Good morning or afternoon, ladies and gentlemen, and welcome to the DEUTZ AG conference call regarding the fiscal year 2017 results. At this time, all participants of the telephone conference 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 afternoon, and thank you for joining the DEUTZ Analysts and Investors Conference here in Frankfurt. I would also like to send a warm welcome to those who participate in the parallel conference call. In this meeting, we will present the consolidated financial statements of DEUTZ AG for the fiscal year 2017. Those who participate by phone can follow the presentation by using the web link, which was sent with the invitation. Alternatively, you will find the presentation on our website, Deutz.com, under Investor Relations, Presentations, Financial Year 2017, 2017 Financial Year. After the presentation, you will have the opportunity to ask questions. First, we will take questions from the auditorium here in Frankfurt, and thereafter from those participating by phone. With these remarks, I shall hand over to our CEO, Dr. Frank Hiller. Thank you.
Ladies and gentlemen, a warm welcome to our yearly analyst and investor conference with the results on 2017 and the outlook on 2018. Together with Margarete Haase, I will give you a presentation. First of all, I am very delighted that Dr. Andreas Strecker is joining. He is now on the Board since March, and he will take over on 1st of April, the CFO position from Dr. Haase. Maybe Mr. Strecker, you could give a small introduction to our audience.
Good afternoon, ladies and gentlemen. My name is Andreas Strecker. I'm 56 years old, joining DEUTZ AG in March. Before that, I worked 19 years in the Daimler Group, thereof eight years in North America as CEO of Daimler Buses North America. In 2003, I had the first connection to hybrid drives. We were at that time market leader in North America with hybrid buses. After that, I went to the Roto Frank Group. They made garage doors and fireproof doors as a CFO. Two years, I worked as CEO of Solaris Bus & Coach in Poland. Solaris is a leader in electric buses in Europe. I am hopeful that through the many years of experience with e-mobility, I can contribute also in the DEUTZ AG over and above the CFO role to help get good results in that field.
Thank you very much, Mr. Strecker. Maybe to the agenda, we will first start with strategy and operational highlights. Next, we will jump into financials and some words about dividend proposal and outlook. The highlights: 2017 was a very dynamic year for DEUTZ. First of all, we made a significant improvement on our financial KPIs, and we fulfilled the financial guidance fully. A big topic in 2017 was the consolidation of our locations, especially in Germany. We concentrated from four locations to two locations, and we sold the Cologne-Deutz property successfully. Another topic was to increase our product portfolio. On the lower range, as well as on the upper range, we did some adjustment with new engines in cooperation with more or less partner companies or customers.
On the lower end, and I will come to this later on, we developed a new engine with a displacement of 2.2 and 2.9 L. A key topic for us is Service business because it is very profitable in our environment. It was also key to grow that business. This was done organically, as well as by an acquisition of our Italian sales and service partner, IML. Another topic, and this is, I think, very important in the discussion, more or less political discussion we have right now about diesel. DEUTZ was the first engine manufacturer for off-highway application who obtained the certificate for EU Stage V emission standard. Besides this further development of combustion engine, we decided to go also into the way of electrification. We defined the E-DEUTZ strategy for hybrid and full electric applications for off-highway markets.
This strategy is based on an acquisition of the market leader for marine applications in electrical applications, the company Torqeedo, which we acquired in the second half of the year. The positioning of DEUTZ as a market leader for innovative drive systems has taken place in 2017. Right now, we have an ongoing tailwind from our end markets, and this gives a good outlook for the year 2018. Talking a little bit about our strategic alignment, you know DEUTZ as a high-tech diesel engine manufacturer. We are convinced that diesel will be the choice of the future for rough applications in the off-highway business. We are a pioneer in reducing emissions.
