric drives from Torqeedo included. The revenue went up nearly 20%. 14.4% out of this is organic growth. We had some inorganic effects by the acquisition of DEUTZ Italy and Torqeedo in the last year. Revenue by quarter, quarter two, EUR 463 million, a very dynamic revenue growth. Q2 2018 revenue improved by 21.2% year on year and 11.7% quarter on quarter. For quarter three, we expect a lower revenue as it was in the years before. That's normal. Also, there will be the effect of the Halberg Guss strike, but we see also a positive outlook for the year end, especially for quarter four.
Revenue by regions, nothing has changed generally. Europe here, excluding Germany, is on a level of EUR 440 million, a plus of 25%. Germany rose by around 14% to EUR 163 million. Americas went up by 20% to nearly EUR 170 million. Also, we had an increase in Asia Pacific by 12% to nearly EUR 80 million. Revenue by application. First, a look at the product segments. Here, our biggest segment, construction equipment, which is 31% of the whole revenue. This was on a level of EUR 270 million in the first half and an increase of 28%. Second biggest product segment, material handlings and fastest growing product segment, nearly on a level of EUR 180 million, a plus of 30%. Agricultural also went up by 16% and achieved EUR 130 million in the first half. What is also important for us is our service business.
That's on a level of more than EUR 160 million, an increase by 7%. Automotive and stationery equipment more or less stays stable. Maybe so far from my side, and now I'm handing over for the adjustment of carrying amounts at DEUTZ Dalian to Andreas Schraeder.
Good morning. This is Andreas Schraeder, CFO of DEUTZ again. Talking about DEUTZ Dalian on page 10, in April, we had the ad hoc report that we were looking into our carrying amounts in China. I think we were able now to correct these items properly and swiftly. I would like to lead you through it. We had in December 2017 a book value of EUR 38.4 million. We had a correction in prior years now of EUR 14.9 million. The book value, the corrected book value on January 1 was now EUR 23.5 million. In the first half of the year, we had two effects. We had an additional valuation adjustment of EUR 8.2 million. The overall equity result in China was minus EUR 2.8 million. We also know now that the total proceeds from the sale of the share will be EUR 9.7 million.
We had a further impairment of our book value of EUR 11.3 million. If you add now the EUR 11.3 million impairment and the equity result in the first half of EUR 2.8 million, you can see the overall negative impact in the first half of minus EUR 14.1 million. We have, however, translation differences that we have recorded in the other comprehensive income of EUR 15.8 million. Once we sell the shares, we will have at least a neutral impact for the year 2018. I think these items are behind us now, and I think we've done it properly now and can move forward. If you look on page 11, the operating profit and net income, there you can see in line with the increased volume of the adjusted EBITDA in the first half of 2018, increased to EUR 87.8 million.
Depreciation in line of in the prior year was EUR 40.3 million, gives you the adjusted EBITDA of EUR 47.5 million. DDE effects, like explained, minus EUR 14.1 million gives you the EBITDA of EUR 33.4 million. That interest expense has been reduced as we continue to pay down the remaining loans, and that leads to that income of EUR 25.3 million, which is an increase of 35.2%. If you look on page 12, you can see here the result by the segments. The compact engines were, of course, impacted by the DEUTZ Dalian, as these numbers report into compact engines. If we exclude that effect in the middle column, you can see that we had a profit of EUR 34.8 million in compact, EUR 17.9 million in customized solutions. The pre-buy minus EUR 5.2 million that you see at the bottom of the column relates mainly to Torqeedo.
These are operational losses as well as the depreciation of purchase prices, which is in line in budget. It's also part of the previous business plans that we announced. If you look on page 13, the compact engines, the details, you can see that new orders increased by 40.6%, very healthy growth. Same with the unit sales, 25.1%, and the adjusted EBITDA significantly improved, which is good news for us that we increased volume, not only service is positive, but also we reached now positive territory on the new engine sales, which is almost a third, at least over the last decade, almost, that the compact engines as isolated reporting segment is positive. Service increased by 7.9% year over year. If you look at page 14, the customized solutions, these are the older engines, but even here we could see an increase in new orders of 6.9%.
Also, the service increased and continued to increase by 5.3%. Also here, you see that the EBITDA improvement reaches 54.3%. All segments are developing very well. On page 15, you see the R&D and capital expenditure. R&D expenses are up compared to last year, which is not a surprise as we had the EDEU strategy, which leads to more projects and more products. Of course, then the R&D expenditure increases as well. We capitalized R&D expenditure of EUR 8.2 million. In the final numbers of the first half, we had depreciation of capitalized R&D of EUR 14 million. The overall situation is that the capitalized R&D goes down in the balance sheet. Capital expenditure is according to plan and in line with the budget.
