DEUTZ Aktiengesellschaft (DEZ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operator. Welcome, and thank you for joining DEUTZ Full Year 2020 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Christian Ludwig, Head of Investor Relations and Corporate Communications. Please go ahead.

Thank you very much, and good morning to everybody, and welcome to our conference call on the full year 2020 results. My name is Christian Ludwig, Head of Investor Relations and Corporate Communications at Deutz. With me today is our CEO, Dr. Frank Hiller; and our new CFO, Dr. Sebastian Schulte, as well as our Head of Controlling, Tesean Cope. Mr. Hiller will give an overview of the key highlights and financials before handing over to our CFO, Dr. Schulte, who will cover the results in more detail. As always, both will be happy to answer any questions you may have in our Q&A session at the end of the call. Also, let me remind you that this call will be recorded. A replay will be available on our Investor Relations website after this call. Before I hand over, please also pay attention to our usual disclaimer that you will find in the presentation. Without much further ado, it's now a pleasure to hand over to our CEO, Mr. Hiller. Please go ahead.

Yes, ladies and gentlemen, warm welcome to our annual results press conference together with our new CFO, Dr. Sebastian Schulte. So I would like to start with strategy, especially our drivetrain strategy and give you a little bit an overview on that. So our challenge, a market environment with many moving parts. There is the demand for emission reduction, noise cancellation, optimization of drive solutions and sustainability, especially on the full scope, well-to-wheel solutions. The answers are hybridization, downsizing, hydrogen, electrification, you know all these words. There's almost no day, which goes by without new statements and even obligations from the automotive and car industry. On our side, the need for change into environmental-friendly solutions is more or less the same. So here, we have a clear need, and we have to come up with sustainable solutions. The main difference between us and the car industry is that our products meets a highly diversified customer base. You see here some examples tractor for field work where you have a very high load in the application, dynamic solutions or, for example, push-backs for planes where you need a high -- a very high torque. So off-road applications and industry drivetrains have to be, on the one side, robust; and on the other side, versatile in use. That's the main topic. For this reason, we need technology openness, and this is a crucial point for us. We pursue 2 parallel paths of -- to meet the environmental requirements. First, the further development of the internal combustion engine and on the other side, the electrification with our E-DEUTZ strategy. You see it here in the picture, on top in red, the further development of the combustion engine with sustainable fuels. For example, our engines today are already ready for biodiesel. So some of the applications are developed for multifuel use. Hydrogen will be a topic which we start with the first development engine this year. And in a long-term, perspective, there are synthetic fuels. On the other side, we have our E-DEUTZ path. This covers hybrid solutions, mild hybrid, full hybrid, and full electric solutions. Also, these solutions can be combined with fuel cell applications in our E-DEUTZ strategy. So our intention is to be really on the leading edge with sustainable solutions. On the one side, combustion engines with sustainable fuels, and on the E-DEUTZ side with green electricity. Deutz was the first engine factory in the world, and our ambition is also to be the first address again when it comes to CO2-neutral drives in the off-road area. Why are we still holding on to the combustion engine? There are mainly 2 reasons: because we still have several applications where no other technical solution currently works. The other reason is because the combustion engine in the off-road segment certainly still has the longest lifetime compared to passenger cars and commercial vehicles. And piston engines have come a long way, and a lot has happened within the last 20 years. You see here the different emission stages. And within the last 20 years, NOx and particulate emissions were reduced by 97% within 20 years. The conclusion is it has paid off in the past to further develop the combustion engine, and will also worthwhile in the future. The internal combustion engine has a long lifespan with us, but the framework conditions will change. Standardization and modular principle, on the one hand, and on the other hand, corporations will become more important to save money on the development side. So you see here 2 examples. On the left side, our new TCD 5.2 liter engine. It's a 4-cylinder engine coming out of the existing 7.8 liter 6-cylinder engines, so we cut off 2 cylinders. That makes it quite easy on the development side, and we have already shipped the first applications, test applications to our customers in this year and serial production is expected for next year. Another big topic for us is the co-development together with Chandia, the cooperation with Chandia. Here, we are developing a new engine SOP-4 liter. Contract was signed last year, and serial production will be in 2025. Development lead is by DEUTZ. And by this cooperation, we are coming up with a significant volume, combined volume of 100,000 engines per year. So however, further development also means to use alternative fuels in order to further reduce pollutants and consistently move towards CO2 neutrality. Here are 2 examples. On the left side, the already existing technology, gas technology, where we are right now developing a 2.9 liter engine, 2.2 liter engine is already existing, and we'll follow in the future a gas engine also for 3.6 liter. So this engine SOP-4 liter are all feasible to power it in combination with a hybrid solution. And they are based on the existing diesel -- on the existing diesel engines also here. The standardization is the main topic. On the right side, you see a real highlight, which will come into place this year as a first research engine. This will be the TCG 7.8 hydrogen engine. So it's based on the existing 7.8 diesel engine. We have to change the emission system and also the H2 supply system. And we'll build up the first engine this year. This will be done in cooperation with the local energy supplier who takes care about H2 infrastructure. So there is a consistent further development in the direction of synthetic fuels. With our E-DEUTZ strategy, we are prepared for electrification. On the left side, a hybrid solution based on high voltage, 3.60 (sic) [ 360 ] volt. So this is a 2.2 combustion engine combined with an electric power unit with 40 or 60-kilowatt at 360 volt. And this will be available as full, mild and combined hybrid configuration. So this is a clear intention to do a downsizing of combustion engines. On the other side, you see our full electric approach, the full electric drive train 360 volt, consists out of a battery pack, which will be done by DEUTZ internally, onboard chargers, which will be done also internally by our latest acquisition, Futavis, and the first prototypes will be available by the end of the year. So there is now a wide portfolio in place for electrified solutions. On the last page to drivetrain technology. This gives you an overview where we see the different applications. As I mentioned already, technology openness is important for us. On the right side top, you see the main applications, which will run by combustion engines here. Where we have a high energy demand and quite a big distance to the energy supply, it makes sense to go on with combustion engine based on alternative fuels. For example, tractor in fieldwork is here a good example. On the other side, left side bottom, you see the main focus for electric powertrains. For example, working lifts or forklifts. So these applications are today mainly also focused on -- already focused on electrified solutions. This will also go on with higher power applications. And here, this gives also DEUTZ the opportunity to move into new fields of activities, which were not in scope in the past. In the middle, this is where you need a lot of dynamic. These are the best solution for that, are hybrid solutions, where we can downsize the combustion engine and use the electric engine as a push principle. So that's more or less so far on the technology side. And as mentioned, technology openness that's important for us. Now I'm coming to the overview and highlights of 2020 and for the fiscal year, there was not only corona. And in the overview, you see, first of all, of course, we had a sharp decline in sales and EBIT because of the special situation in 2020. But looking into the last quarter, quarter 4 in 2020, there was already a quite good improvement on the order intake. So the market is coming back. We used the time in 2020 to work heavily on our cost structure. So the program Transform for Growth is full in plan. So restructuring costs totally were EUR 31.9 million, and this was already allocated