DEUTZ Aktiengesellschaft (DEZ) Earnings Call Transcript & Summary

Thank you very much, operator. A warm welcome from my side to you all. Before we start, some housekeeping items. 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. Also, please note that management's 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 related to our full year 2021 reporting are available on our website. Joining me today is our new CEO, Sebastian Schulte, who is also our interim CFO, and Mr. Oliver Nord, our Head of Finance. As usual, Sebastian Schulte will walk you through the highlights of the performance of the group and then hand over to me, as I will provide some more details of our financial performance. Sebastian will close the presentation with our current market outlook and our guidance. After that, we'll be happy to answer your questions. And now without much further ado, I'll hand over to Sebastian.

Thank you very much, Christian, and good morning, a very warm welcome to our DEUTZ annual results call for '21. As stated by Christian, I'd like to start to give you an overview about some key operational and strategic developments that were achieved during 2021. Let me first start with order intake, which raised significantly by a bit over 50% to EUR 2 billion. Unit sales are when we talk about our DEUTZ engine, so that excludes the Torqeedo, the smaller Torqeedo units, unit sales was up by 33% to a bit over 160,000 units. And that brought us revenue up by 25% to EUR 1,617 million. And if we combine that with the order intake, we recorded a book-to-bill ratio in '21 of 1.24, so quite a significant growth still at the end of the year. On the bottom line, we have achieved EBIT before exceptional items, we didn't have many exceptional items. We see that later, of EUR 37.2 million. That brought us a margin of 2.3%. And that meant we walked up 8.1 percentage points or EUR 112 million. If we compare with the prior year. Having said that, prior year 2020 obviously was heavily affected by the COVID implications, and that was the year of a lot of uncertainty. So we don't like to compare that much more towards with that prior year because that is not really a fair comparison. And on the free cash flow side, we closed the year with positive EUR 21.6 million, and we're quite proud of that because we have the operational impact, obviously, from the EBITDA, but also we increased business significantly as we showed earlier, but we still managed to keep working capital on a reasonable level. And in that sense, we were able to record debt, EUR 21.6 million cash flow, which brought us then also to the decision to propose a dividend of EUR 0.15 per share, which is quite a high ratio for the time being, 47%, but -- and we believe that was exceeding our expectations on the market quite significantly. But we show that as a starting point for a solid dividend policy going forward. Also on the innovation side, product innovation side, we presented -- we developed and presented on wheel our hydrogen engine. We'll come to that in a minute. And very important nowadays, ESG, we increased our sustainability exposure. We joined the UN Global Compact. And with having joined the UN Global Compact, we are committing ourselves also officially to their core values or principles when it comes to human rights, OSH, corruption prevention and obviously, environment. But this is only one example of our ESG and sustainability achievements. We'll come to it more in a bit. And last but not least, we had in mid-February, quite a significant change in leadership. I assumed the role of CEO following Dr. Hiller, and we also had on the Head of the Supervisory Board, a change, Dietmar Voggenreiter, who has been with us on the Supervisory Board. As you all remember, before, since 2019, he assumed the role of the Chairman from Bernd Bohr, who will remain at the Supervisory Board. And If we look back on the past year, we do see quite a few positives but also quite some negative input factors, which kept us busy in those 12 months. First of all, we had a broad economic recovery really across all relevant end markets, which all grew pretty much with double-digit sales growth. We had further effects -- positive effects from our cost measures. We managed to lower our breakeven volume point to 130,000 units as promised. We achieved our service target. Sales and service went up 16%, and we went through the previous wall of EUR 400 million, we'll come to a bit more detail during the course of the presentation. And also, in particular, when it comes to our classic segment, we broadened our customer bases. We signed new long-term contracts with SAME Deutz-Fahr, with AGCO and with ASCO just to name a few. On the flip side, the year was challenging, as said, we call it here, were namely the semiconductor short, which is one example. We have significant issues with the electronic control units, particular on the smaller engines. They led to, I would call it, sales loss. In other words, without that shortages, we would have produced and sold significantly higher volume, but that's how it is. And semiconductor is just one example. We had other issues, just to name a few, polymers, plastics, pretty much across the supply chain. That wasn't easy. That's still challenging right now. But as a company, we have learned, and we are learning to deal with that situation in sort of a new normal better day by day. COVID-19, there were waves. And really, that's -- that depends a little bit on which manufacturing site, which operational side and our side, on our end, but also in our key suppliers. There were days and weeks where we weren't able to run our operations as efficiently as possible. But again, that's also something, which we have to face now. It shouldn't be an excuse. It just should be an explanation. And on the price side, raw material prices are hiked, and a lot