Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the DEUTZ AG Q1 2023 Results Conference Call. Throughout today's recorded presentation, all participants will be in the listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press Star followed by one on your touchtone telephone. Press the Star key followed by zero for Operator assistance. I would now like to turn the conference over to Christian Ludwig, Senior Vice President, Corporate Communications and Investor Relations. Please go ahead.
Thank you very much, Operator. To you all, also a warm welcome from my side. Please note that this call is being recorded and a replay will be available on our website at deutz.com later today. Your participation in the call implies your consent with this. Joining me today are our CEO, Sebastian Schulte, as well as our CFO, Timo Krutof. As usual, Sebastian will walk you through the highlights of the performance of the group and then hand over to Timo, who will provide some more details on our financial figures. Sebastian will close the presentation with our current market outlook and our guidance. After this introduction, we will be happy to answer your questions. Please note that management comments during this call will include forward-looking statements which involve risks and uncertainties.
For the discussion of risk factors, I encourage you to review the disclaimer contained in our annual report and this presentation. All documents relating to our Q1 2023 reporting are available on our website. Without much further ado, I hand over to Sebastian.
Thank you very much, Christian, and also from my side, good morning, and welcome to our Q1 2023 investor presentation. It's great to be with you and talking to you again about our progress. Let me start with the highlights, so to speak, key operational strategic developments. Of course, we appreciate that last week when we had our AGM, our virtual AGM here in Cologne, we already published or had to publish preliminary results for the Q1 and gave already some insights on our outlook this year. Not, not all of it what we're talking today is big news, but we believe it's worthwhile spending some more time on that and going into the details.
With that in mind, let me start with the new orders in Q1, which went up roughly 3% to EUR 526 million. You know, starting also or phasing on quite a strong Q1 last year already. That's why the increase is not that impressive, but as I said, it's on a high level. It shows also, you know, book-to-bill 1.02, so still slightly but still above one. That means the growth path is still intact, but on a fairly high level, given where we came from. Unit sales, DEUTZ Engines up 6% to now 46,110 units in the Q1 . Very important, obviously, their revenue went up by almost 60% to EUR 17.2 million.
We're continuing that path that revenue increase exceeds unit sales increase, which typically is a good sign of profitability, as we'll see later in the bottom line figures. Yeah, bottom line figures is here the point. Adjusted EBIT pretty much doubled if you compare to the comparable quarter last year from, you know, now to EUR 32.1 million, up EUR 16 million, translating into an EBIT margin of 6.2%, also up almost three percentage points. Very important for us, and we'll come to the, you know, strategic implications later, is that our Classic segment, which currently is the backbone of our business here, now yielded an EBIT margin of 8.8%, up three percentage points.
We have here, like, arrived on a newer, on a higher and very, very good level. Free cash flow. Cash conversion, it's all right. +EUR 10.8 million in the Q1 . Not a bad, not a bad number. Typically, the Q4 is always, you know, a bit of a challenge. Sometimes you have like a reversion. That's a very good number for Q1 . With that in mind, after we looked at these preliminary Q1 numbers last week, we also defined or refined, to be precise, our full year guidance slightly. We'll see revenue for 2023 now in the range of or at the level of EUR 2.1 billion in EBIT margin, now at five percentage points.
Pretty much on the upper end of the guidance which we published earlier this year to the market. Strategically, certainly wanna highlight regarding our cooperation with Daimler Truck. We announced that the signature of that deal at the end of January and now the closing has occurred. Yeah, everything is well prepared now, and as a result, Daimler Truck is now a shareholder in DEUTZ with a stake of roughly 4.2%. Also, you know, we'll talk about our service strategy a bit more later in this call. Here we made further progress in expanding our international service network. Just to name one of the milestones we achieved. We now opened the ninth DEUTZ service center, DEUTZ Power Center, DPC, in the U.S.
That's another proof point how we grow here that in particular in terms of profitability, very important field. Let me go structured through our 2 or 3 pillars of the Dual+ strategy. Just keep in mind, you know, Dual+ is on the one hand here, the Classic DEUTZ, then the Green DEUTZ, and the plus is gonna be the service DEUTZ because it supports it effectively, both Classic and Green business. As said, Daimler Truck deal is completed. Integration roadmap defined and the relation started. I'll spend some more minutes in a few, a few pages on that. We do, we are making progress in our supply chain production processes. It's still tough, it's still challenging at times for us. It's also for our customers.