On the other side, and this is a positive effect of that diesel discussion, we see a lot of additional potential in existing producers for diesel engines, OEMs, who are captive to have thoughts about outsourcing their production. Besides diesel technology, and all our engines are more or less already certified on Stage V, we are looking into alternatives. This is, first of all, into alternative fuels. Here we will come up in 2019 with a liquid gas engine. This will be for 2.2 and 2.9 L applications. We are also looking into the field of CNG, hydrogen, and synthetic fuels. This is a topic which we are following quite closely in our development department and also with some cooperations of external companies. We will see what will come out, what will be the future development in the market about alternative fuels.
A clear way we have on the E-DEUTZ strategy, here we see the potential to come up with hybrid solutions and full electric solutions in the lower range in the future. By the acquisition of Torqeedo, we can really provide a full solution for our customers, complete engineering, software engineering, and complete systems competence. Talking a little bit about our product portfolio, you see on the left side, you see the new engines, which we will introduce for a new key customer, KION, in 2019. This will be the 2.2 diesel as well as gas engine. This is a three-cylinder engine. There will be also a four-cylinder engine, which has a displacement of 2.9 L. In the future, also these engines will be bi-fuel engines. This means you can also power these engines by gasoline, which is quite interesting for the market in the U.S.
On the right side down, you see two engines as an example. This comes out of the cooperation with Liebherr. We are taking four new engines in our portfolio, starting with a 9 L engine going up to 18 L and 620 kW power. These are in-line engines, very efficient engines. Maybe you have noticed that the engine TCD 9.0, which is the smallest one, four-cylinder engine, has already received the prize for the engine of the year, 2018. I think a good start. We will jump into production with the lower and the higher range of engines in 2019. This means even if we have a good perspective on the market in 2018, we do not know what 2019 is going on. Here we have new opportunities with additional engines and new contracts.
Talking a little bit about our E-DEUTZ strategy, you see some potential applications on the left side. For sure, one benefit is to reduce CO2 emissions. Our customers, they are focusing on CO2 emission reduction. Even more key to their business is reducing costs. We see a big potential by especially hybrid solution to come up with a reduced TCO, total cost of ownership, with lower noise emission, and also with some additional performance points, for example, torque advantages. We are more or less the first engine manufacturer in the off-highway business who is really focusing on that new technology and that consequence. There is one other competitor of us. This competitor is also serving the commercial vehicle business. We are absolutely convinced that this is the right way. By acquiring Torqeedo, we have the full competence in-house.
We see the first marketable products, especially on the hybrid side, in 2019, end of 2019 and early 2020. Out of the discussions we have with our customer, we see that this is really a key topic for them in their applications. Before the acquisition of Torqeedo and before the definition of our E-DEUTZ strategy, this was not really a topic which they discussed in the past together with DEUTZ because they recognized DEUTZ as a pure diesel manufacturer. The intention is clear. We want to move from a pure single diesel manufacturer to an innovative drive solution provider. We have invested, or we are still investing, in total EUR 100 million on the E-DEUTZ strategy. For sure, the biggest part comes out of the acquisition of Torqeedo. You can read it now. It is disclosed now. It is around EUR 74 million, which we spend on Torqeedo.
There are some additional topics like increasing the staff, having some testing application, which will lead us to EUR 100 million. In the end, we see a revenue share of electrified solutions in 2022 and 2023 of around 5%-10%. For sure, we are targeting on an interesting EBIT margin with these new products. So far, maybe strategy and operational highlights. Let's go to the financials. Here you see the key figures for 2017. All the key figures have been improved dramatically. You see new orders is higher than revenue. We are on revenue level now on a EUR 1.5 billion level. EBITDA, as well as EBIT, developed quite nicely. An improvement of more than 80%. The relative improvement, we are happy with that. For sure, the general level, here we have more ambitious targets.