of our suppliers requested additional premiums to be paid, particularly in Q4, that number went higher and higher. We recorded here demands of EUR 25 million. We are not accepting all those demands, to be very clear. In fact, we're fighting against it. But in some aspects, it's a bit of a give and take together with the suppliers. And that will also -- Christian will tell about that later. It's one of the impacts we saw particular in Q4. And we had catastrophic events. You all know them on the global scale, the blockage of the Suez Canal. And on a German scale, the flooding in the Ahr Valley. The blockage of Suez Canal, as a response to that, we moved quite a lot of our freight operations from sea freight on the train line, particularly between Europe and Asia. We'll come to that later. But obviously, due to the recent events in Russia and in Ukraine, we have reverted that, but that was something which kept us busy quite a lot during that period of time. And in the flooding, we had a few suppliers who were affected during that course, apart from obviously all the terrible issues with the people. And some of our employees were also negatively affected by that. Talking on our hydrogen strategy, we'd like to name a couple of points. First of all, our pilot project, we are very proud of that, the TCG 7.8 hydrogen. We piloted that project with a regional utility company, RheinEnergie in Cologne. So we have developed a stationary equipment for power generation together with those guys. And that's going to be the first or that is the first pilot application for that engine. We have, and you see here on the right side of that chart, you see the picture. That's still on the DEUTZ facility in Kern port. There we have that demonstration model in operation since the end of December. We opened that as a Board by the end of December, and we're going to deliver that to RheinEnergie in the course of this spring. And as a demonstrator but full production of that engine, we expect to happen from 2024 onwards. Another project we're quite proud of is our cooperation agreement with the DLR, the German Aerospace Center. That is a joint project where we are focusing really on making construction site more environmentally friendly. And that's something, which has been developed jointly by the DLR innovation hub with the DEUTZ Innovation Center. So 2 really sort of innovation keen groups working here together. And the idea is pretty much, when you look at the construction side today, particular, the heavy equipment is almost 100% fueled by -- or driven by diesel engines. And we want to create solutions, develop solutions, ideas how to enable, on these construction side, the use of hydrogen-powered vehicles. And a lot of this is to do with the issue of fueling. Because obviously, the diesel has a much higher energy density than hydrogen, and we need to develop here clever fueling and logistics solutions in order to make best use of the new hydrogen technology. Moving on to service. We have mentioned earlier already, our service target of EUR 400 million we achieved. We see that here in the chart. We came up from EUR 348 million to EUR 403 million. 60% may sound a little low compared to the overall revenue increase. However, we need to keep in mind that in 2020, service revenue wasn't down very much if we compare it with 2019. It was more or less stable. So that was pretty good how we kept our highly profitable business growing here. Already taken order backlog is not that relevant in the service business because obviously, the business is turning much quicker than our new engines. And if you look back to 5 years, we have a positive track record of CAGR of 7%, and we intend to grow that business further off more than 5% per year. Just a few examples how we grew because we grow, on one hand, organically, and on the other hand, also smaller acquisitions. But for example, what we did in the last year, we opened new -- 2 new so-called DEUTZ power centers in the States. One, it's called the DPC Mid-Americas in Dallas that opened in May 21. Another one, the DPC West opened in the Las Vegas region in November -- on November 1. And that's something, which brings us really profitable growth, profitable business, but also expands our footprint also beyond using only DEUTZ reports and servicing only DEUTZ engine. So we're getting broader here as planned. Talking of our road towards more green business. First step we did is we increased transparency at the beginning of fiscal year '22. We are -- we have included or we have incorporated a new segment structure as of January '22. We are now reporting our 2 segments. The one is Green. In Green segment, we are summarizing everything related to electric drives, everything related to hydrogen engine and business and our Green businesses, Torqeedo and Futavis, and also the small investment in Blue World Technologies and obviously, the related service business as well. On the classic side, we keep what we are good at and what we are strong with and what we still believe will be important for the next decade or more to come. That's the diesel engines, gas engines, bi-fuel engines and the earlier management-related service business. As you remember, in late '21, we went on a Capital Markets Day, where most of you were also present, where we shared a vision that by 2031, we believe that roughly 50% or more than 50% of our revenue shall be green, and that's something we want to measure ourselves internally against and we want to also give you the opportunity to measure us against that. So that's the vision. And we need to -- the first thing is given the transparency, that's what we've done with the new segment structure. And as I said, we start with formerly with that new segment structure now in '22. So going back in '21, we just want to give you a bit of a pro forma view where we would have