Ladies and gentlemen, welcome to the DEUTZ AG Conference Call regarding Q1 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 Management Statement for the first quarter 2018. We apologize for the 30-minute delay of the call on short notice due to logistical reasons. In this call, we will present you the full set of the final Q1 figures after we have published preliminary Q1 figures already in mid-April. With the invitation, you received 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 Quarter 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.
Dear ladies and gentlemen, a warm welcome to our Analysts and Investor Conference on Q1 2018 results. Andrea Strecker and I will give you a presentation on the following topics. Going on page two, key messages and update on eDEUTZ, financial and outlook. After the presentation, we are open to your questions.
On the key messages on Q1 2018, we had a strong start to the 2018 financial year. Exceptionally high volume of new orders because of a strong market environment, new customers and applications, and also river effects on EU stage V. We achieved a marked revenue growth and a substantial improvement of profitability. Another topic is the review of carrying amounts on the joint venture DEUTZ Dalian. Out of the intention to be more successful in China and Asia in the future, DEUTZ engaged an audit firm to review strategic options for the joint venture. According to preliminary estimates, the necessary write-down might impact the consolidated financial statements in the range of EUR 16 million-EUR 32 million. All issues are related to the past, mainly to the years 2011 and 2013. Going on page four, I would like to give you an update on our DEUTZ activities.
We had a successful transfer so far of the e-technology from Tokyo to DEUTZ. The first DEUTZ hybrid concept was presented at the trade fair Intermat in Paris, and we are working on a modular scalable hybrid system. This is a combination of what you see on the picture of a TCD 2.9 stage V diesel engine with an electric motor. We are working right now on first prototypes for customer application, which will be presented during the year 2018. Besides our eDEUTZ activities, another technical highlight was the award of our new diesel engine, TCD 9.0, as Diesel of the Year by the magazine Diesel. The TCD 9.0 is a 9 L, four-cylinder engine with 300 kilowatt power coming out of our cooperation with Liebherr. The award shows the high acceptance for this modern new engine.
Going to the financials on page six, you see an overview of our key figures. More or less all key figures have improved on Q1 related to the quarter one in 2017. New orders on a very high level with a plus of 42.6%, revenue, more than EUR 410 million, and also EBIT developed very nicely with EUR 21.7 million. The negative free cash flow is according to our plan, and it's caused by the increased working capital to fulfill the high customer demand on the volume side. Overall, we had a very dynamic revenue and EBIT improvement in quarter one. Looking at the sales figures on page seven, you'll see the nice new order development now with an order intake of EUR 575 million. Unit sales increased up to more than 48,000 units, and the revenue also increased to EUR 414.5 million.
The deviation between unit sales and revenue, or the deviation in increase, is caused by the product mix. We have a stronger move to engines below 4 L, and also the Torqeedo products were included in Q1 2018. Torqeedo sold in Q1 2018 2,133 electric drive systems. Looking at the book-to-bill ratio on page eight, you see that we have a very nice book-to-bill ratio with a factor of 1.39. We see a strong increase of the order intake in all regions and more or less for all off-road applications. The business conditions are very favorable, and also we have a change in the customer behavior, which comes out of the high demand in the market and the introduction of the emission standard EU stage V in the coming year, which leads to some prepay effects.
Revenue by region on page nine, we had an increase in Europe of around 20% if you compare Q1 2017 to Q1 2018. This was a quite strong increase, but also in our other important regions, Americas, here we see an increase of more than 13%, and also Asia-Pacific increased by 10%. Taking the activities in the joint venture Dalian into account with 100%, we are on a level of EUR 506 million turnover in the first quarter, and the global share of Asia-Pacific is on a level of 25%. Revenue by applications on page ten, all the major applications are running very well. First of all, very nice increase on the material handling side, which is a portion of around 20% overall. Here we see an increase of 30% in the comparison of quarter one 2017 to quarter one 2018.
Our biggest segment, construction equipment, is around 31% total turnover, increased by 28%, and also agricultural machinery, which is 15% of the whole portion of turnover, increased by 25%. Very good development in all major segments. Now I would hand over for the operating profit and net income to Dr. Strecker.