We are targeting on an EBIT level of 7%-8% within the next five years. I think that's a real good step towards better margin. Net income more than EUR 120 million and free cash flow EUR 82.5 million. For sure, this is also influenced by the extraordinary effect of the selling of the DEUTZ location. Looking into the figures of Q4, we had a quite strong Q4. This gives a good outlook for the market opportunities in 2018. Sales figures here. New orders increased by more than 23%. Unit sales, more than 160,000 engines in 2017. That's a nice increase of 22%, which led to a revenue of flat 17%. You see that revenue increases not in the same way as unit sales.
The reason for that is that we had a real peak on the lower size engine, below 4 L, where we invested a lot in the last years, came up with a lot of new products and a lot of new customer relationships and contracts. Revenue by quarter, we had a dynamic grow in 2017. What's quite interesting is that Q4 was the strongest quarter last year. Typically, in our business, Q2 is very strong. Here, Q4 in 2017 was even stronger. That shows you a little bit what's going on in the market. The market is really good in all regions and for all segments now for DEUTZ. Revenue by region, we grow tremendous in Europe and Germany. You have to take into account that the turnover for Europe is also related to the European OEMs. In many cases, they also export their applications worldwide.
This means that the installed base of engines we've got is really spread over the whole world. America's also a nice increase. In Asia Pacific, we are more or less on the same level. Here we took in 2017 a lot of activities, especially in connection with our joint venture, DDE, to be more successful in the future and to grow even further in Asia Pacific. Africa Middle East reduction. This is also a very small region. Here you have still some negative effects in the first half of 2017 out of the oil and gas business. You know that we are not consolidating our joint venture in Dalian. Taking this into account, we are on a level of nearly EUR 1.8 billion. Taking this into account, looking into Asia Pacific, we have a share, including DDE activities, of around 25% in Asia Pacific.
Talking a little bit about our applications. Material handling was growing very fast last year. This will be also a trend in the future because here we will come up with new customers. Also, agricultural machinery was growing very nice. Construction equipment. What is important for us is our Service business here. Clear focus on Service business to grow the Service business activities turnover-wise because here we have a quite nice margin. We addressed a lot of potentials in our organic business. New products, digitalization. We also invested in an acquisition of our Italian dealer and service partner. This is also included. Here, the clear intention is midterm, talking about next five years to increase on a level to EUR 400 million. Maybe so far from my side. I will hand over to my colleague, Mrs. Haase. Thank you.
Good afternoon, ladies and gentlemen. Let's talk a bit more about profitability in detail. You see on the next page that we could boost our EBIT. We have to say that this comes mainly from the compact engine business. Overall, we improved the EBIT by EUR 20 million, almost doubled to EUR 42 million compared to last year. The EBIT margin also shows a decent improvement to almost 3% now. The compact engine business benefits from the tailwinds from the market. We were able to turn this positive development into sales and profit. We came from a slight negative number in 2016, minus EUR 6 million. Now we reached EUR 22.5 million. Overall, we could realize on top of this operating business a very good sales proceeds from the sale of the real estate in Hamburg and in DEUTZ-Mülheim.
After having finalized our site optimization, we sold those real estate. You see here in the segment other, almost EUR 100 million resulting from these transactions. This number shows the proceeds. This is minus the transaction cost. The customer solution with Bluefield moved more or less sidewards and showed more or less the same level as last year if you take into consideration that prior years' result had been boosted by a license income, which we could not repeat every year, of course. How does this positive impact translate into net income? We could boost the EBITDA from EUR 140 million in 2016 to EUR 136 million in 2017. The D&A increased from EUR 90 million to EUR 93 million. Please notice that here is an impairment included. We could digest an impairment of about EUR 8.8 million.
This is the result of a decision to stop an engine project in favor of more profitable projects in the electric segment and in the repair project. This was a very good decision for the future of the engine portfolio. Finally, we could add the exceptional items of about EUR 104 million, as mentioned, real estate sale. The EBIT after this item is EUR 146 million. After interest and income taxes, we show now a net income of EUR 121 million. This, of course, strengthens our balance sheet, our equity ratio, even after increasing the dividend. Talking about more details in the compact engines on page 16, we have seen a decent uptick in the market. We could realize this development. We have shown a considerable increase in new orders, 27%, unit sales, and revenue of about 23% improvement.