to the year 2020. By a sound balance sheet, it was feasible to focus also in a critical year 2020 on our strategic measures. So no compromises on that. So there was a clear focus to drive the programs without any restrictions in the field of alternative drive systems. Also, our China strategy is performing well, and the service strategy runs also according to plan. Also, there was a focus in 2020 on the expansion of sustainability efforts and anchoring this topic in the company, and we see an improved outlook for 2021. So it means we are looking positively into the future. Coming back to our program, Transform for Growth. As mentioned, we have used 2020 to bring our costs into shape. So we started with a substantial reduction in jobs in 2020. So workforce was in 2020 reduced by 400, nearly 480 people by temporary workers fixed-term contracts, which come to an end in natural attrition. So also in this program, voluntary redundancy program was included. So this is focusing on 350 people. And the program runs until the end of the month, until the end of March. So far, 200 -- 302 people have already signed contracts and as mentioned, restructuring costs of nearly EUR 32 million recognized as exceptional items in 2020. And there was also a supplementary collective pay agreement with the unions, which we agreed, this leads to significant cost reduction on the employee side. On the other side, the company gave a clear commitment to the German sites and invested EUR 41 million -- or will invest EUR 41 million within the next 3 years in the German sites, means Cologne, Ulm and Herschbach. So this gives us a long-term perspective on the competitiveness. Other focus is China. Why do we always focus on China and what's the background of China. Here, you see the picture of the market situation, especially in China. So our relevant highway market worldwide is around 4.6 million engines per year. We have to take out the captive engine manufacturers, and this means a serviceable addressable market for DEUTZ of 2.5 million engines per year. In a normal year, we are nearly on a level of 200,000 engines, means that we have a market share which is somewhere below 10%. And these 2.5 million engines, they are divided in the 3 region. Americas takes 15%, EMEA at 29%, and the majority and the main focus is in Asia, Asia Pacific, 56%. And out of this, 39% of 2.5 million is just allocated to China. Therefore, China is the most important market for us. And now also, the quality level and the level of emission regulations is on a same standard, worldwide standard. That means that our engines are fitting very well to the requirements in China. Therefore, the main focus is really on China. If you look at this, this is a demand, a yearly demand of nearly 1 million engines. So far, we are maybe delivering 30,000 to 40,000 engines to China with our own activities in the JV. And there's a lot of room for improvement and a lot of room for gaining further market share. The activities are running well. You see here on this side, our development on the left side, first of the JV, DEUTZ Hunan, the JV with SANY, biggest player in construction equipment in China. Last year, we already achieved 20,000 units. This will be doubled this year to 40,000 units. The plan is in place for 2022 with 80,000 units, and we are building up a factory with a capacity of 200,000 units. This factory is more or less double the volume of today existing DEUTZ Group. You see here a picture. Second picture from the left side, this gives you a little bit of a feeling about the dimensions. And we are convinced that we will reach capacity restrictions in this factory quite soon. On the other side, we have our own activities in DEUTZ Tianjin. These engines are mainly related to customers who are not in favor to receive engines out of SANY Corporation because they might be in competition with SANY. So our target through 2022 is on the level of EUR 800 million. This year we'll not see in the balance sheet because it's under the equity method. And -- but you will have -- we will have the contribution out of the result. And already last year, the joint venture was profitable. So that's the sales side. But China is also very important for us on the supply chain side. To be successful in China means that we have to localize all components for our Chinese activity in China, and this is running well, even by the restriction we had during the corona various times. So we have built up a strong team in China. And this means we are in time, especially with our most important engine, TCD 5.7, which will have the major volume in China. Localization in China is not only crucial for us, for our Chinese activity. It's also crucial for us, for the security of the whole supply chain of the DEUTZ Group. Also here, we'll have the situation that we bring components back to Europe and build it up here in our engines. In some cases, we have cost benefits, which reach a number of more or less 20% price reduction. As already mentioned, our E-DEUTZ strategy is performing well during the crisis time. There was still a lot of interest by our customers, but a lot of programs were postponed. But this doesn't lead to the fact that we stopped our programs because we are convinced after the crisis, this topic will really accelerate very much. And so we have -- we are working on 4 core drivetrains, on electric and hybrid electric based on high voltage, 360 volt and 48 base systems. So this programs will be ready for seal production in 2023. For the all-electric 360 volt based system, we are planning the first prototypes this year contracts -- sorry, the first system this year. Prototypes agreements were already signed in the last year. Another topic is to grow our profitable service business. Here, we are good on the way. You see the development within the last years. Our target for this year is already to achieve this EUR 400 million turnover on the service side. The decrease during the crisis was just 1%. This is a very good result. If you compare this with our competitors, in some cases, you see decreases of double-digit numbers. So we kept it more or less stable. And this was done by the additional measures we have defined, new distribution channels and existing network to improve the density of the network, digital services and also new analog service concepts and products. Also, to do repair work for non-DEUTZ engine is one of the core topics for sure. And this is maybe just with some words. We are doing a lot of improvement in our existing production process. One example is here new production lines of 4-liter in Cologne with the newest standards on industry 4.0 lean production, which gives us more quality, efficiency and capacity. Also, the integration of the cool testing is a unique new topic for us, which gives us a reduction in lead time. And also, reduction of fuel consumption in the testing phase of the engine, for sure, also requirements on employee safety were fulfilled and on a new standard in this new line. Expansion of sustainability efforts, important topic for us. Not only on the product side, also to anchor these activities in our company. So application to join the UN Global Compact was done in 2020. And this is a focus topic for us in the company, but also for our complete supply chain. So this will also affect our suppliers in the future. I'm coming now to the sales figures in the year 2020. You see here the decreases on new order unit sales and revenue, minus 20% on new orders. That was quite a frustrating situation seeing the market going down in 2020, also on the sales side and revenue, a tremendous dramatical drop down to a revenue of a little bit -- or less than EUR 1.3 billion. On the Torqeedo side, it was quite interesting that numbers picked up, so plus of 43%, mainly by some smaller trolling motors and orders. And orders on hand also improved a little bit at the year-end compared to the year 2019. What was positive in 2020, it was the last quarter, quarter 4. Here you see that the market is coming back. New orders increase of 25.5% to nearly EUR 390 million. Also increase on the sales side, 42.3 thousand engines. Here also nearly 6,000 engines included from -- or motors included from Torqeedo. And also on the revenue side, quite good improvement compared to quarter 3. We had a significant revenue growth in all regions and in all relevant application segments that was quite good. Coming back to the full year 2020 here on the region view, you see that Americas was tremendously down by minus 45%. This was related to the products we are selling in Americas, mainly logistic applications, which were by the end customers, normally rental companies, they act very strict in a crisis situation and stop ordering. So therefore, a sharp downfall. Also in the other regions, yes, minus 30%, plus/minus. Africa, Middle East, small niche market was more or less stable. Looking at the application segments, here, we see also the effect in the U.S., material handling. That's mainly U.S. business, minus 60%. All the other segments also down. And here, you can see again, service more or less stable. So growth strategy for the service business pays off. So now I'm handing over to Sebastian Schulte.