Good morning, ladies and gentlemen. We are on page 11 of the presentation. We've seen a significant improvement of the EBITDA by 42.5%, mainly driven by higher business volume. The EBITDA margin improved from 8.1% to 9.9%. The EBIT before exceptional items increased strongly by EUR 14.1 million to an amount of EUR 21.7 million. The return on sales improved accordingly from 2.2% to 5.2%. In the prior year, you can see here an exceptional item of EUR 10 million. It was based on the special occasion of the property sale from the Schubert company.
The net income also improved accordingly to EUR 18.2 million from EUR 15.4 million. DNA decreased by EUR 2 million. That was according to plan as well, and that contributed as well to the higher EBIT. If we go to page 12, there you can see the split between the DEUTZ compact engines and the customized solution. Both segments improved strongly. For the most part, you can see the improvement by compact engines, as you can put really increased volume in that segment. If you go on page 13, some more detail to the application segments. Material handling improved 31.4% year over year. Construction equipment 30% and agricultural equipment 24%. You can see that the growth is a very broad base over all our applications.
The positive trend also on the service side where the revenue increased by 4.6% year over year, and the profit EBIT improvement of EUR 15.5 million year over year on the compact side, which is one of the best results we had in the segment for many years. If you look on page 14 on the customized solution, there you could see on the new orders was more or less flat compared to the first quarter. Unit sales slightly less, but on the other hand, a very good order intake with a book-to-bill ratio to 1.33. That means that going forward, we will see further improvements on that side. Very strong development on the service business side in the customized solution, and that's contributed to the 20.3% increase on the EBIT.
If you go on page 15 with R&D capital and capital expenditure, on the left-hand side of the slide, R&D expenditure increased by EUR 2.5 million, which is fully according to plan as we roll out new products and also increase expenditure in the eDEUTZ strategy. The capitalized net R&D expenditure is EUR 4.3 million, which is slightly higher than the year before. On the capital expenditure, on the right side of the slide, excluding R&D, increased. We are fully in budget. The first quarter 2017 had seen some delays, and therefore the increase in Q1 2018 looks high, but if you normalize all things, then everything is according to budget. On page 16, as Dr. Hiller mentioned previously, working capital increased. As you may have heard also in other industries, it is really important to have all materials on site right now to quickly react to customer needs.
Also there, the working capital ratio of 16.9% is still very good, and it's all according to expectations. The operational cash flow decline in Q1 to EUR 10 million is even higher than planned, driven by the better EBIT. On page 17, the free cash flow, left-hand side of the slide, EUR 33.7 million in the last 12 months. It's lower than in 2017, but again, that will improve over time when the shipments increase further and working capital needs go down. The net financial position on the right side of the slide at EUR 88.9 million is still extremely healthy for DEUTZ. Page 18, according to the good numbers, you could see that the equity ratio is now at 49%. We surpassed the EUR 600 million mark on the EBIT side. On the financing terms, you can see that the bulk of the loans are due in five years from now.
We extended the credit line of EUR 160 million with the bank consortiums until June 2022, and the loan from the European Investment Bank is also repayable only by July 2020. As we mentioned in earlier calls, we are in a good position to react on needs on the M&A side or other needs to finance a lot from in-house. Page 19, in the summary, we have a very high volume of new orders. It's driven also then transferred into dynamic revenue growth and EBIT improvements. We will see a very successful transfer and rapid transfer of key technology from Torqeedo. The first eDEUTZ hybrid concept successfully presented at the trade fair Intermat. The review of the carrying amounts of the joint venture and DEUTZ Dalian is initiated, and we will know more in the coming weeks. The balance sheet is extremely healthy and strong. For the outlook, I would hand back to Dr. Hiller.
Coming to the outlook, forecast for Q1 customer market 2018. Overall, very positive market outlook in nearly all segments and all regions. Construction equipment and material handling is very strong, especially in China. Only a weaker or neutral segment is agricultural machinery, and here especially in China. Overall, we are seeing a very positive market. Coming to the financial outlook, we are confirming our financial outlook means marked increase on the revenue and moderate increase on the EBIT margin. This for sure is subject to the final results of the review of carrying amounts at the JV DEUTZ Dalian. We expect also a strong second quarter. The third quarter will be seasonally lower than the second quarter, but in comparison to the last years, also quarter three will be quite strong.