stood had we already reported in that structure earlier. And you see, the green bars are relatively small still in our smaller order intake, EUR 65 million versus almost EUR 2 billion on the classic side. Unit sales, a little more advanced. That's due to the high -- relatively high number of Torqeedo units, small value units on the Maritime sector. And revenue obviously, as said, because the smaller -- relatively smaller value of Torqeedo business we had EUR 54 million. And you see on the EBIT side, you see that we -- let me first state a very clear thing. On the classic business, we achieved 4% marginally. So that's another step up towards where we've come from and where we want to go to. And on the green side, highly negative at the moment, driven by this considerable start-up investment, particularly in research and development, everything, all the activities related to our hydrogen engines and our electric portfolio is shown here. So that's a little bit of an upfront investment, but we're convinced during the course of the decade, that will grow. Moving on. On the topic of sustainability, I want to give you a few highlights of '21. We significantly reduced CO2 emissions by 55%. We reduced significantly waste for disposal, and we're down to 5,000 tonnes now on waste for disposal, meaning that more than 17,000 tonnes we can reuse. At all of our sites, we use 100% green electricity. We showed earlier already about 3.3% at the share of our green business. And also on the G part of the ESG, 99% of our workforce have now completed our compliance strength. That's very, very important. And 75% of our production site is now in line with the ISO-45001 certification. That is our 2 sites in Cologne, our site in Ulm, in Herschbach on the German sites, essentially, as well as our component factory in Spain. And last but not least, 55% of our top 150 suppliers are now ESG rated by Ecovadis. So that means in our sort of fields of action for ESG, environmental, social and corporate responsibility, we are working hard but also successful to make progress here. And that's visible and clearly reflected in an improvement in the ESG ratings. We are utilizing quite a few here. So I'm not going to go through it in all the details. But to pick out a few in MSCI, we went up from BBB to A, where we are top 50% in our peer group on the systemalytics. We are top 30% of the peer group. And in the corporate ESG performance rating, the prime one rated by ISS ESG, we are on top 20% of our peer groups. So that means our sustainability efforts, they are paying off. And I also would like to give you a bit of an outlook on our strategic roadmap because as we heard earlier, our results conference '21, obviously, the focus is on completed year '21. And we come to that later, the outlook on the next -- on the current year and the next quarters. But in my position as new CEO, I'm now in that office for 4 weeks. And I would also like to use the opportunity to provide you a little bit of -- with an outlook on how we are sharpening our corporate strategy in the months to come. Let me first look back and reflect a few points already mentioned. We are in the middle of a big transformation. When it comes to the technological transformation of DEUTZ, we have defined and agreed internally with our 10-year outlook division, a clear vision of that of being able and needing to bring our business share in the green technologies of more than 50% in the next 10 years. Also, when it comes to our path of improving profitability, we have clearly defined that we see DEUTZ with an EBIT potential of up to 8%. So that's very, very clear. Both of these objectives are correct and important, and we'll work on achieving them. And we want that our shareholders remain or gain confidence in the long year development of our company. And when we look back now in the last years, DEUTZ has addressed quite a few, let's say, building blocks for this path. And my impression is some of them are correct, but not every -- more than some of them are correct. But not everything was, let's say, consequently and with the necessary stringently implemented. And a few things might also still missing, but we don't want to make a fast, snap decision here. We want to move on systematically. And what we want to do now is we want to evaluate all those sort of building blocks and activities to really see whether all these activities contribute as we hoped for and as it is necessary to achieving our goals. And this -- in terms of impact, but also timing and stringency. And that might mean that we also come to new conclusions and new considerations. We will, as a management team, work on that very, very structured and consequently in the coming months, and it's very clear, our objective that -- first, we defined the specific activities for, what we call quality, the first Horizon '22, '25, and also make it operational. But we also think further ahead and are already looking firmly at the next horizon '26 to '29. And it's also very important to come to Russia and Ukraine later that we need to see are there any geopolitical sort of changes, which we have to carefully analyze and we might have to include some activities in our strategy. But that's just a teaser, and we will give you -- in the every 3 to 6 months, we'll give you an update on where we stand here and the next sort of point where we will inform on that will be after the similar annual figures. And that everything against the background of transforming DEUTZ more towards green and bringing and defining the way and achieving the way to the profitability of 8% asset. Having said that, I would like to hand on to -- hand over to Christian Ludwig, who will provide more detail on the annual numbers '21, and I will, at the end of the presentation, I'll take over again to give an outlook on the current fiscal year. Thank you for now.