Thank you, Frank, very much. Good morning. Good day from my side as well to this call. I'm new to DEUTZ. I joined the company beginning of January and assumed the CFO position in the beginning of March. So welcome to you, and looking forward to work with you, guys. Let's start with looking back at the full year 2020 on the bottom line point of view. Obviously, the drop in revenue, which we just heard of significantly, led also to a negative operating result. We closed the year with an operating loss of EUR 75 million, after positive almost EUR 80 million in the previous year. As stated, mainly driven by the sharp fall in revenue due to the coronavirus and the consequent diseconomies of scale and production. We also were additionally impacted negatively by a few payments to be made under continuation agreements with key suppliers that affected the results with additional EUR 9 million negative. And on top of that, that happened in Q4, we had to record a few impairment losses on capitalized R&D projects as well as sales licenses around EUR 17 million. And these EUR 17 million, we did not record as exceptional items. So you'll see them here in the operating loss of the previous year. And the restructuring cost, which Frank mentioned earlier, of EUR 32 million for our restructuring program Transform for Growth, was recognized as an exceptional item. And combining the operating result with that restructuring cost mainly adds up to the net loss of some EUR 108 million for the group, leading to an earnings per share of minus EUR 0.89 in 2020. However, we heard also earlier that the pickup in demand in Q4, and we see that also in the result on a quarterly basis after the main impact to the bottom line, was recorded in Q2, followed by a little better in Q3 already, we closed Q4 with minus EUR 9 million. However, considering that the majority of that EUR 17 million, in fact, it was EUR 12 million impairment losses due to the R&D projects both recorded in Q4. If we take that out, we see that Q4, we were already slightly positive and operating EBIT. If we move on to the view on our segments. It's on the first page here. We see on the left side, we see the DEUTZ Compact Engines. It's pretty much the liquid cooled engine smaller 8 liters, as well as in principle, the numbers coming from our SANY -- joint venture with SANY, which is recorded at equity. But in 2020, these numbers are relatively small due to the position in the ramp-up. And on the right-hand side, we see the segment Customized Solutions, which are the larger engines larger than 8 liters. So our exchange engines business as well as some engines, which are to be discontinued shortly. The numbers are -- the picture is quite comparable in both of these segments, heavy decline in new orders, unit sales revenue, and consequently also in the bottom line. More impacted or more negative effects coming from the compact engines, pointing out here the revenue down by 35%, and the EBIT significantly down to minus EUR 80 million in total in the Deutz Compact Engines System segment. However, looking also at new orders and revenue, you see here also on the numbers, the positive impact coming in from Q4. We have a book-to-bill ratio of larger than 1 in both of these segments. So that's -- that we saw already in the Q4 numbers, and that also gives us some guidance how we are moving forward in the current quarter and the months to come in the current fiscal year. If we continue to our third segment called Other, which mainly is the Torqeedo business and the Futavis business. We see here a sharp rise in unit sales and revenue. That's mainly due to the ramp-up at Torqeedo. See from some 20,000 units up to almost 30,000 units, plus 42%. And that translates also into increase in profitability coming from minus EUR 22 million in previous year, up to minus EUR 13 in 2020. So this year-on-year improvement, mainly, as I said, due to the increase in business volume. But we also continue to work there on performance, optimizing cost structure within Torqeedo. So that paid off significantly in the last year, and we expect this to continue to improve. If we move on to R&D and CapEx. As Frank Hiller said earlier, despite the crisis, we continue to invest in both R&D and our facilities because we're convinced that we need to keep being prepared for the future. So in terms of R&D spending, we always show the numbers here after grants, which we deduct in these numbers. We were cautious, particularly in Q2 and Q3 and the peak of the crisis, to preserve cash and resources. So that leads to the reduction from EUR 96 million to EUR 81 million in R&D expenditure. But particular for the projects for the future, mentioning E-DEUTZ and activities like that, we continue to invest, again, a little more cautiously than initially planned. However, obviously, due to the sharp drop in revenue numbers, the ratios went up here, I would say, significantly from 5.2% to 6.3%. But in all, it's a balanced picture. On the CapEx side, on the right-hand side, we see we expanded '20 -- in 2019, some EUR 109 million, including EUR 10 million IFRS-16 effects of leases that we reduced in total, slightly to EUR 104 million. But if you see that obviously the IFRS-16 effect was much, much more much -- much greater in 2020 with EUR 32 million. So let's say, the CapEx without IFRS 16 was in the range of EUR 70 million after being in the range of almost EUR 100 million in previous year. If we move on to the cash flow side of things. Cash flow from operating activities reduced significantly on the one hand from EUR 115 million previous year to EUR 45 million, obviously driven by the reduction in volume and business. However, and we see that on the right-hand side, we did do a great lot of steering in the working capital side. We reduced working capital from EUR 290 million to EUR 235 million and pretty much around all aspects, payables, receivables, inventories. So we did reduce in absolute terms, and that helped us to keep the operating cash flow slightly protected and minimizing the drop in OCF if you compare it to what we saw from the EBITDA side. Working capital, as I said, decreased in absolute terms. In relative terms, that was not possible to keep the ratio also due to the fact I mentioned earlier that we had to -- we were dealing with some suppliers who were in difficult waters in terms of insolvency. So we had put a few key components in our stocks to maintain production on these critical items. So that was a slight counter effect. But overall, the right measures were taken in order to preserve cash as much as possible. If we look on free cash flow and net financial position, free cash flow remained almost on the same level if we compare 2020 with 2019. And that's obviously supported on the one hand side by a very strong Q4. So in Q4, isolatedly, our free cash flow was EUR 43 million positive. So that's a good sign also for the outlook. Then we managed to -- well, we managed to reduce working capital. I said earlier, we reduced capital expenditure. We had only minor M&A activities. We didn't -- in 2019, the numbers were affected by the investment we did into the joint venture in China. If you look at the net financial position, December 31, 2019, we closed with a net financial debt of EUR 15 million. That always includes leasing obligations under IFRS 16, and that number went up to a net financial debt of EUR 84 million, driven by the free cash flow, as I mentioned earlier, as well as the increase in lease liabilities, which in previous year was EUR 42 million and which had gone up now to EUR 58 million. Moving on to some balance sheet and financial numbers again. On the equity side, equity book equity reduced due to the net loss of the company from EUR 650 million to EUR 535 million. So it's a significant reduction. However, the ratio which was previously at 50%, now at 45%, I would still say is a solid and very healthy equity ratio, which DEUTZ has. On the funding side, on the financing side, we are equipped with credit lines totaling up to EUR 310 million, comprised of one line of EUR 150 million maturing in November this year. But we do have an extension option, and we currently have not drawn anything out of this line. And the other line is EUR 160 million, it's a loan maturing in June '24. And out of that line, we have currently -- or we had drawn at December 31, EUR 65 million. On lease liabilities, a stable picture with EUR 40 million up to 1 year, EUR 36 million, EUR 1 million to EUR 5 million and some EUR 8 million beyond 5 years deadlines. So I would say we have a very solid equity ratio set and also solid finance situation funding situation. Meaning, we are very much well prepared for the anticipated increase in business, which will lead to a certain increase of working capital, as you know. And with that funding position we currently have, we would also be prepared for unexpected developments, should they occur. We do not see anything in particular at the moment. One important aspect to point out is that in the current year, 2021, we do expect a positive and exceptional item, both in cash as well as in profitability perspective of EUR 60 million from the payment, the final payment of the sale of our previous production facility or the property in Cologne DEUTZ. We do expect this payment to come in, in the year of 2021. We'll keep updated on the developments on that. Yes. With that in mind, I close my short view on the financials and hand over back to Frank Hiller.