We'll hear later that market currently is not really a limiting factor, but supply chain is. We're becoming better at managing this, and that's certainly a plus, and that also reflects, is reflected in the numbers. With that in mind, we have a strong demand, particular in our compact engines below 4 liters. That's why we decided to implement a third shift here in Cologne, in our production plant in the highly automated lane, line for assembly line for sub 4-liter. Most likely we're gonna start that in the beginning of the second half, to really, you know, meet the very, very healthy customer demand and benefit more from scale later on. That's all under preparation.
In that context, actually, that was also one of the reasons why we decided to increase capacity here. We managed to further roll out our fixed-volume program, with most of you will have been talking in various roadshows and conferences on that fixed-volume program on how that has been a success. Just to bring back to mind, where the demand in these compact engines exceeded pretty much supply. We are, well, well managed here to combine fixed-volume commitments from demand offtake commitments from our customers with respective price increases. Now, if you consider the increased capacity for the sub four-liter line, we are now have sold pretty much 75% of the yearly capacity.
We are at the moment already talking to some first customers in expanding this program into 2024. Summarizing here, the Classic business continues to provide a strong foundation also for the implementation of Green strategy. We're making good progress here. A few comments on Daimler Truck Corporation. As you all know, following our earlier communication this year, we as DEUTZ have acquired IP and licenses here for the development and also production of the medium duty and the heavy duty Daimler engines. Initially for the off-highway application, but perspectively also on highway. This transaction has now completed, so the closing has occurred the end of March. As a result, Daimler has taken a 4.2% stake, shareholding stake in DEUTZ.
Now it's obviously important to bring that corporate to life. We are, we are now, first of all, technical point of view, we have done all the kickoff meetings. You know, to transfer, you know, the technology also physically to DEUTZ. We have initiated talks to the most important customers for those products. We're spending always some time on that because we want to make that really clear, you know, our commitment that as DEUTZ we take an active role in the consolidation of the combustion engine market. That's certainly after our partnership with John Deere on the 3.9 engine, which is already running for a couple of years. This is the second big step. There's more to come.
Our Green business. At the moment, still, as you know, fairly small in terms of top line. We need to, and we will, and we want to invest in the future of the company. Here the project pipeline is growing. At the moment we are collaborating on 10 battery electric systems projects with OEM partners. Some of them actually very, very large and relevant OEM partners. We're also working on 5 hydrogen projects. As soon as any of those projects, you know, we are able to disclose, we will do so, but at the moment, that's still in the background.
We also initiated a, and established a process to evaluate new business models and potential partnerships, which brings us also going beyond the engine, beyond the drivetrain, establishing us more working and thinking in ecosystems as well. That's internal preparation. We're well on track here. As you know, part of our commitment of our Dual+ strategy is that we as DEUTZ will invest more than EUR 100 million into the green segment by 2025. When I say investing, it means a combination obviously of R&D in terms of electric, of battery electric technology, hydrogen potentially, but also M&A and partnerships. Yearly objective is clear, long-term objective is clear. We wanna become emission-free across the entire process chain no later than 2050.
When we say 2050, I mean, it's a while, but we also need to be aware that our CO2 emission in the products we produce, like more than 98% is in the use. That's really the big lever in terms of production. We are gonna be emission-free much, much sooner. Jumping to service. Very proud. We are very proud that we've recorded here a strong Q1 . Our revenue rose further to now EUR 121.3 million. That's another significant increase by almost 11%. Remember we came last year, we closed at roughly EUR 450 million over the full year profitable business.
After 3 months, we are already at higher than 120, so we're well on track here. New orders up 128, so also book-to-bill in a healthy way. Where does it come from? Yeah, volume effects, particular for parts and our exchange business. So that's great. We'll see some details later. As mentioned at the beginning of the presentation, we are continuing here our expansion of our, you know, service structure. We opened now the ninth DEUTZ service center in Ohio, Michigan. You see here on the map how we continuously rolling out here our footprint in the United States.