Yes. Thank you very much, Sebastian. So I will continue and give a -- share a little bit more color on our financial results, starting it off with the order intake. As already mentioned, we've surpassed the EUR 2 billion mark for the first time, I believe, in the past 20 years, so growth of 52%. This was driven by all our major application segments. But clearly, the highlight here was Material Handling with a growth of 118%, the Gensets business with growth of 83% and construction machinery with a growth of 68%. If we look then on to the unit sales. And here, you can see that we had also a solid growth of 33%. This was more or less evenly distributed between the DEUTZ engines and the Torqeedo engines. Torqeedo was up 35%, DEUTZ 33%, but basically barely a difference here. So their share was fairly stable. And then if you look on the revenue side of the things, you can see that actually, we have a little mismatch here, unit sales up 33%, revenue only up 25%. There are 2 reasons for that. First of all, in the revenue column, there's also the service bucket, and service obviously did not grow as strong as the engine business. And secondly, we also had a mix effect. We sold a lot more of smaller 4-liter engines than we did in the previous year. And that led to a decline in our average sales price per engine. It was actually down roughly 20% year-over-year. But please keep in mind, last year, 2020, was not a usual year. But also, if you look at 2019, we saw a roughly a 5% decline in our average sales price per engine. Nevertheless, we had a very strong year overall. The order intake revenue figure gives a book-to-bill of 1.24x. And that led to the fact that at the end of the year, our order backlog more than doubled to almost EUR 680 million. This roughly implies 90,000 engines in the order backlog. If we have a look at the revenue breakdown per region, you can see that, especially Germany as well as the Americas were the top regions with more than 30% growth. You also can see that in the Asia Pacific region, growth was a little bit subdued. There you can, I guess, already see that China was not as strong as some expected last year. But please keep in mind, this does not include the joint venture revenues as these are only consolidated at equity. And the weakness, if you want to say, in Africa and Middle East, were only 4% is due to the fact that this region is mainly a gensets region, which was our weakest application last year. Looking on the revenue breakdown by application. You can see, as said before, material handling with plus 65% and the construction equipment was plus 30% were our 2 strongest application segments. And we are very happy that already a #3 position in the service business with almost plus 16%. Service is now 25% of our revenue share, which, of course, is important for us as it has a higher profitability than the new entry business. Coming to the profitability. You can see that we were able to improve our operating profit significantly by more than EUR 100 million year-over-year to EUR 37.2 million in 2021. And actually, we were able to increase our profitability in every single quarter of the year versus the previous year's quarters. Main drivers here were, as we already said, the increased volume of business with better economies of scale and also the result of the cost savings we've implemented. But we also have to say that the absolute payments to a supplier is going to instantly play a small role here. Our EBIT margin at 2.3% is only in the lower half of the upgraded guidance of 2% to 3%. But please keep in mind, we started the year guiding 0% EBIT margin. They were able to increase it to 1% to 2% and, only in September, increased again to 2% to 3% with a very solid positive development through the course of the year. One more addition here. If you look at the Q4 results, you can see that our EBIT margin declined versus Q2 and Q3. There are 2 reasons for this. First of all, we had a rising material cost effect that really hit our bottom line stronger than the other quarters because we couldn't pass on these cost increases as quickly as possible to our customers. And secondly, we also had a negative effect from our joint venture in China. As stated earlier, we saw a significant decline in the second half of the year. And in Q4, we actually had to book a loss. But still, overall, our net income amounted to EUR 41.3 million, which means that we were able to report an EPS and earnings per share of EUR 0.34. Now a quick plan at some of our balance sheet figures. First of all, starting with our R&D spending. As you can see, absolute R&D spending was more or less stable year-over-year. And the reason for that is that we did not cut any R&D spending in the crisis year of 2020. And I expect that this figure will be going forward in the similar range. But of course, what happened due to the strong rise in sales is that our R&D ratio came down significantly to 5.1%. And just as a side mark, our capitalization ratio was well below 10% in 2021. On the investment side, you can see that we actually were able to decrease our capital expenditures significantly by almost 30%, but the main reason here is that our leasing expenditure was almost half and the PP&E were only down 20%. And the main driver here was the fact that in 2020, we built the new Line 5 in Cologne for the smaller for leisure engines, and we didn't have a similar investment last year. And finally, a quick glance at working capital. We're very proud that we're able actually to keep the working capital growth at only 7.7% despite a sales increase of 25%. That meant that our working capital ratio actually declined by 2.5 percentage points to 15.7%, a very strong figure and a result of the rigorous working capital manager across the group. All these effects now accumulate basically in a very strong cash flow. First of all, if you look at the cash flow from operating activities, you can see that we're able to increase this by almost EUR 50 million. Drivers here, clearly, of course, the much better operating performance and also the very efficient working capital management. The free cash flow result was even a tad better. The results here, clearly being that we had lower investments, as mentioned before. And finally, if you look at net debt, also here, a very solid situation. The deviation between free cash flow and the net debt is that we paid back a significant amount of leasing liabilities so that everything that we were able to generate on free cash flow that is also visible in net debt. But overall, we're very satisfied with the results. Finally, a quick glance at our balance sheet overall. We were able to increase the total assets by roughly 10%, and our equity ratio was stable at 45.6%. You can also see that our leverage is back to pre-crisis levels. After the crisis year 2020, we're now at a net debt-to-EBITDA level of 0.6x, so in a very healthy situation. And this allows us basically to finance our organic growth. It also has allowed us to turn to a dividend proposal of now EUR 0.15. This equals a 47% payout ratio. And at least the last time I cooked, roughly a 3% dividend yield. And of course, also, we have sufficient financial headroom for a potential future inorganic growth. Although there's no immediate target, which we can talk to you about at the moment. If you look at our financial positions, we have basically unused credit lines of more than EUR 200 million available for us, only EUR 35 million of those have been utilized so far. And that ends my presentation on the numbers. I'll now hand back to Sebastian.