Yes, outlook 2021 on key customer end markets. So these figures are coming from the market survey institute. And they look positive in all regions and for all applications, only exception is China agricultural machinery. But this is not really relevant for us because all what we are doing in China are more or less, nearly all what we are doing is related to material handling and construction equipment. So there's a positive outlook in Europe, up to 5%; North America and China, up to 10%. And maybe we will see even stronger growth on the DEUTZ side because our customers are upstocking. So our customers, in general, today are very low with their still stock level, and there are no prebuy engines anymore. So this could be even a little bit more positive for us than shown here in the picture. Group guidance for 2021. And you have the actual figures 2020 on the left side. For the unit sales, we see at least 130,000 engines. That's also our breakeven level. So by the program, Transform for Growth, we brought a breakeven level from more or less above 150,000 in last year, down to 130,000. Maybe right now, looking into the end market, this could be a little bit conservative. But on the other side, there are some really big challenges in the supply chain not related to off-road business and not related especially to DEUTZ. But that's a general situation what we have right now in the industry, especially microcontrollers, ECUs are short. This is a topic, which I would say, restricts further growth, especially in the first months of this year. We see a revenue at least by EUR 1.4 billion EBIT margin, at least back to breakeven free cash flow, negative low- to mid double-digit million euro amount, taking here into account the second payment for the Cologne DEUTZ side as Sebastian Schulte mentioned. On the midterm targets, '23 and 2024. So we are on the way to our EUR 2 billion and 7% to 8% EBIT margin. That's a clear target here in the company, and we will achieve that. Now -- what we have to do now within the next month is to push forward our technology approach according to plan and implementation of the regional growth activities and initiatives, especially in China, and the systematic implementation of our transform for growth program. Already in the year 2020, we achieved the first saving of EUR 12 million and the target this year, EUR 100 million 2022 onwards. This will be realized by the reduction of staff and additional measures. So I think we are on a good way. And the positive thing of 2020 was that we had a good opportunity to bring our cost structure in shape, which will help us for the achievement of our midterm targets. Maybe so far, the presentation from our side, and we are open now for your questions.