There are more acquisition targets in the pipeline. We are very confident that in the next months and quarters, we will announce, we'll be able to announce here further rollout. Very important, one part of our strategic ambition objective is that we want to grow sales business top line to EUR 600 million annual revenue by 2025, and we are here with our measures and activities well on track. With that, with that said, on the operational strategic highlights, I would for the moment hand over to Timo, who will translate that a bit more into numbers, which is obviously very important in this call.
Yes. Thank you, Sebastian. Let me also welcome you to our Q1 call. I'm very happy to show you a little more of the numbers of the Q1 . We indeed started out very strongly into the new fiscal year. The Q1 with the sales of higher than EUR 500 million was the strongest Q1 DEUTZ had in the last 15 years. That's something I think we can be fairly happy about. We saw increases in new orders, unit sales and revenue. This does give us a strong base for the rest of the year. Therefore we can now say that we are expecting to end up at the higher end of our guidance of EUR 2.1 billion in sales.
If we look into the different parts in a little more details, the book-to-bill ratio was with 1.02, a little higher than 1. That means we're still growing. Looking at new orders, +3.2% compared to the Q1 of 2022. Doesn't look too much, we have to remember that the Q1 of 2022 was indeed a very strong quarter. Unit sales up, therefore 10.6%, revenue up 15.5%, means yes, we do have some benefits from a mix effect, but also from the very strong pricing effects we're seeing. If we look into the different regions and also applications, we can, first of all, say that we did grow in every region and in every segment.
That's a very strong statement from my point of view. A little more specific, if we look into Americas, that had the highest growth rate with roughly 35% growth, and there especially our material handling business, which is strongly supported by all the investments that go into infrastructure right now in the US, it grew the most. The other regions, if we look into how we grew in Europe, including Germany in 2022, we had a growth rate of roughly 16%. Now we're closer to 10, if you combine those two. Therefore, still a strong growth, not quite as much though, as in the last year. The Asia region did grow the least, 6.2%.
We're only seeing slight growth in the, especially in China, after all the lockdowns are now over. We're expecting a little more growth for the rest or for the second part of this fiscal year. On the different segments, as I said, growth in all areas, Sebastian already talked about a little bit, but it's for us very important that also the service segment grew again by 10.5%. We did grow 10% last year, that did go well. If you now take the Q1 with EUR 121 million, then we should be in line with what we are planning and well above EUR 450 million we did have in last year in sales.
EBIT, of course, also a very nice Q1 , especially compared to the weak quarter we had in Q1 in 2022. If you look at the absolute numbers, we pretty much doubled it. EUR 15.8 million we made in Q1 in 2022. Now we're at EUR 32 million with a margin of 6.2%. There are different reasons for it. Part of it is, first of all, scale effects. As I said, sales were very strong, so that, of course helped, but also positive mix and positive price effects. We do have to say there are also some one-time effects in it, not too much though, but a little bit.
For the rest of the year, we're gonna see a little headwind potentially from the wage increases we are expecting over the year, which especially in Germany, are going to hit us by mid of this year. On the other hand, we're also hopefully gonna see some scale effects. Net income before exceptional items is also up very nicely. We can say there were no exceptional items in the Q1 , so just normal business. Earnings per share, which of course is in line with EBIT, is now at EUR 0.20 compared to EUR 0.10 last year. Looking in a little more into the details, on the R&D side, we are very well in line what we are planning. Also very much in line with last year.
If you look at the absolute numbers, last year we spent EUR 23.7 million, now EUR 24.1 million in R&D, investing heavily still in our future, and are well on track. A little special thing is if we look at capital expenditure here. On the capital expenditure side, we are not looking just into cash out for investment, but into the addition to fixed assets. Here we especially have the Daimler Truck increase in the intangible assets that hit us or has a big effect on this number.
We look at the normal effects of normal investment, I'd say we are slightly above the last year, also in line of what we've planned. Working capital is also, we were at 17.7% in the last quarter of last year. We're at 17.8%, no big effects in this area. Cash flow situation is from my perspective, very simple right now. We did increase significant in EBIT and EBITDA. Also, we have the operating cash flow and the free cash flow effects. Free cash flow positive now again with EUR 10.8 million, also fits well to our guidance, which is in the mid two-digit area for this year. No big effects or issues here.