EBIT is now very strong in the positive territory. This is mainly the result of better capacity utilization. This is the main driver in the compact engine business. Last quarter was even better. Unit sales increased by 33% and revenue by 27%. The business was mainly driven from the key application segments. It was material handling, very strong increase of 43%. This comes from U.S. and Europe. Agriculture equipment, 31% from Europe mainly. Construction equipment, 25% Europe and U.S. Service business is growing steadily and helps a lot to support our EBIT margin. Not to forget, it's not only our core business, our consolidated business. Last year, we could also move DDE, our joint venture in Dalian, into the positive region. We made positive net income, which could be booked into our return.
Yeah, I mentioned already the impairment, which caused here a small negative impact in the compact engine business. Customer solution showed, at least as new orders are concerned, an improvement. Orders rose by almost 5%. The business, as such, was slightly lower than last year. Please don't forget that we had the license income shown in 2016. And we had a lower capacity utilization, which is, of course, one reason for the EBIT, which is a little bit less than last year. Still, the EBIT margin in this business by about 10% is very satisfying for us. It is very strongly driven also by the Service business. It is a strong support for our profitability. At least in the fourth quarter, the unit sales rose by about 8%. We are happy to announce that we have done a lot of sales initiatives, mainly in Asia.
In the short term, this business has a good chance to grow again. In the long term, it will be boosted because of the repair project. Costs for this project are also included in the fourth quarter. You see a lot of reason why this development is not that straight as we could have expected. R&D and CapEx, as always, we are more or less in line with our guidance. Yeah, we promise to keep innovative. We, again, invested about EUR 70 million in 2017. Again, we capitalized more than in the years before. It was a portion of EUR 17.5 million. You see that is due to the new engine projects we have now in the pipeline. CapEx a little bit higher than 2016 and on the way to increase again because of new projects.
Working capital, of course, grew because of the higher business volume. It grew less than volume because of the strict working capital management. The consequence of this is a lower working capital ratio, which comes now to 15%. Operating cash flow mainly driven by higher business, higher profitability. We could reach EUR 112 million. As a consequence of all these positive cash inflows, our free cash flow exceeded to EUR 82 million. Very strong improvement from last year. Don't forget that we digested new acquisitions in Italy, Torqeedo. The real estate sales compensated with new acquisitions. Net financial position increased to almost EUR 100 million. Yeah, we stabilized again our balance sheet. We increased our equity ratio to almost 50% because of all the positive impact I mentioned already. This means an equity of almost EUR 600 million.
On top, we still have our medium-term loan, which is now extended up to the second quarter of 2022. To summarize what you have seen so far, we benefit from strong order momentum, which continues. We could turn this development into double-digit growth in sales and in significant operating profit increase. On top, we boosted the net income by substantial property sales proceeds. As a consequence, we have seen a high free cash flow number despite the acquisitions we have realized last year. Finally, we strengthened our equity ratio. It's your turn again.
Thank you. Coming to the dividend proposal and the outlook. Our proposal on the dividend is EUR 0.15 for 2017, which is more or less doubling the number from last year. This reflects also the positive exceptional items. We want that our shareholders participate in the successful property sales.
Our dividend policy is 30% of the profit over a longer period of time. I think this would be a nice increase for our shareholders. Talking a little bit about the outlook on the market side, here you see a table which compares the market this year to last year to this year. We see in all regions more or less a nice improvement: Europe, North America, China. China is a little bit divided here. We see a better improvement in construction equipment and material handling and more or less on the same level for agricultural machinery. All in all, we see a possible increase on the sales number side of around 10%. The financial outlook for this year, and based on our figures last year, 2017, revenue here we see a marked increase. On the EBIT margin, we achieved 2.9% this year.