Yes. Thank you, gentlemen. Operator, please open the line for the questions.

[Operator Instructions] The first question comes from the line of Charlotte Friedrichs with Berenberg.

I have 3 questions in total. The first one would be, if you can give us any sort of idea around the impact that the chip shortage is having right now on your operations, for instance, at the moment, do you see revenues being above the prior year or perhaps a little bit below? The second question would be more broadly on raw material prices. Are you seeing a negative impact here from raw material price increases? And then thirdly, I think you mentioned it already a little bit during the presentation, the order momentum in Q1 so far. Did I understand correctly that your book-to-bill is at about 1x right now?

Okay. Maybe I will start on the shortage of shipment. Yes. So there are a lot of topics now. As I mentioned, it's on the micro controllers, but also, there are a lot of hiccups in the whole supply and logistic chain. That means that, for example, transportation times from here to China via ship is more or less 25%, it takes more or less 25% time longer. And for sure, prices are increasing. So I think we have that quite good under control. On the price side, also our localization activities in China helps us already. So in some cases, we have this benefit of more or less 20% costs or price reductions on the component side. I think that's under control. But it's right now mainly a topic by shortage of chips and micro controllers, yes. Current trading, it's difficult to say. I think if you are right now looking on the order intake and our sales volume, I think it's far above 1x, but -- 1.3x around? Yes. But it's quite a difficult situation because all the needs could not be fulfilled on the customer side. But that's not only DEUTZ topic. I think it's a whole industry topic. So we have to be a little bit cautious with this book-to-bill ratio of 1.3x because now quite a lot of customers are putting additionally orders inside to have the opportunity to get more out of the system. So right now, to be honest, market is not the problem. It's really fulfilling all the demands, especially out of the limitations on the supply side.