If you look on page 16, the working capital, you see here an increase that is very much related to the spot date on the 30th of June of 2017 and June 2017. As Mr. Hiller pointed out, we increased working capital just to make sure that we can continue to produce. In line with that, the operating cash flow was slightly reduced, but again, that's a temporary situation by year end. These numbers will improve significantly. Here on page 17, you can also see that the net financial position is still positive with EUR 68 million. If you look at page 18, the equity and funding situation is positive even after the correction of the Dalian equity value. We have an equity of EUR 590 million, which is an equity ratio of 48.3%, extremely healthy.
If you look at the facilities, project facilities that we have, there is nothing critical at all. We are very liquid. We are able also for short-term M&A measures if that should be necessary. Here we are in a very good position. To summarize on page 19, the order book is very strong. Revenue continues to increase. The underlying profitability is healthy and improving. We have put the transential with FAW on the rearview mirror, and we are looking forward to new alliances in China. I would like to hand over now back to Frank Hiller on page 21 for the quarter.
Yeah, on the outlook on our key end customer markets, nothing has changed generally. Outlook for Europe and North America is unchanged. Construction equipment and material handling are growing nicely. Also, some improvement on the agricultural side. China, here we have some changes. More positive development on construction equipment, material handling stays strong with up to 20% increase. Agricultural machinery develops a little bit weaker, but this is not affecting us so much today because here our market shares are very low. This will change, I think, in the future. Also, here we have the indication for truck business, 0-5%. This will not be relevant anymore for the future because by stepping out of DDE in China, there will be no significant truck business anymore. We will change that for the next recordings. Going on page 22, financial outlook.
We raised the financial outlook one week ago. Revenue coming from EUR 1.5 billion in the year 2017. We said there would be a marked increase. Now we specified it to more than EUR 1.6 billion. EBITDA margin. Last year, 2.7%. We said a moderate increase. Now, after finishing the. From EUR 70 million-EUR 80 million. CapEx will stay on the planned level of EUR 60 million-EUR 70 million this year. Last but not least, page 23, I would like to invite you to our capital market day. It will be the first capital market day in DEUTZ, and we will do that on the 18th of September, starting from 9:45 A.M. to 5:00 P.M. here in the headquarter in Cologne.
I would like to invite you, and it would be a pleasure to have you here and to explain to you with my management team about strategy and new products. We will show the first prototypes of electrification in customer application, for example, hybrid solution and pure electric solution. I think it will be quite interesting for you, and I'm looking forward to meet you here in September in Cologne. Okay, so far, thank you very much, and we are open for your questions.
Ladies and gentlemen, the floor is now open for questions. If you want to state a question, please press nine-star on your telephone keypad. If you want to withdraw your question, press nine-star again. Please press nine-star now for your question. The first question comes from Gordon Schnell.
Yes, good morning all together. My first question would be on the strike at Halberg Guss. Do you expect any negative impact on your order intake from the strike, or will the order intake be unaffected by the strike? This would be my first question.
Okay. Right, answering to your question on Heilberg, I think order intake will not be really effective. We have a problem that the capacity now is limited for the year end, and we cannot fulfill around 12,000 engine orders from our customers. Also the financial effect, and this is not completely sure right now because it also depends a little bit on the ramp-up at Heilberg. So far, it's running quite well, but we are estimating between EUR 15 million-EUR 20 million negative impact. I think for the order intake, there will be no impact.
Okay. The second one, if I reduce my revenue expectation for 2018, let's say, by 12,000 engines, as you indicated, is it right to increase Ceteris Paribus my forecast for 2019 by these 12,000 engines? It is only a delay into 2019?
May I respond, Mr. Schulte? Partly, that may be possible. There may be some impact as some pre-buy engines are also affected. By definition, if the engine is not produced by December 31, it cannot be built next year. We have to discuss with the customers whether they can switch pre-buy engines into regular Stage 5 engines next year. These discussions are ongoing. I would say half of the 12,000 you can put into next year.
Okay. The third one is on customized solutions. After six months, the margin increased nicely despite only a moderate revenue increase. What is behind that nice development at customized solutions?
I think we had a very good engine mix in general and the new engines, and we introduced the exchange business. Exchange is you take an old engine and you put it back in almost new order. We moved also the exchange business from INTEDE in Bavaria to Ulm. We had there a nice efficiency gain. Also the new DEUTZ Italy that we bought last year contributed to that good development.
You're saying this will be a sustainable development on the EBITDA margin side at customized solutions so that going forward 2019, 2020, that this higher margin level will be sustainable?
Yeah, I think so. Also, then starting next year, we're starting to move the 2011 engine series from Cologne to Ulm. The Ulm sector will even have higher utilization and better fixed cost allocation to the main products. Yes, absolutely.