We are not planning with a summer shutdown like in the years before. Quarter three, the outlook is quite positive and quite strong. So far for the presentation, and we are now ready for your questions. Thank you.
Ladies and gentlemen, if you would like to ask a question, please press nine forward to the star key on your telephone keypad. If you wish to cancel your question, please press nine forward to the star key again. Please press nine star now to state your question. The first question comes from Ms. Friedrich. You have the word. Ms. Friedrich?
Oh, hi, sorry. Yes, my first question would be if you can give us an update on current trading. Second question would be around the engine sales that you saw in Q1, and if you have an idea how much of that was sort of underlying demand and how much of that was driven by pre-buying. Thirdly, on the working capital development, how do you see this progress across the quarters? Thank you.
Maybe starting with the quarter one and what is driven by pre-buying. We are talking now about order intake. This is on a level, I would say, of around EUR 50 million-EUR 60 million. We are planning on the pre-buy effects for 2018 and 2019. Also in 2019 will be a pre-buy effect because the engine segment between 56 kW and 130 kW, the emission legislation change will be in 2020. This means that also in 2019 is a pre-buy effect.
All in all, we see around, I would say, 10,000-20,000 engines in these two years. Our intention for here is to reduce this pre-buy effect. We are planning for 2018 around 10,000 units, and 2019 might be right now on planning side 5,000 units. If you can say working capital ratio, that stands at 16.9% as of March, we expect by year-end a ratio between 15%-16% of revenue. It will improve. There was another question, I think, a third question on the current trading.
Andreas, yeah. Thank you.
There are no further questions at the moment. If you have any additional questions, please press nine forward to the star key on your telephone keypad.
I think the question on the current rating was not answered yet. Current rating is developing in Q2 nicely. We'll see again a quite good order intake that most likely will be above Q2 in the last year. Not necessarily that we could achieve the level of Q1 of the current year, but we cannot rule out that it might get close. With regard to the top line revenue, we will see another good quarter in the current year. The trends that we have seen in the different applications remain valid also in the current quarter.
We have a question from Mr. Sperling. Mr. Sperling, your line is open.
Yes, hello. Just one question on the guidance. You have said that your guidance is subject to the outcome of the review on DEUTZ Dalian. As I understand, the guidance is on revenues and on EBIT before exceptional items, and DEUTZ Dalian shouldn't have an impact on either one. I don't understand why your guidance is subject to the outcome. The second question is, unfortunately, I haven't understood acoustically what you've said, the second part of what you've said about the pre-buying effect. You said you were expecting 10,000-20,000 engines over 2018, 2019. What I haven't understood is how this is distributed over the two years.
Okay. Maybe to the guidance, we are still in the analysis about what has happened in DEUTZ Dalian, and if this is an exceptional item, then for sure there is no change in our outlook. Yeah. That's for sure. The second point is about pre-buy effects. Pre-buy effect is caused by the change of the emission legislation. EU Stage V, there will be a change in 2019, January 2019, for all the engines, except the engines going from 56 to 130 kilowatt.
For these engines, the emission legislation change will be at the 1st January 2020. This means that they will cause a pre-buy effect in 2019. We are planning more or less that we have a pre-buy effect potential of 10,000 additional units by pre-buy in 2018, and then in 2019, another 5,000. That is the rough calculation so far.
Okay. Half the volume impact than you will have in 2018. 10,000 in 2018, 5,000 in 2019. That is our planning so far.
That does not give the overall 20,000. It is difficult to calculate right now. We say overall, it is a range market between 10,000-20,000 engines overall. We are in a lot of discussion with our customers out of the past. They are used really to have the pre-buy activities, to have engines, the older emission legislation. Now the change from TIFO final to stage five is not that big. We also make it happen that these are drop-in solutions for our customers, that they do not have to change on their equipment that much than in the past. This is also the driver for reducing this pre-buy effect because overall, seeing the pre-buy effect is not positive for us as a company because it leads to very high volatility. Our intention is really to reduce that.
Okay. I just want to come back to the DEUTZ Dalian issue. What you have said so far, that this could lead to a write-off. Write-off is necessarily an extraordinary item. What else? What regular items could be affected by the review? Do you think there could be already an impact on sales or on EBIT in the joint venture in 2018?