Yes. On the raw material prices on your question, we did foresee -- we did see in the last month of the previous year an increase in some raw materials, particularly, coming from shortages of supply as well as increasing demand out of China. We do, at the moment, see some, let's say, volatility, but not a major impact in our cost structures, at least nothing which makes us somehow revise our internal calculations. However, it is obviously a subject which we continuously observe very carefully, but nothing significant at this point in time.

Okay. Understood. And just a quick follow-up with regards to the shortage, what's your best guess as to when the situation will ease again? Is it end of Q2 going into Q3?

It's difficult to say. So really, main topic is easy use. And this -- a lot of demand was shifted to home entertainment and so on. And then the lead times on this component is more or less 3 months. I think there will be, for sure, also effect in Q2. I think without having any implications from the supply chain, I would say, where we would have been able to more or less produce or deliver more or less nearly 10,000 units more in the first quarter.

The next question comes from the line of Frederik Bitter, Hauck & Aufhäuser.

A couple of questions, please. The first one I'd like to start with is just to get a better understanding of what I consider quite cautious guidance, particularly on sales for 2021. I mean if I do the math, we're just looking at something of EUR 100 million or so in incremental sales '21 compared to '20. And then you say you want to achieve EUR 400 million in aftermarket, which is, let's say, half of this number, so EUR 50 million also. So that means that on the OE, just on the new business side, it's only EUR 50 million, which looks very, very low. But just I would like to understand a bit more the reasons for you to choose this guidance. And obviously, you have a certain visibility for the first half of the year but not for the second half. And then we have the component shortage. Just to maybe get a feeling for what you're thinking is in terms of the shortage of components you basically mean, just a bit more understanding would be real helpful for us, I think.

Okay. Maybe I'll start with this question on the guidance. You think it's too cautious. To be honest, yes, looking on the or the order intake without the restrictions are of the supply chain, I think, yes, I can agree, but what is now going on in the supply chain is not really feasible to charge on, especially how long the situation will run into the whole year or second or third quarter. Yes. On the service side, so this is more or less a stable business. It's not really affected. Here also, the topic of shortage is not that critical. So here, we are, I would say, yes, we are a little bit more on the aggressive side with this EUR 400 million, but I think we are on a good way and also the first 2 months shows good development into service business.

But I mean, as you said correctly, with the revenue of slightly short of 1.3 last year. And now with that guidance, it is correct that we do not currently, in this guidance, expect a major shift from the new engines due to exactly the reasons Frank just said. It means also if we are able to see a little bit more visibility in the future if and when the shortages on the supply side of the components are -- will relax, then obviously, we have to reconsider that.

Yes, absolutely. Understood. And second question I had is I can't really help thinking that you adjusted your savings target, and please tell me that I'm wrong or if I'm wrong, because previously, you were talking about EUR 100 million in cost savings, and now we're talking about EUR 100 million in gross cost savings. Now could you explain the gross to me? Well, from my experience, looking at industrial companies for more than 10 years now, it's always been that you sort of obviously expect certain savings, in this case, EUR 100 million. And then you take out the EUR 30 million or so you spend now, so we end up with EUR 70 million in cost savings, net savings. So I'm just really trying to understand is that -- is my thinking correct? And is that basically and implicitly you expect now a EUR 70 million savings instead of the EUR 100 million previously? Or do I misunderstand maybe the gross here? And could you define it for me, please?

Well, the gross is not a secret means to adjust our savings target. It's more a clarification. What we consider is the gross is also on the cost basis of 2019, we want to reduce, and we're convinced that we will be able to reduce the cost structure by the EUR 100 million. What we try to clarify with the gross is that there are some counter positions like the normal, the regular increase in personnel costs as well as some material costs which we would like to -- that we would might like to make clear that this is sort of the effect which made us using the word of gross here. In fact, from your question, I would like to point out on another aspect, I mean, which I think is also a positive impact. We -- as we said earlier, we expensed EUR 32 million in the restructuring expenses. And in fact, at a previous assessment of that expenses we assumed this to be even a bit more. It was EUR 37 million. So we reduced this restructuring expenses so which means actually, we confirm our savings targets, but we were able to reduce the sort of investments to achieve those.

Yes, 100% understood. And obviously, that elevates my spice like concern perhaps here as well. It's just a matter of definition, and I totally understand that, obviously, you're accounting for labor and also material cost inflation here in this case. Perfect. The next one I had also on the savings. Could you just maybe talk a bit about what kind of savings you expect in '21 and also in '22? And obviously, I understand that from 2022 onwards, you expect this EUR 100 million. But just in terms of the progression of cost savings this year and next would be helpful, please.