Okay. The last question is on your new China strategy, Mr. Hiller. You often see or there's today an article in Börsen Zeitung where you gave a rough idea of what this new corporation or this new strategy might have the financial impact on your numbers. Can you elaborate a little bit on that? What do you expect in terms of financials of the new setup in China when it comes to additional revenues, investments, CapEx, and so on?
Yeah, I think it's a little bit too early, but what I can do, I can tell you a little bit about the concept. The concept is that we bring in, first of all, that we are aiming for two partnerships on the agricultural side and on the construction equipment side. This is quite a difference to our past with DDE, which was mainly focused on on-road application. Now this is a clear commitment to our core business, off-road application. The concept is that we bring in technology, especially for fulfilling the emission legislation China 4. On the other side, we are focusing on the existing production equipment which is installed on the partner base.
What will be also different in comparison to the past is that if we go into a joint venture, this will be purely focused on production, a production joint venture, and sales and R&D will be in the hand of DEUTZ and will be a wholly owned DEUTZ organization. This is a big difference if you compare this with DEUTZ Dalian and our activities with FAW. Maybe in general, there are some rumors already in the Chinese market that we are collaborating on the agricultural side with YTO. YTO is the leading agricultural manufacturer in China. I will not deny that now, but please, we are in a stage where I cannot say more. The discussions with the partner are running well, and we will keep you updated. Both partners we are talking to, they have a need, each of them, of more than 100,000 engines per year.
These are real big players for sure. Today's engines, they are coming not completely from their in-house productions, and they have also external suppliers in some cases to a certain portion. It's also DEUTZ, but this will give us a real big footstep into China. I think in two, three months, we will definitely tell you more. I think the setup of these activities will be more or less finished because China 4 starts in January 2020. All the activities are under big time pressure.
Okay. One last follow-up on that one. In the future, you will show the revenues you will generate with the corporation partners as group revenues and not only as equity. Is that right?
Exactly. It will be group revenues. Taking into account the volume of DDE in the past, if you would show that at group revenue, this would end up to around 25% of the whole turnover. This more or less is also our target for the future. Later on, to have, I would say, a 30% share of revenue in China. This will not be within the next two or three years. This will take some years, but in the long term, this will be our target.
Okay. Thank you. That's all from my side at the moment.
Bye-bye.
The next question comes from Richard Schramm.
Yes. Good morning, gentlemen. I just have a follow-up on this issue at Halberg Guss where you mentioned that there will remain a gap here and that some of the pre-buy engines ordered by customers will not be able to be produced. You have obviously to compensate them for this. Is it fair to assume that this will be a drag on profitability in the second half here in compact engines? Can you elaborate a bit on how this pre-buy process developed a bit? Has it slowed down here after obviously a strong impact in Q2? What should we expect here going forward also for next year? I think the whole thing is a bit delayed. Has it twisted this time and not fully comparable to what we have seen some years earlier?
The second point on this customer solutions, will it be a fair assumption that we more or less double the EBITDA from first half for the full year? Is this achievable or was Q2 really a bit outstanding here in this respect, and we should be a bit less optimistic? Nevertheless, a nice increase for the full year should be expected. Thanks.
Again, the Halberg Guss effect demanded 12,000 engines are part of our forecast. To state it absolutely clearly, we have taken that into consideration. I think without the strike, we would have been able to keep a higher guidance. There is a drag on profitability, but we still expect that overall returns will reach higher than 12.5%. With the pre-buy situation due to high demand, I think customers are trying to get engines more this year than to have for the current year's production. Also, with some loss of the pre-buy production, customers can compensate that if they have their machines ready for Stage 5. They can also get the new emission engines and continue to sell. We are in contact with these customers regarding where they are with their product programs. We are working with them to introduce the Stage 5 engine in their machines.
The good thing is the change between stage 4 and 5 is from a technology standpoint not that big. The overall envelope of the engine does not change much. It is not as difficult as you have seen in previous stages to make the machines ready for new emissions. Again, we think that half of the engines will be lost. I think the other we can save together with the customers. At the end of 2019, yeah, the next step in the new emissions and then different power class. Again, we do not see that as a big impact. By far, not as much as in the past when pre-buy engines really made 30,000-40,000 units. We are far away from these numbers. When it comes to DCS, yeah, do we double the EBITDA for the full year? I am not predicting that we can.
We are on a good way. I think when we talk about midterm, once we have moved the 2011 series to Ulm, there's a much better fixed cost allocation than now. I'm quite optimistic about profitability in the customized solutions on even higher levels than today.
The letter then mainly to Puto Puto, is it the scale effects you want to assume, or is it also that this acquisition in Italy makes a meaningful contribution here?