Thank you, Christian. Looking ahead in the guidance, we brought here one overview on, let's say, the global market developments for the current year from the perspective of our end customer or main end customer sectors. You see here in brackets, that's the view as of February '22 because we believe that was the last time when we really got, let's say, reliable information. And obviously, we'll come to that later. The impacts or potential impacts of the war and the crisis in the Ukraine and Russia, that will certainly be reflected going forward also in these sort of studies. But if we look at that picture, we see almost across the board here quite an optimistic outlook all across our relevant markets, both in terms of sector as well as region, and we see a particular agriculture, green arrows in Europe, Americas and APAC. We have been talking recently on our Torqeedo customers, and they do see obviously a bit of an impact on Ukraine and Russia. But they, on the other hand, see quite strong order backlog in their portfolio. So their statements have been -- it's quite stable, but we need to watch it carefully. Also in terms of construction equipment, the studies show, and that's what we've been confirmed from our customers an outlook of 2% to 3% growth, '22 versus '21, we certainly see that in our order book. And when we talk about material handling, here, it's always very interesting to see what the rental companies believe and how they act, and we carefully observe their statements with conversations also looking at what they say on their websites. And when you, for example, look at United Rentals, or HERC, these sort of companies, they still believe '22 versus '21, partially an increase in CapEx spending from 50% or more percent compared with '21. So that's something we need to -- which means we still can support you the positive outlook. China or APAC, with the truck business, that's still the radar error. We already informed last year on this development. We see a slight improvement when we talk to our partner, but we have to keep in mind also the recent information. And when it comes to what happens now in terms of COVID in China, there have been quite interesting news this morning, as you all will have seen in the media. In topic already addressed Russia and Ukraine. So obviously, one of the most important aspects we're analyzing right now is what is really the impact of that war towards DEUTZ. I mean we are all looking terrified to the overall geopolitical development. I think there's no doubt on that. But today, I would like to focus on really the potential business impact. And when looking at that, we would like to structure it into 3 buckets, pretty much. The one is the direct top line impact. And that's not that much for us. We had before the crisis in revenue in the region. And I talk about Russia, Ukraine and Belarus. And the majority of the numbers I'm mentioning is Russia, didn't have very much direct business to Ukraine and Belarus. But -- so we had a pre-crisis revenue of some EUR 20 million there. We don't even have an own footprint in the Ukraine or Belarus. We have our subsidiary, DEUTZ Vostok, based in Moscow. And also, none of our -- so that is certainly something. Okay, maybe the direct impact on the revenue side is not that high. What we did immediately when the war started, we stopped the major business with that. When I say major is that we said, okay, the local service business will continue for the time being, but also we reduced that to the minimum now. What we also did as an immediate risk mitigation action, we transferred all the majority of money, which was on the bank account of our DEUTZ subsidiary in Moscow, we transferred that to Germany. And yes, we incurred some translation losses, but that's in the region of EUR 1 million. So that's nothing, which will have a major impact on our profitability. And we keep that operation now on a very, very low profile. So pretty much keep it able to pay their rent and the basics of their salaries. We have 19 employees in that region. So that's already sort of puts it a little bit in perspective. The second big block is logistics. I said earlier that as an immediate response to the Suez Canal crisis, we moved a lot of our shipping to the railway -- to the railroads on the one hand, and you see that on that slide, the 2 lines, the transit as well as the Silk Road. And we use this for pretty much 3 reasons. So first of all, we produced high-quality engines in Germany, which we sell in China. So this is one of the freight reasons or the reasons why we have logistics here. The second one is certain parts, which we send out of Germany to our Tianjin operations in China for local production of engines there. And the third is then bringing certain parts of China into Europe. So all of these 3 routes are relevant for us. When the crisis started, we had 20 containers on enroute. And we stopped immediately, so we moved it all going forward, all back on sea freight. Right now or as of Friday, that's the last information we have, that was -- there were 12 containers still on the railroads, 5 towards China with engine, 6 also parts towards China and 1 container from China towards Germany also with parts. So overall, rather limited exposure. So that's something, which we have reacted immediately, and we are -- or we can work with that. Obviously, we are affected as everyone in that situation why increased transit times and potential higher cost. The third bucket is the supply chain, the overall supply chain. When it comes to our suppliers in there, we have -- historically we have increased -- we have implemented a task force, which on a pretty much daily basis, observes the situations and act accordingly. So one example, we have now secured our annual requirement for palladium. We need that on the level of a Tier 2 supplier, but you see how much in detail we go into that subject in order to secure our supply chain. We have other issues, for example, like the truck drivers. A lot of truck drivers come from Ukraine, Belarus and Russia. And as you know, majority of them are not available anymore, so we changed it also to other providers. We are not heavily affected by the issue of wiring harnesses. We know that Leoni has a major plant in the Ukraine. We're not directly affected, but we do know that one of our suppliers uses some components from Leoni from that region. And here, we are working together with our suppliers to find suitable alternatives. So after all, direct consequence for us are, for the time being manageable, but the indirect consequences are difficult to predict, and we will monitor that very, very carefully and act accordingly. Moving on, and that brings me to the last point of the presentation, the guidance, the '22 guidance. So we put together our guidance in February now as with the regular schedule. And when we put together the guidance, we see -- we saw unit sales in the region between 165,000 and 180,000 engines, so another step-up from the completed figures '21. That translates into sales volume or sales revenue of between EUR 1.7 billion and EUR 1.85 billion. We see here, on the one hand, the classic number of EUR 1.6 billion to EUR 1.75 billion and the green between EUR 75 million and EUR 100 million. With the implementation of the new segment reported, we are also now in providing principle guidance on this level of the segments. When we look at the EBIT margin for the group, we see a range between 3.5% and 5.5%. Here, we see increasing profitability of classic 4.5% to 6.5%. And Green for the same reasons stated earlier, high upfront investments when it comes to R&D, in particular, of minus 30% to minus 20%. And free cash flow, we see in our step up in the low to mid-double-digit millions of euros. Having said that, that was the state of February, and that's the best available information we have. But we are cautious on that subject because of the war in the Ukraine, and we know that -- particularly when it comes to the supply chain, we already had in Q4 '21, quite a challenging environment. And now with that issue in -- pretty close to us here, the environment has become even more difficult, and the visibility is low. As mentioned earlier, particularly when it comes to the supply chain, there will be or we expect there will be price increases for freight, raw material and energy very clear. We are working very structured on passing it on to our customers, but there is a time delay in achieving that because of the still high order backlog we have in our books. We have almost EUR 700 million order backlog in the books, and that needs to eat itself through the P&L. And we are -- we need to observe how our end customers and their end customers change or keep their investment decisions in our core markets. So in that sense, we put the guidance under review because this numbers -- these numbers do not yet include potential effects related to the current geopolitical crisis. Having said that, I would like to thank you very much for your attention. And yes, we are here to answer your questions.