A little deep dive into our two segments. We have the Classic segment and the Green segment. Let me start out with the Green segment. First thing we should look at here is the EBIT margin, 0.8%. This is where we think, in this area we wanna be with our business in the Classic segment. A very big jump again from the 5.8% in last year. That is super. If we look into the Green segment, we do see on the new orders, a little bit of a decline. This is especially due to our boat engines from Torqeedo. That's a lot, yeah, we did have some special effects in the last year, because of still COVID crisis.
A lot of the leisure departments or people for their hobbies, they buy engines. We see a little bit of a decline there in new orders, but unit sales are still up. Our most of what we're spending on R&D in our Green segment goes directly into the EBIT. What you see here is 100% investment into the future of our business. That's all from my side for now. I'm looking forward to your questions. Now I will hand over back to Sebastian.
Yeah. Thank you very much, Timo, for that update on the numbers. Let me continue with a bit of an outlook for 23, the guideline or the guidance, sorry. We said already at the beginning and we announced last week, we'll see now the year certainly at the upper end of the range we had earlier this year announced and very clearly so. You know, demand is still strong, particularly in the U.S., particular also on the smaller engines at the moment. That's unchanged to what we have explained over the last months. That is one of the reasons why we went here on the upper end.
We made the adjustment to capacity in the second half, obviously that brings us more in line, more aid in the ability to actually meet the customer demand and that then translates to the 195K engines. Accordingly translating in revenue of EUR 2.1 billion, according to our current estimations, and also bringing the EBIT margin on the upper end of the range as previously announced. Having in mind we started Q1 with 6.2%, but having also in mind there are still some uncertainties in the second half of the year. Which brings us to that sort of cautiously optimistic view of cash flow. I heard a lot from Timo already on the Q1 performance, and we expect for the full year mid-double-digit million EUR amount.
Yeah, strong start in 2023. We expect the results to be at the upper end of the previously forecasted full year range and are looking quite optimistically into the remaining nine months of that year. Moving on on the medium-term targets, which will derive off based on our new Dual+ strategy . Revenue 2025, we'll plan to. We plan revenue in 2025 to exceed EUR 2.5 billion, with the growth coming also from the Service business. 600 is our new target coming from the 450 last year. Keep in mind, that's very profitable business, so that's great. Everything else will come mainly also from scale effects and obviously a little bit continuation of our price policy.
Translating into a range for the adjusted EBIT margin for the group, you know, including or considering continuous ramp up of investing in Green, which from a pure margin point of view is dilutive. For the group, we expect here the range for the margin between six and seven percentage points for 2025. Last point, like, obviously we want to keep in touch, close touch with you, in various physical, maybe physical, but also partially virtual meetings. We're gonna be present at Roadshows in Frankfurt and Munich and throughout May. We're gonna be at the conferences in Frankfurt and Hamburg throughout June. In August, we will then, as usual, announce the H1 figures. Planning another virtual roadshow in August.
A bit of a highlight, in September, we're going to host the Capital Markets Day here at the facility in Cologne, where we're gonna obviously talk in detail about all our aspects of our new group strategy, but we also want to combine it with, you know, being able for those who participate, to feel, you know, the products, see the products we have within, in Green and in Classic. That's a bit of an outlook. With that in mind, would like to also thank you for your attention to the presentation. As usual, we're ready to take any questions. Back to Christian.
Yes. Thank you very much, Sebastian. Thank you, Timo. Operator, please open the line for questions.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making a selection. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. First question comes from Jorge González from Hauck Aufhäuser Investment Banking. Please go ahead.
Hello, good morning, Sebastian, Timo. Thank you very much for taking my questions. The first one, I'm sorry if you have commented about this because I connected to the telephone line at the beginning and the sound is much worse than the webcast. I don't know why. Firstly, regarding the Service business, I was wondering if you can give us a roughly percentage of its contribution to the increase of the adjusted EBIT in the quarter. I mean, it is impressive the EBIT margin you achieved in the Q1 .