There must be an increase in this year. Here we see around 1% increase. R&D expenditure last year, EUR 67 million, more or less on the same level, a little bit higher, EUR 70 million-EUR 75 million, based on the higher product portfolio and also our activities we are doing on the electrification side. CapEx, here we have some backlash out of 2017. We think that this will be on a level of EUR 60 million-EUR 70 million. Maybe so far our presentations. Thank you very much for your interest. We are open now for your questions.
Ladies and gentlemen, if you would like to ask a question in the telephone conference, please press nine and the star key on your telephone keypad. In case you want to cancel a question, please press nine and the star key again. The conference call can follow the discussion. Mr. Heimbürger.
Hans-Joachim Heimbürger, Kepler Cheuvreux, maybe three questions from my side. First of all, can you elaborate a little bit on the pre-buying effects from engines you expect for 2018 going into 2019? Secondly, a word on service business for electric engines, what do you expect here? And certainly, maybe a word on customized solutions, the margin in Q4, which was weaker than last year despite stable sales. Thank you.
Okay. Maybe to the first question, pre-buy effect, we will have a pre-buy effect this year, 2018, as well as in 2019, because the emission legislation starts at the 1st of January 2019. For certain power range, and this is the power range from 56-130 kW, it starts at the 1st January 2020. This means there will be pre-buy effects this year as well as next year.
We estimate the pre-buy effect this year around 3x higher than next year. We are talking all over about, yeah, I would say 15,000-20,000 engines. This will be an effect, but this is, I would say, a much smaller effect than in the past going on Tier 4 Final. Coming to the Service business, for sure, in general, electric motors have smaller maintenance or have smaller maintenance needs. That's right. In general, I think this will not affect our Service business that much because we are mainly looking into hybrid solutions. For sure, there might be a lot to do on the service side for the combustion engine. On the other side, combining combustion engine with electrified solution gives also big potential on the digitalization side, which also goes into our service turnover. This could be compensated.
I think in our plan midterm, there is not a really negative effect on that. The third question was on?
Customized solutions.
Customized solutions, yeah. Yeah. This is mainly driven by, I would say, the small volume. You know that our segmentation for compact engine and customized solution is mainly related to the production side. It means customized solutions are related to our factory in Ulm. The load in the factory in Ulm was not that high because we have here a lot of mature engines, which are running out on the lifetime side. We also took a decision internally to transfer one engine, the 2011 engines in the future to Ulm. This will also have the result of a higher base load in Ulm and will also generate some positive effects in the future.
I can add to the Service business of electric vehicles. There is good potential for battery upgrades, battery replacements, inverters, converters. There are new releases. I do not see that negatively. The opposite is the case. It is not that things break down, but they improve. These are things you can offer to the customers.
Thank you. Alexander Mar from Metzler & Co. Just a brief question on your end-usage margin improvement. You just mentioned you aim for an improvement of 1%. If I see it correctly, I think the R&D impairment cost you about 0.6% this year. The negative impact from Torqeedo with about EUR 4.7 million was also included, which I think is about 0.2%-0.3%. Could you just elaborate a little bit on where you are or which development you see for your underlying business and also how you see Torqeedo evolve in 2018 and 2019? Remember, as when you believe you will reach break-even with Torqeedo.
Okay. Maybe I'll start, and Mrs. Haase can take over later on. On Torqeedo side, we see the break-even within the next two years that was planned. The main driver for Torqeedo to be profitable is to increase the business. They are growing 40% every year. They did a lot of investment in their technology, in new products, and in new markets in the past. I would say that the roadmap of Torqeedo in the past was a little bit different than now in the cooperation with DEUTZ. The intention of the previous owners of Torqeedo was to bring the company on the stock market. It was a real push towards new markets and new products. This was a lot of investment which was done.
Now we see this being profitable, Torqeedo, within the next two years. This is not a new situation. This was reflected in our due diligence.