[Operator Instructions] And the first question is from the line of Charlotte Friedrichs from Berenberg.

Three or 4, if I may, and I'll do them all in the beginning. So the first one would be with regards to your guidance. Based on what you've seen so far in the first couple of months now of the year, are you, so far, on track to achieve the guidance and it's more about how we move on from here? And connected to that, in terms of the indirect impact, where do you see the biggest challenge? Is there one particular item? Or is it rather a whole range of different issues that could become problematic? Also in the beginning, in your prepared remarks, you mentioned roughly EUR 25 million in additional demands from your suppliers in last year. What exactly was that referring to? And then finally, the outlook for your Chinese JV in 2022, do you reckon it's still going to be loss-making?

Thanks, Charlotte. Let me start here with your first question in terms of outlook or what we see January, February. Obviously, as you know very well, we cannot give detailed information yet. That's only sort of an indication of January, February was in line with our planning that we can clearly say. January was seasonally typical for the season a bit of a slow start. But February, we went actually quite well in terms of production and also margin quality. So, so far, those 2 months have been as planned. So looking back at January, February, that's not the reason why we put the guidance on the review. Had we just had the crisis in the Ukraine not started, we wouldn't have put the guidance on the review because of January, February numbers to make it very clear. The -- what is the major issue? At the moment, and, again, that is really the situation as of now. At the moment, I do not see the major issue from the top line at the moment because we have a high order backlog. So we have a lot to do, and we still could sell more if there was any restrictions on the supply chain. So that, we need to observe. What I see at the moment, that relates to your third question already, is really the shortened -- the shortages on the supply chain, both on freight but also on freight cost, but also on certain important components. When I mentioned the EUR 25 million, these were demands from our suppliers. I think I mentioned clearly that these were demands, which we obviously did not accept. We have here also a task force in place carefully evaluating what kind of demand we must consider because we also don't want to endanger our supply chain. But there are -- the major issues are pretty much from those suppliers who have a high load of energy costs in our foundries, for example. So that's certainly the biggest issue related to the EUR 25 million. And now when we come to the uncertainties going forward, it's really are there any sort of surprises for us on Tier 2 or even Tier 3 with components, which are out of -- beyond our control. So that's something -- yes, that's mainly supply chain, to cut a long story short, is the major concern, which we see at the moment. But again, we will evaluate the situation very carefully over the next 4 to 6 weeks. Last question related to China. So at the moment, we expect our joint venture to be slightly positive, only slightly positive. We -- as I said, we saw first lights on the horizon when it comes on volumes. But again, with the current COVID developments in that country, we also need to see. But yes, I hope this answers your question, Charlotte.