On EUR 30 million to EUR 40 million in 2021, a lot of the savings also in '23 onwards, is EUR 100 million. 70% to 80% of these savings will come out of reduced personnel costs. By reducing headcount on the other side by this agreement, we have achieved with the unions who -- which reduced costs more or less over the whole existing workforce. So this year -- last year, it was EUR 12 million. And now this year, it will be on a level of EUR 30 million to EUR 40 million. And next year, we'll move, I would say, on the EUR 60 million, EUR 70 million, and then the full effect will come in 2023 with EUR 100 million.

Maybe to complement on that. The EUR 12 million we achieved in previous years, this was not yet driven too much by the personnel effects, that will come now because on a full year basis, now we'll see the first people really having left the company. So looking back on 2020, we did see the effects coming from, for example, just to name a few items. We consolidated our logistics infrastructure with some cancellation of warehouse leases. We increased the productivity for example, by optimizing our value chain in our Spanish operations. We discontinued a few old engines series earlier than initially planned. And obviously, making use of that momentum coming out of that crisis in Q2 and Q3, Q3, we went quite structurally through the cost base and deduct -- or reduce costs wherever possible. So that explains the EUR 12 million, and we'll continue with a very regular tracking year on the current year and the years to come to get to this EUR 100 million.

Yes, that's excellent. Well, understood. And then I suppose the answer is no because you reduced basically your restructuring provision now in Q4. But do you think there might be any additional restructuring cost in '21 and '22? Or is that integrated, just to be clear?

We carefully reviewed the provision now with -- in Q4. And as you correctly said, we reduced. And as we also said earlier, this voluntary leave program targets 350 employees who are currently on this level of 3, just north of 300 the program runs for another few weeks, although we believe that will fit perfectly well to the provision we had taken. So I would not expect, let's say, a major thing. And in the end, if we do the final calculation, it might be plus/minus EUR 1 million or EUR 2 million, but that's almost cosmetics. So we do not expect an increase in this exceptional items for restructuring.

Yes. Excellent. And then my last one was on China. Apologies for the many questions, but there are so many exciting things to talk about in this case. So on China, I really saw quite excitedly that basically, you see a higher -- basically a higher volume in terms of engines from the SANY joint venture side, so now you indicated something around 200,000 engines, which has been the sourcing volumes from SANY in the past, if I remember correctly. What would it entail in terms of the sales volume overall you would generate in China? Because the EUR 800 million you're targeting now by 2022, it's only taking into account part of that 200,000 engines you could potentially produce for SANY in-house. So are we talking about EUR 1 billion plus on the JV front?

Yes. We still stick to that figures 2022, this EUR 800 million. For sure, the story will go on. And we have a lot of new projects, which we are starting together with SANY, as you mentioned, the whole demand today is 200,000 engines. It's not feasible for the JV to deliver all these engines because there are also some engines we have not in scope. But this is the situation right now. And now, SANY, additionally to the activities in construction equipment, they are starting very successfully their truck business. And we will also produce in the future truck engines for SANY. And here, they see a tremendous growth, so it may be within some years, the demand will not be just 200,000 inside SANY. It will be more or less 300,000, 400,000. So they are planning very, very aggressively on the truck side. And yes, there is a real commitment by SANY because, as mentioned before, SANY has applied personally by the government for the subsidies. And the Chairman himself he gave the commitment on volume. So you can assume that more or less every feasible engine which is needed by SANY, and that's just the SANY story is -- if it's possible, is allocated to this joint venture. So I'm absolutely convinced that this story will go on and it will not take a very long time that the volume we are doing in the JV will be higher than the volume we are doing today in the whole group.

And Frederik, if you look at that graph that you're referring to, if you look at it in detail, we haven't given a clear year when we will achieve the 200,000, right? It is our intention, but we'll not give you a date right now.

Yes, I noted that there's an X for whatever year it might be in the '20s. And of course, thanks for that. And then the last one...

To give you a little bit background, the Chairman of SANY here reserved also a space for the extension of the plant. So he is convinced that this volume of 200,000, the capacity of 200,000 will not be big enough. So we are a little bit here more on the conservative side, but the prospectives are very good.

Yes, I can see the outlook. The last one, please, is on China, and that's really it from my side now. The 7% to 8% margin target. You didn't talk about for a little while. Obviously, I know that's the target for the group. But is there any -- could you give us an update on this target, how you -- how you see the business progressing in terms of the China business and the margin target there. Is there potentially any -- an upside to that? Or just some ideas around that would be helpful.

In general, there's no doubt that with the -- our strategy and how we run the company, that 7% to 8% EBIT margin is absolutely feasible. We postponed it by 1 to 2 years because of the corona crisis. Now we will have an additional, I would say, positive effect by the cost reduction program on the other side, there will be some other topics coming up, which were not in the past in our planning to 7% to 8% maybe on the supply chain. So this will more or less equalize benefits out of cost savings and maybe higher supply chain costs. But we are absolutely convinced that this 7% to 8% within the announced postponement of 1 to 2 years will be feasible.

[Operator Instructions] The next question comes from the line of Richard Schramm with HSBC.

Yes. Gentlemen, just to follow-up on this question on the midterm margin target. Isn't it so that your equity result is included in the EBIT calculation you make?