We came out with that message very early. We had quite a lot of our supporters on an analysis on that. What we have to do now in the next days is to discuss that result with the local auditor because the local auditor gave us always a certificate on the audit. This has to be discussed with the local auditor, and it is also going on, this discussion with the joint venture partner, FAW. There are not, I would say, important information so far. Maybe with a first-order speaking, Tito, one technical remark. We are in discussions with PwC. Is it an exceptional item? I think it is a one-time item, that is for sure, but the question is whether technically an EBIT exceptional item or whether, even if the source of the issue lies many years back, whether it is an operational issue.
If you have stuff with inventory, then it's operational, and then maybe technically you have to show it in EBIT, even if it's a one-off. The question is, do we have to show it in 2018, or will there be a backwards adjustment in 2017? It's too early to tell, but I hope I could clarify a little bit with exceptional and one-off items.
Okay. Understood. Thank you.
The next question comes from Mr. Heimbauer. Your line is open.
Yeah. Good morning, gentlemen. Very quick question. Remaining at the time of the analyst meeting, you guided for roughly 100 basis points increase in the EBIT margin in 20 8 year-on-year. Now, after the strong Q1 performance and also given that you indicated a rather strong Q2 and also Q3, don't you think that this 100 basis points rough margin increase this year is a little bit too conservative, excluding negative effects from the potential write-down? So just looking on the underlying operating EBIT margin. Thanks.
Yeah. Mr. Heimbauer, I'm glad. Yeah. Yeah. I think maybe we are a little bit on the conservative side. The quarter one started very nice with an EBIT ratio of more than 5%. What is important to us is more or less the long-term or mid-term target to show up with an EBIT margin of 7%-8% within the next five or four, four to five years. We don't want to have a back-end loaded development.
It was always our internal target to achieve 1 percentage point absolutely improvement on the EBIT margin. Maybe it could be a little bit better this year, but we will see what is coming out in quarter two. Also the topic with the joint venture in Dalian. Let us stay a little bit on the conservative side, and we would like to surprise you later on with some good news.
Okay. Thank you.
The next question comes from Mr. Tezic. Your line is open. Mr. Tezic?
Yeah. Hello. My first question is also a little bit on EBIT and one-off. Maybe also getting back on your remarks during the analyst conference that at customized solutions, you were kind of underutilized. Could you give us an update if you still feel underutilized? What are the measures you have taken there to improve capacity utilization and c ould it potentially lead to additional costs in the running fiscal year?
Yeah. About capital utilization. Overall, it's very much depending on the different lines, engine lines, and on the different locations. For example, if we are looking into China, there is a clear potential to have more volume. The load of the factory is on the level of, I would say, 30%. Now looking here into Cologne in our sub-4 L engines, here we are quite good filled. We started with a three-shift model and are increasing now the efficiency. Overall, I think there are not really restrictions on the capacity side. This is one driver to be even more successful in the future, to gain more business. I think here was done a quite good job in the past years.
We're always addressing this Kion project, which will start in 2019, which is a real major project, but also for smaller customers in a number range of 500-1,000 engines. We want quite a lot of new customers on that side. On the customer on the division, on customized solutions, yeah, here, this is very much related to our location in Ulm. Here, it's always a topic to increase the volume, but these are, I would say, very mature engines and also at the end of the life cycle. What we are doing here within the next year, we are transferring one engine, the 2011 engine, to Ulm to have more space here in Cologne for the sub-4 L. These activities are ongoing, and we are still optimizing on the capacity side. Really, to invest in new production equipment is very much limited.
Taking it from the other side, do you expect one-off costs, or is it likely to see one-off costs regarding DEUTZ Dalian and customized solutions to optimize those utilization levels?
Maybe with a first-order speaking, I think the Dalian and customized solutions, two different topics. In Ulm, the Ulm factory, where most of the customized solutions is built, we will improve the utilization in Ulm very much by transferring the 2011 model to Ulm. That will happen during next year. That means that fixed cost allocation in Ulm will improve significantly also for the other engines that are built there. At the same time, we will free up more capacity in Cologne to take in more volume like the Kion sub-4 L engine. DDE technically is reported under customized engines, sorry, compact engines.