I was trying to understand how this is going to look like for the rest of the year, if this is like an exceptional quarter and we should not take into account this contribution for the rest of the year, or if there is any trend that is supporting an increase of Service business in general for the year. Apart from that, I'm also curious about the development of SANY joint venture. Looking to the equity accounted income, it should be at similar levels, but I will appreciate if you can give us an update and also if you can also enjoy some tailwinds from the business in China for the rest of the year. What is your view here?
Thank you very much.
Thank you. You were very difficult to understand, but I believe we covered most or we understood most of your question. Please feel free if we didn't answer the question then to repeat back. Service you, what we got is you wanted to understand the percentage to EBIT in the Q1 . You know, Jorge, we are fairly reluctant to disclose service margins. I can just assure you that the service margin quality has remained on a constant high level like in the past years. We grew the top line and margin quality has been constant. That's one of the important preconditions also for our service growth, that we don't want it to be diluted.
We do expect, I mean, we closed last year with service revenue of EUR 450. I said in the midterm, we wanna grow to EUR 600 in 2025. We do expect a rather constant growth over those three years without disclosing any number yet. We do expect the growth compared to 2022 to remain constant. Whether it's gonna be really 10% throughout the year, time will tell, but it's gonna be a substantial increase. That's what I understood was the question on service. The second question you, we understood was on the development of the SANY joint venture in terms of engine production and sales and probably contribution to net income. That question, I believe, Timo will take. Right?
Yes, I'll do that. I will do that. If we look at the situation in China, as I said before, we're only seeing a slight pickup. We did have negative numbers in China last year. We indicated that. The Q1 did look a little better. We are just slightly negative in Q1. If we do look into the situation, we do expect a better outlook, though, for the second half of the year, hopefully. Everything we hear from the construction business, especially the market, is going to hopefully pick up and then we should also see that in the results.
As you know, the numbers, neither the top line nor the EBIT, is fully consolidated. When we're talking here about bottom line contribution, that's the at-equity income, which as Timo said, is slightly below the bottom line. I hope we got the questions right because again, you were not easy to be understood. Was that all right?
Yes, Sebastian, thank you. Yeah, the line is not, is not really clear, but I think I got, yeah, I got the answers I was looking for. Thank you very much again.
The next question comes from Stefan Augustin from Warburg Research. Please go ahead.
Yes, hello, and I hope you can hear me. I will ask my question quite slowly because the phone line seems to be quite bad. I probably listen to your answer over the Internet, but there is a couple of second time delay, so if I respond a little bit later, please bear with me. The question I have is on the net positive price increase I sense in the Deutz Classic business. I fully understand that you expect that wages increase by the second half and that diminish and that net price increase year-over-year we have. Is there any thing else we should take into account for diminishing of that net positive price effect going forward in this year?
Yes, thank you for that question. Yes, indeed we did have some effects also in the Q1 that might only have an effect on the Q1 . The first one is that we did have some inventory that was still on a lower price level. We also saw, of course, price increases on the component side. Therefore, we are going to have a little higher cost in the second part of the year if we look at our components. That should hopefully then be partially offset by some of the things we do on the sales side. Price increases are of course still in the negotiation, and we'll see where we'll end up there.
To add one thing, we are, as said, preparing here the ramp up of capacity for the third shift in our automated assembly line five here in Cologne. Once the ramp up is complete, that will help us significantly to utilize higher scale. Obviously, when you ramp up a production line from 2 shifts to 3 shifts, it's not completely smooth process. The first 2-6 weeks will not be super efficient and cost effective. That's just something we need to keep in mind as a slight risk, let's put it that way.
I think you hear between the lines that we are fairly optimistic, but obviously, you know, there are still some uncertainties around there, and we'll hope to manage these uncertainties in the best way like we managed to do that recently.
Just a second. I'm still listening to your answer.
Okay.
Yes, thank you very much.
Okay, great. Operator, what do we have something else?
Yes. There are no more further questions at this time, and I hand back to Christian Ludwig for closing comments.
Thank you very much, Operator. Thank everybody for listening in. Thank you for your questions. If you should have any additional questions, the IR department is at your service, so please give us a call. If not, we'll see you either at one of our roadshows or conference or at the latest at our Q2 call on the 10th of August. Have a great day and goodbye from Cologne.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day.