You are right. We had a strong first quarter. On the other side, we had to digest some negative effect, as you mentioned. We had also a positive effect. Right, Italy was for the first time included. If you ask for, yeah, I guess for an operating leverage, it's about 25%. It has not greatly differentiated from last year. About 25% is our operating leverage right now, taking into consideration what we have as a business model, as a portfolio, and after-site optimization. I think this is the right number we have to calculate for the next year. After having new products, it might differ. Right now, it's a number we have to calculate.
A brief follow-up on the situation at your DDE joint venture in China. When we last met, I think you said you would like to plan to get more business from the off-road market segment in China. How are you proceeding there?
We reorganized our off-road sales team in Asia, in China, and combined it with DDE. We have done much more effort now to improve. We will see the fruits of these initiatives, hopefully, this year and mainly next year. In 2017, it was still dominated from the truck business. Nevertheless, we showed a positive result.
Okay. Thank you.
For the other side, we did some adjustment on the management. We have now local management, Chinese management in place, which turns out to be much stronger connected to the market. Here we see some real good opportunities for next years.
Fantastic.
Yeah. The first one is on your market forecast. Could you give us a feeling where you see currently the strongest dynamics compared to your view in Q3 and where you see the biggest headwinds coming?
A second.
The biggest headwinds and the strongest momentum which we could expect for 2018?
Where we see a very good development is in material handling activity. This is connected, first of all, to our products which fit very good into that market. This is also very much related to the U.S. region. That is very positive. We had still some questions on, and there are some headwinds on the situation of agriculture in Asia Pacific. We are also working hard to increase the share in the Middle East. Here might be some good opportunities in the next months and years by an upcoming oil and gas business. This is really improving. Was down for several months and years, I would say, and now it's improving.
Okay. Also on the market, stationary equipment was pretty strong in Q4. Could you give us some details? What were the drivers behind that?
These are normally gensets. We have some cooperation with some OEMs on the genset side who are doing quite well. One big customer is sitting in Italy. Also here we see some improvement in Africa. We have our location, Magideutz , in Morocco. Here we see some improvements.
Okay. The second question on your guidance on sales, you were speaking of a marked increase. Could you give me a feeling what percentage range that could be on the lower and upper end?
I would say out of today's perspective, it's around 10% on the engine numbers. Will be a little bit lower, I think, on the turnover because we are growing faster in the smaller engine segment than in the higher engine segment.
On your capacity utilization, could you give us a feeling what is the current number and what was it, let's say, at the first half of 2017?
It's depending which location you are focusing on. For example, Cologne, yeah, here we are, I would say we had a very good capacity load. We switched in November from two-shift to three-shift model. Now the training is done with all the workers, and efficiency is increasing very much. There might be also a higher output in the future. If we are talking about Ulm, there we have still some open capacity. Also China, here we have the possibility to bring more work into the factory.
One is on your new production start regarding the engines for KION and Liebherr. Could you give us a feeling of the size and units, what we could expect during the course of 2019?
This is a difficult question because 2019 is the year of ramp-up. I can tell you that the KION order is on a level in a stable year. This will take two years to come up with the maximum output. This will be on a level of around 30,000 engines. For the engines starting from 9 L displacement to 18 L displacement, which we are doing together with Liebherr, we are focusing on a number in between 5,000 and 10,000 engines. For sure, these are big engines with a high turnover. Also in the future, this will take some time with a lot of work on the service side.
Okay. Thank you.
Hello. I have another question to better understand your guidance for the current business year and your expectation of rising EV margin. Could you give us an impression how depreciation, the normalized depreciation, will develop in 2018? Will it be higher or lower in 2017? Do you also expect EBIT margin to rise in the current business year? The second question is on the service sales. You showed growing service sales in 2017. Was it just due to the consolidation of the Italian operations, or is there also an underlying growth in the service sales?