One follow-up, if I may. So the EUR 25 million, would that be the cost increase on an annual basis? Or over what period of time would that have been?

These were -- again, this wasn't a clear cost increase. These were demands, which the supplier stated towards us. And we -- by the end of the year or the beginning of January, the sum of that was EUR 25 million. I think we can fairly state that it's roughly equivalent to an annual demand from those suppliers. But again, we didn't give them all of that. But also this number is increasing, and we expect this to increase.

The next question is from the line of Jorge González Sadornil from Hauck Aufhäuser Investment Banking.

My first question will be around the cost savings that you were expecting last year for 2022. If I remember well, they were around EUR 40 million to EUR 50 million. And I know like 1/3 of them were related to cost savings in raw materials. How these cost savings -- how do you see these cost savings being achieved during the year? These are going to be completely compensated by the negative impacts? Or what are you expecting regarding this? And then although you have already commented on China, I don't know if you can give us a range of the production that you spent for the new inventor and the name, some -- a little bit more color on that? And maybe regarding the backlog of the 90,000 engines that you commented, can you confirm how many months of yourselves are already in this backlog included as I imagine that not all the aftermarket sales that you expect for the first part of the year are going to be included in the backlog. So how much of the year is already included in this backlog, please?

Okay. Jorge, this is Christian. I'll start with the cost savings. So we had accumulated -- accumulative cost savings of roughly EUR 40 million after 2021. So that includes also the savings we had in 2020. So that was roughly EUR 12 million at the time. So another close to EUR 30 million came on top of that last year. Of course, we expect further cost savings this year as you can also see in our, let's say, initial margin target guidance that we expect the margin to expand significantly over last year. As we have to, yes, put our guidance under review, of course, we cannot say today what exactly the effect is going to be. But clearly, without the Ukraine, the expectation would, of course, have been that we would see additional positive results for the margin from the cost of activity this year as well.

And let me just add one topic, Jorge. So yes, that is the plan. And in the light of this whole, like, inflationary environment, obviously, we are working again to pass on cost increases to the customers. And on a net-net basis, this will be at the end of the year when we look back at cost increases as well as price increases that we'll -- we will come forward to a grossing situation. Because when the targets for the cost savings programs were defined, that was in a year or in a time where it was hardly any sort of price increases, general pricing considered. So that's something, which I believe, all the industrials have now to reassess. That's not by no means saying we're not going to be successful in concluding the cost savings. I'm just saying the whole effect of what is net, what is gross we have to reassess when -- because we'll see a shift upwards on both costs and revenue side. And regarding China, what we currently see is our production volume between 20,000 and 30,000 units in the joint venture. That's the current plan. And yes, we'll follow up on that as soon as we have first quarter numbers here completed. Your third question related to the order backlog. It's roughly, on average, roughly 7 months of order backlog. There are some KLOs, that's what we call our sort of lowest defining unit of an engine, which have not a backlog of a year, others are much, much, much shorter. But on average, it's 7 months. And on the service side, we're not that high. It's usually a bit 10 months -- bit more than a month because the business turns much, much more quickly.

Okay. And 2 quick follow-ups. Regarding the negative EBIT margin that you expect for Green, is it related to Torqeedo negative profitability? Or is it because you are ramping up some new projects for the Green division, like the product that you saw us in the Capital Market Day? And finally, regarding the dividend. So this number that you have proposed, well, it looks like a message to the market now because it was the previous dividend in the past. But what about 2023 is going to be more important, the 30% payout or this reference of dividend?

Yes, Jorge. First of all, coming to your question on Green. It's right that the major -- the majority of the expenses, which bring the margin of Green so significantly below 0, that's related to R&D for a new project and relating both the hydrogen engines as well as the electrification projects we have there. So to give you a rough number, we currently foresee a number of R&D expenses of between EUR 8 million and EUR 10 million on the hydrogen system as well as EUR 10 million on the electric system. So that's quite a lot of that. And Torqeedo is around breakeven. So that doesn't really have a major impact here on the negative profitability of Green. With your second question regarding dividend. Yes, on the first glance, the payout ratio, 47% sounds quite high. We intentionally did that because in 2020, we did not provide -- we did not pay a dividend for 2019. Although 2019 results were very much favorable of doing so. But back in that year of 2020, COVID crisis just took off. So it was, from the management in charge at that time, the right decision. I would also say from today's perspective to suspend the dividend in order to first evaluate what is really the full impact of COVID on DEUTZ. So we are trying to sort of do that now and to pay something to the shareholders, which we believe was due already a couple of years ago. But in the future, as you said, or as your question implied, we want to grow the dividend. And we want to grow the dividend not by keeping that high payout ratio but by going to the 30% payout ratio but with the underlying of a stronger operational performance. So very clearly, that should be the return of DEUTZ to be a strong dividend payer as well.