I think it's both. The DEUTZ Italy that we bought last year in October, we knew that they were profitable. We further improved now under the DEUTZ umbrella, so the contribution is good. Again, the fixed cost allocation for the 2011 is at least as meaningful.
Okay. Thank you very much.
The next question comes from Charlotte Friedrich.
Hello. Thank you for taking my questions. I have a few on your order intake. I would like to understand how pre-buying has affected your order intake in Q1 and Q2 because it looks like on a quarter-to-quarter basis, Q2 was a little bit slower than Q1. I wanted to understand if that's mostly driven by pre-buying or if it's more also underlying. That's the first question.
Okay. Maybe on the order intake, the effect we are still seeing is for Q4 around 30,000 engines, where we said around 20,000 will be a positive effect on 2018. In general, as Mr. Schraeder already mentioned, the pre-buy effect is much lower than in the past emission regulation changes. What else can I say? For example, maybe what will help you a little bit on that question if you talk about order intake related to the different regions. We have in Europe an order intake increase in the first half of more or less 36%. For example, Americas and Asia, which is not affected by the Stage 5 emission legislation, in Americas, we had an increase on the order intake of 23%. In Asia, it was coming from a low level, it was more or less 63%.
If you see that, the order intake is not really related completely to Europe, where we have the effect of pre-buys. I would say order intake is not really driven by the effect of the emission legislation stage 5 and pre-buy effects.
Okay. Perfect. Maybe can you give a bit more color on your guidance because you say revenue above EUR 1.6 billion, and you said also that you're a little bit limited with capacity going into H2. Is there maybe a range that you can give here to give us a bit more guidance here?
Yeah. I think EUR 1.6 billion on the revenue side, I would say, as this is maybe a little bit on the conservative side, to have the next number, which would be EUR 1.7 billion, that would be quite ambitious. I think it will be.
Between?
Somewhere in between. Everything is now a little bit depending on the ramp-up on the Heilberg side. Right now, this is running, I would say, in a planned way. Let's stay on 1.6 and see it as a conservative.
Okay. Thank you. I have one smaller question on organic growth in Q2. Can you confirm what was organic growth in Q2 if you strip out your acquisitions?
In the half year, it was 14.4% for Q2. We have to look into our figures and give you a call on that.
Okay. Thanks very much.
Thank you.
There are no more questions right now. Just as a reminder, if you want to state a question, please press nine-star on your telephone keypad. The next question comes from Patrick Schmeck.
Yes. Good morning, gentlemen. I have three questions remaining. The first one is on order development. One of your major client sectors is the agricultural machinery industry, and I think this industry could be heavily burdened by the hot weather in Europe because, yeah, there are the drought and so on. Do you see any changes in order development coming from this industry? You confirmed the outlook for this industry, so there seem to be no risks. Is that right?
No. Also, this is, I would say, an outstanding situation. We talked to our key customers, and there was not really a fear on that. Order intake for agricultural is, let me see, it is an increase of 12.5% in comparison quarter two 2018 to quarter two 2017. Plus 12.5%, I think that's not bad. Out of the discussion with our customers, we have not heard that there will be a negative effect on that.
The plus 12.5% was the plus in order intake?
Yeah. It was order intake, quarter on quarter.
Yeah. All right. The second question, did I understand you correctly that you expect the revenue in Q3 being lower than in previous year because of the strike?
No, no, no. Not in previous year. It's just in comparison to quarter 2, which is normal. Quarter 3 is always our weak quarter. For sure, this missing 12,000 engines, this will take happen in quarter 3. First half was not affected by Heilberg. We think also that if it stays without a strike, there will be no effect on quarter 4, but all will be concentrated on quarter 3, the effects.
As normal, we will see a weaker revenue in Q3 compared to Q2, but you still expect growth in Q3 compared to Q3 2017, right?
Yes. We are confident.
All right. My last question, do you see any compensation payments coming from Halberg Guss because of the shortfall in your production?
For sure, we are checking this and discussing this internally and also with our lawyers. For sure, strike is normally force majeure. Also here, the strike was on the court on different levels on the court. We do not know exactly, but normally on a strike, it is difficult to have compensation for that.
We shouldn't expect anything?
Yeah. We have nothing in the planning for that.
All right. A quick follow-up, if I may. Assuming that the strike will not continue, how long will it take you to bring production back on a normal level?
It will be the next, I would say, next two months. We expect that October will run again according to plan. The effects will be especially in August, and we have to close the factory on the end assembly line for one week. This was in the past not planned. This we have to do, and there will be effect in August and for sure in September. We think that October will run according to plan again.
Very clear. Thank you.
Thank you.
There are no more questions in the queue.
Ladies and gentlemen, given that there are no further questions, we here will end the conference call. Thank you for your participation, and bye-bye.