Yes, that's correct. The equity result coming from the SANY joint venture, we consider as part of the EBIT because we consider this at equity result of this operation as a core operation. So that's why we have this at equity result, representing our shareholding in that joint venture in the mechanism, as you know, in our EBIT results. That's correct.

So obviously, the margin improvement to the 7% to 8% should be just because of a growing share in your profit of this joint venture, while the top line is left out. So obviously, that's the main effect here, is that correct to assume this?

It's not the main effect. It is one effect, but it is not the main effect. We do also increase the profitability of our operations and business, which we fully consolidate as part of the -- yes, let's say, the ongoing operations. But as you rightly said, it has an effect. That's correct.

After achieving this 7% to 8%, we are open for new challenges. But now I think we have a lot of opportunities, which were not in the beginning when we announced that midterm target taken into account, there was not the JV with SANY. There was not a Transform for Growth cost reduction program and things like that. We want to safely deliver the 7% to 8%, and then we are open to talk about new challenges.

Yes, fine. Then just a clarification on your free cash flow statement, you signal that it will remain negative for the current year, quite obviously, as working capital is growing again, and this will eat up the effect of this one-off inflow you get from this real estate deal you made. Is that correct that this EUR 60 million is included in this free cash flow calculation you gave?

Yes, that is correct. The free cash flow going forward in this year will see positive effects from the increased revenues slightly increased, as we said earlier, when we talked about the guidance. So the effect in '21 will be there, but not that massive, obviously. And then we'll see the net working capital increase negatively affecting. We see the cash-in from the property sale positively affecting, but we also must not forget that we do have some cash outflows from the restructuring, where we booked the provision in the previous year. And a certain aspect of that will become payable due to the -- towards the employees who decided to accept in the course of this year. So -- but yes, your statement is correct.

Yes. And just on this point, I wanted to follow up. You just mentioned this cash out for restructuring, will this happen mainly in the current year? Or will it stretch also into 2022 to some extent? .

It's a mixed picture. It's a mixed picture. The redundancy program, which towards those 350 employees, we're using a combination of different mechanisms for those leaving the company and those who accepted a straight redundancy option are [indiscernible] drag for these people. That will become payable this year. We do have also a fair share of people under part-time [ foreign language ]. Yes, so I'll just translate in German. And for them, that will not become payable this year. So it's a mixed picture. Some of them will be -- will go into 2022 as well.

Okay. And then my last question concerning the development in America or especially, I think it's the U.S. market, more or less. Here, you underlined again that you depend a lot on this business with rental companies for this AR platforms, which gives you a very high cyclicality in this market. Isn't there a chance to make this a bit more balanced from the customer structure here because I think this problem, we have not seen already for quite a while. And I wonder why not more aggressively addressed by your strategic positioning in this market.

Yes, Mr. Schramm, That's right. So very much in the U.S. is related to SOP-4 liter and to their logistic applications, aerial work platforms. We are working on other programs and also to win other customers above 4 liters. I think a good example for having a stronger footprint in the U.S. is, for example, a collaboration with Chandia, not only the volumes, which come out of Chandia, also the visibility of DEUTZ in the U.S. by the cooperation. But here, our clear intention is to have a stronger focus on engines above 4 liters. And these engines are normally not that much related to rental companies. But overall, this is an -- I would say, an American way of doing business. This is very much related to rental companies. So the end customers are just leasing the equipment. On the one side, it's like, I would say, conceptual topic. On the other side, we are working on a better customer base above 4 liters.

The next question comes from the line of Hans-Joachim Heimbuerger with Kepler Cheuvreux.

Two questions left from my side. First of all, on Page 26, your material handling sales in 2020 are dropping by at 57% year-on-year. At the same time, KION recently published data that the market for industrial trucks was globally up by 9% year-on-year in 2020. Can you reconcile why your material handling sales are dropping that much? And the second question would be a comment on the pre-bought engines. Is this topic now over?

Yes. Maybe on this material handling. This is very much related to this aerial work platform, a product which is very common in the U.S. So it's not really fork lifters. And as mentioned, this equipment is owned by rental companies. And those guys, they have a perfect year. If we are looking at their results, the rental companies, their market is booming, but these guys are very cautious now with the crisis situation. And so more or less, they stopped ordering new equipment and work with the existing fleet. So this is one explanation. It's very much related to these aerial work platforms, not to forklifts. Also, if you see our forklift business, which, for example, there are some important customers here in Europe, they are exporting later on their equipment. And so this goes more or less on the account of our European sales figures.

Okay. On your second question regarding the prebuy engines, we can say that the vast majority of those prebuy engines is out of the system. There might be a handful left, but nothing significant.

[Operator Instructions] At this time, there are no further questions. I hand back to Christian Ludwig for closing comments. .

Well, thank you very much, everybody, for joining the call today. Should there be any follow-up questions after the call, don't hesitate to contact Investor Relations. We're happy to answer any questions you may have. On that, I wish you a good remainder of the day and talk to you at the latest at our Q1 results in May. Goodbye.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thank you for joining, and have a pleasant day..