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

Yes. First question would be on China, and not on the joint venture with SANY, you elaborated already on this, but your own activities and the activities with the other partners. Can you shed a bit light on how these are developing in the current environment? Do we have also here a delay in business performance? And what results you have achieved in these cooperation agreements and to your own activities there? That would be my first question.

Thanks, Richard. So in our, well, I say beyond the joint venture in our operations in Tianjin, we are, for this year, foreseen to produce between 8,000 and 10,000 engines, particularly smaller for a little. This is running according to plan right now. And what I really believe now is that with the geopolitical changes we see that it's going to be very much China for China and Europe for Europe and Europe for America. So we -- I do not expect, let's put it in that words, that from what we produce in China in terms of engines, there won't be a lot of engines being sent to Europe at the time being. So it will mostly remain in China. There is sufficient demand. And when I say 8,000 to 10,000 units, you see that is already not the high -- not a very high number there. So we don't have a high dependency there. What we do see still is certain key customers, particular Tariks and gentry, these are customers which we globally serve from our key accounts from our U.S. operations. And they do also have Chinese operations and Chinese demand. So we do send some of the -- particularly the 2.9 and the 2.2-liter engines from Cologne to China. But there, we see pretty much new shortage of demand at all at the moment. So it's more the opposite. But again, you catch me here in a cautious way, as I said throughout the presentation, we need to really keep a close eye on what is the development over there. But one thing is also very clear, China remains an important market for DEUTZ, but it's not the only market for the future. We are standing here on several pillars. And our standpoint in Europe and in the U.S. is very, very strong. So we want to keep -- we want to be in China because it's an attractive market, but we do not say that we depend on China.

Okay. Then my second question is on the ability to increase your own selling prices. So in your press release, you state that, yes, in fact, you are always a bit, let's say, running behind the actual development and that your backlog at the moment, obviously, has not satisfying margin level, which would compensate the higher prices you are paying on the material side and logistics side, et cetera. So what prevents you from catching up with the current development and not staying behind the curve but maybe being a bit proactive and, yes, being at the end of the day, a bit more aggressive from pricing with your customers that you do not run the risk of being squeezed here on the margin side?

It's a very good question, and the answer is very clear. First, let me start with the fact we did run a couple of price increases, one as of July 1 last year, another one as of January 1 this year. But to be very honest with you, I believe it took us too long, and now we needed a change of mind to be more aggressive, and that's exactly what we're implementing right now. We are in a situation to be very clear on that, where it's not the question about how is the justification for price increase. The question is more what is the number, the percentage and so on. And that is something, which I can tell you very frankly, though it hasn't been very strong in the past, sometimes being a bit over aggressive, I think, so that hasn't happened. And often, in our environment, we, as a company, were used to being very concerned about losing a customer, losing volume. And I'm not saying it's wrong. It's always been important. It's important to be cautious on your base. But on the other hand, it's very important to react immediately when you see there is an opportunity out there. And there is an opportunity out there. There was -- there were already opportunities last year. We were a little slow. We're catching up on that right now. And to be very specific with what we're doing right now is to address systematically our key customers and confronting them very clearly with the impact we see on our cost base, particularly from energy prices, because that's something you can explain very easily and people will understand. I'm not saying it's easy to incorporate this, but that is one of the focus points we are already putting much more pressure on since the last 4 weeks.

Okay. So then good luck with that. Final small question concerning this effect on the deferred taxes last year, this EUR 22 million to EUR 23 million, were you obviously capitalized on loss carryforward? Or what is precisely behind this step since you've made this decision and which pushed up your tax position here?

Yes. That's -- I would call it more like a technical point because when you describe or when you define the value of the late tenders going of the deferred taxes, it's -- you look at the next 5 years of your business planning. And when -- in the last year, when the accounts of '22 -- sorry, of 2020 were closed, the 5 years of the business plan were '21, '22, '23, '24, '25, with, at that point, a fairly weak outlook in '21, which was pretty much breakeven. Now this weak year has been taken out of the planning, as we explained today, replaced by middle strong year. And now we're planning '22, '23, '24, '25, '26, so the week year has been taken out, and the stronger year '26 has been taken and that has an impact on the book value of the deferred taxes. So that's exactly the reason why we have that impact here on the accounts. We went in with fairly conservative assumptions quite to be clear on that. It's not -- we do not use that as an instrument to boost balance sheet while we don't need that. We have a high equity ratio, so fairly stable. But that's the explanation for this mere technicality.

There are no further questions at this time. And I would like to hand back to Christian Ludwig for closing comments.

Well, thank you much for listening to our presentation and to asking questions. If you have any additional questions, please feel free to call the Investor Relations department. We will be at your service. We will be back on the first week of May with our Q1 results, and hope to talk to you by then again. Goodbye.