Yeah. Depreciation will be moving sidewards. No major steps in depreciation or R&D in 2018 compared to 2017. The EBIT number will, of course, increase according to the higher business volume. This is in combination with our guidance we gave.
a marked increase and moderate increase in EBIT and in EBITDA as well. Because if the A does not change, it is in line with our guidance for EBIT. Okay.
On the
Answer? Question? Yes. It's okay.
On the service side, the effect of integrating IML was a minor effect, EUR 3.7 million on the turnover side. The biggest portion was really out of organic growth. Here we took a lot of activities, new products, new pricing of spare parts, also dealer management, things like that. I think that's really the key driver to be successful and to grow the Service business.
One last question on your guidance. You guided for a marked increase in revenues and a moderate increase in the EBIT margin. I'm just wondering if you could state some numbers there to get that more granular. Because if you said that you plan for a 1% increase in the EBIT margin, if I calculate that, that's a 34% increase in the EBIT margin. It is not what I would characterize as a moderate increase. Maybe you could give us some more granularity there.
You got that point. It's how you see it. I would say also moderate increase. We announced it also last year. Our biggest intention is really to be reliable and to fulfill our promises. Also, last year it was 80%, and we said moderate increase. I think it will be absolutely around 1%. The biggest target for us is really to reach the 7%-8% within the next five years. This should not be back-end loaded. This we want to deliver continuously.
For sure, there is your consensus, which we think, yes, this we can fulfill.
On the revenue side?
On the revenue side, as I mentioned, sales figures we see a plus of 10%. This will be a little bit lower on the revenue side. You see also last year we grew on the number side around 23%. On the revenue side, just 17%. Maybe it will be the same relation.
Georg Geiger, Value -Holdings, as you will start selling electrical engines from 2019 or 2020 on, will it be diluted for EBIT margin or do you expect even higher margins here?
I think we are really first mover here. For sure, there should be also a benefit on the profit side. What we are doing right now besides solving technical topics and developing the system is to set up business cases.
Here we see also a benefit for our customer on the cost side. It will be interesting for him to change in some cases, depending on the load cycle, from pure combustion engine to hybrid solution. Sure, there should be a better margin included for DEUTZ than we have today. What we said is on the end of a single digit or beginning of a double-digit revenue profitability.
Go for this.
Hello. Charlotte Friedrichs from Berenberg. Three questions from my side. How should we think about average selling prices in the compact engines over the next sort of two years if we think about smaller engines growing quite fast and also Stage V coming into your mix? Secondly, what do you think will be the margin impact of the Liebherr cooperation? Thirdly, what was the headwind you saw from increasing raw material prices in 2017?
Good question. I didn't get it.
Raw material prices?
Okay. Maybe price development on the compact engine side. For sure, it's always—and this we are doing with our suppliers as well—it's always a fight on prices. Going from tier four final to stage five engines, there is a small price increase for our customers included. It's not the situation we had from or we had to the Stage IV F inal. I think more or less we can keep these prices stable. On the other side, we have to reduce our costs. We are running a lot of programs on the material side.
Talking about the Liebherr Corporation and the engines on the Liebherr side or on the higher engine range, here we see the potential for a nice margin because these engines are very much related to very sophisticated applications. Here we also want to address some customers in the oil and gas business. Normally the environment is quite nice for higher prices. Raw material was the last?
Yes.
Raw material. Right now, I would say we have more challenges in keeping up the supply chain. For sure, it is always also a discussion on the supplier side about prices. Here we see overall reduction of our purchasing prices on the supplier side. We have a lot of special programs addressed for the direct material as well as in the indirect environment. We still see a reduction on the DEUTZ side.
Thank you. Okay.
Thank you. Three smaller questions. One follow-up on the depreciation. You talked about stable ones. This is without the impairments of the 5.0 engine, I guess. Second one is on the tax quote. Could you elaborate a bit on this? How was it influenced by the sale of the DEUTZ real estate? How was the tax rate on the normal operating business? What is the tax rate going forward 2018, 2019, 2020? The last one is on the IML. In the fourth quarter, the sales was about EUR 4.7 million. The pro forma sales was EUR 9.6 million. Is there any seasonality in this business?