If something happens in Dalian one way or another, it will not be under customized solution. Again, the optimization of the European network is going on after we closed the DEUTZ site and moved many things to Porz. Now the next step to move some engines from Cologne to Ulm, we further will optimize capacity utilization. The situation in Dalian DDE is separate from these four. These are different engines in a different market.
Okay. The next question is pertaining to your Torqeedo business or your others line you are now showing. Could you confirm your break-even target for 2019, if I remember correctly? Could you help us out? What seasonality throughout the year should we take into account to model those units on orders and sales?
Break-even was always planned for 2020. More or less, it is running according to plan so far It's a very seasonal business. Now the order intake starts in the summertime, and winter is normally always a little bit weaker. This fits quite well into our business model. Revenue torpedo will be at the end in the range of EUR 30 million. That's the plan, and that should go up to some EUR 50 million in the years to come with a break-even in 2020. Okay. Thank you. On the EBIT side, it will be single-digit negative million this time. In 2018. 2018.
Okay. Thanks.
Mr. Koenen has a question. Mr. Koenen, over to you.
Yes. Good morning. Some minor questions from my side. First question for the equity result. It increased EUR 1.2 million, especially because DEUTZ Dalian increased with a delta of EUR 2.7 million. The other earnings contribution, I guess it must be Argentina and South Africa, had a declining result. Are there any special items in there? Anything we have to take a look at? What is the reason why the other two have a negative or declining result? The second question is on the average selling price in DCE, which also declines from EUR 8,300 to EUR 7,900 per engine. Normally, I would guess that the value of the machine should rise over this cycle or over the time, especially with the higher regulation, etc. Is this a trend to smaller engine? What is the reason behind that? The third question would be on the raw material development. Maybe you could give some remarks on this development. Thanks a lot.
Maybe starting with the average price. This has a little bit declined to an average price of EUR 7,100. This is related by the smaller engines. You see that we have a very high increase on the sub-4 L engines. On the other exam, yes, Dalian, from an operative standpoint, without the current ongoing analysis, improved the result. Other than that, there are no substantial issues that need to be taken into consideration going forward.
Okay. Thanks.
We have a question from Mr. Jaboo. Your line is open.
Hi. My question actually was answered earlier, so thank you.
Okay. We have no questions at the moment. If you have any additional question, please press nine and follow the star key. We have a question from Mr. Schöne. Your line is open. Mr. Schöne?
Yes. Hi. Good morning. Thank you. Three questions from my side. The first one on the strong improvement in EBIT in compact engines in Q1. Would you say this is solely driven by the much higher revenue and the capacity utilization, or did you also enjoy some tailwind from the component side? Because in a past conference call, you indicated that you are in negotiations with suppliers for better pricing conditions. How is this program running? The second question is, can you remind us of the strike situation in Q1? Did you have a shutdown in Q1 due to strikes? How many days? Has there been an impact on your operating results? The last question to follow up on Torpedo. You had a negative EBIT at Torpedo in Q1. You indicated the summer season should bring up revenue. Is it possible that maybe in Q2, Q3, Torpedo might be even slightly positive? That's it from my side. Thank you.
Okay. So it's Andreas Strecker speaking. The utilization plays a big role in the compact engines. That is for sure. Last year, combined the factories in Porz in DEUTZ. There are some residual items, positive items from a cost base that we've seen in Q1 of 2018. Of course, pricing discussions with all the suppliers are always ongoing. We will have for the whole year, we are on track in these reductions that are in the double-digit millions. We have to see, unfortunately, that some of the raw materials are increasing. We have to even increase our efforts to compensate that effect. On a net base, our material costs are going down. When it comes to strike, we had one day strike in Porz, but there was no negative overall impact.
We had some special shifts to make up for that. The strike was not an issue. When it comes to Torpedo in Q2, yeah, that should be a strong quarter, whether it will be strong enough to break even in the quarter. We have to see as the expenses in new product development are still holding up very strongly. We have to look. For the whole year, it will still be a loss driven by the additional infrastructure that we build up because also the Torpedo people help on the DEUTZ side, on the DEUTZ strategy.
Okay. Thank you.
We have no further questions anymore. Ladies and gentlemen, if you have any last question, please press 9 and follow the star key. We have no questions anymore.
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.