The depreciation stable before impairment. A little bit better this year compared to last year. Tax rate very low. We have to pay minimum tax because of our tax loss carry forward.
We could use the tax loss carry forward also for the proceeds of sale of real estate. We had even lower than last year. If I remember right, it was about 15% now. It is always between 15%-20%. Around 17% on average is our tax rate. This is a number we can take also for the forecast for the years to come, around 17%. IML, should I? Or you?
Yes. You can go ahead. In general, it is a strong Q 4. It is a little bit also seasonality. This is always on the service side, variating a little bit depending on the customers. Some of the customers are taking spare parts out of their stock or filling up the stock. This might be an effect.
I have a follow-up question on the pre-buy effect.
Is it right that you said 15-20 thousand engines in 2018 as pre-buying effect?
No. Overall. Overall.
Overall. But you said three times higher. So it could be, let's say, around 10 thousand.
Yeah. Yeah. That's our estimation right now. It's not easy to predict. We are trying to avoid this pre-buy effect because for sure, it's quite difficult for the load of the factory. What we see here is that the customers are much more relaxed now with the Stage V because it's a real drop-in solution. It makes it easier for our customers to go on Stage V engines than it was in the past going on the Tier 4 F inal engines. This is our estimation so far.
Okay. Going back to your guidance unit-wise, you said around 10%, which are around 16,000 units. Am I taking it right that you mainly expect a pre-buy effect that is boosting the sales growth?
It's one effect. On the other side, it's also a little bit there is a time gap in the pre-buy engines between producing and selling. There will be also a high production in 2018 on pre-buy engines, which we sell in 2019.
Okay. Also a question on your midterm guidance. You said 6%-7% margin. When I remember correctly, you said that the unit level should be around 200,000. Given your guidance for 2018, it's not far away. Not far away.
Yeah. Yeah.
Is it fair to assume that in 2019, 2020, those goals could be reachable?
I think we have to, to be honest, we have some things to clean up. We did quite a lot in 2017.
This will go on in 2018. We said not 6%-7%. We said 7%-8%. This in a normal year where we expect a higher or an engine production number of 200,000 engines plus.
Okay. The final one is, should we take into consideration any one-off items in 2018? Some savings which are still open from the relocation or further one-off gains from the real estate sale?
I would say you are meaning special effects or extraordinary topics. Yeah.
Discounts like that? Discounts for the same?
Exactly. Here we are talking about, I would say, EUR 50 million-EUR 60 million, depending a little bit on the final plan. It is not really sure if this comes already in 2018. It could be also coming in 2019. This is still a question mark.
Yeah. Absolutely. Thank you.
We have further questions here in Frankfurt. If it's not the case, then we would be ready for taking questions from the phone call operator.
Ladies and gentlemen, please press nine and the star key to raise your question now. The combination for raising your question is nine and the star key. Mr. Krupp, there seem to be no questions. There's one question, which is from Gordon Schönell, Bankhaus Lampe. Your line is open.
Yes. Hello together. Just a short one on Torqeedo. Can you give us a rough idea about the engine production of Torqeedo in 2018? How many engines will Torqeedo assemble in 2018?
This is a good question because here I would like to make the point that these engines or these numbers are not included in our outlook. What we are talking here so far is about combustion engines.
The plan so far is around 30,000. 30,000 on the engine units.
30,000. Okay. I guess these are, yeah, very or relatively cheap engines.
Yeah. If you actually, you cannot compare it with the value with the DEUTZ engine. We also had this discussion internally to putting the numbers together, but this gives a different picture.
Okay. I understand. Thank you.
Thank you.
At the moment, there are no further questions. I would like to repeat one last time. Just press nine and the star key to ask your question. No, we have no further questions.
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