DEUTZ Aktiengesellschaft (DEZ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the DEUTZ AG Full Year 2022 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Christian Ludwig, Senior Vice President, Corporate Communications and Investor Relations.

Thank you very much, operator. You all good afternoon. A very warm welcome from us to our analyst investor call on our full year '22 numbers. As we are in the U.S. today, taking part at the ConExpo fair, our call takes place a little bit later than usual. 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 [Audio Gap] Joining me today are our CEO, Sebastian Schulte; as well as our CFO, Timo Krutoff. As usual, Sebastian will walk you through the highlights of the performance of the group and then hand over to Timo, who will provide some more details on our financial figures. Sebastian will close the presentation with our current market outlook and our guidance. After this quick introduction, we will be happy to answer your questions. 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 this presentation. All documents relating to our full year 2020 reporting are available on our website. And without much further ado, I hand over to Sebastian.

Thank you very much, Christian, and good afternoon from my side also to all of you joining in our today's analyst and investor presentation call for the fiscal year 2022. Yes. Before we'll go into the details of the number, which Timo will do today, and let me look back briefly on the highlights because we can probably say we're looking back on a strong performance, so fairly volatile environment. If I may walk through the main aspects of that. So first of all, we increased new orders by just 1%, but to a level of slightly above EUR 2 billion. So that's a high level. We had already a high level in '21. So that's why the increase isn't that impressive in terms of new orders. The book-to-bill on a full year basis was 1.04. So still slightly growing business. And that was a picture which we had throughout the year. We increased unit sales for Doug Classic engines by almost 13% to 181,249 engines, and we increased revenue by 20.8% to EUR 1.95 billion. So you see here already, we increased revenue by a larger share that sales that's due to mix and price, and we'll talk about that later. What obviously extremely important is what it hit the bottom line. And our adjusted EBIT was increased by EUR 52.2 million to a level of EUR 89.4 million, which in terms of margin translates into 4.6% for the group, which is pretty much a doubling compared to previous year, where, and that's something we're particularly proud of a classic segment. We now achieved a margin of 6.8%, an increase by 3 percentage points. And going forward, we, as a Board, will propose a dividend to be paid at EUR 0.15 per share. That's this time a dividend ratio of 24%. That's our proposal for the Annual General Meeting. We also released our new midterm targets for '25. We'll come to that later in more detail. But that means revenue of larger than EUR 2.5 billion and the EBIT margin for the group between 6% and 7%. Earlier this year, in January, we unveiled our new dual plus strategy with the Elements classic Green and servers. I will talk to that a bit more in detail later end. And a couple of weeks ago, we announced our first major proof point for the classic part of the dual plus strategy that we entered into a strategic alliance with time truck, where we are working together, collaborating with the 2 engine platforms in the discussion between 5.1 and 15.6 liter. A few numbers from my side, but on a very high level, looking here, particularly at the classic segment, as I said, very high results, 6.8%, which was the best result in recent history. I mean we are showing here pro forma view on revenue and adjusted EBIT in the segment DEUTZ Classic and DEUTZ Green. We had a very high sales level, the highest double in the last 6 years in the classic business and as said, 6.58%, the highest margin in the past 10 years. EUR 128 million, [indiscernible] the EBIT contribution of DEUTZ Classic, which obviously means in turn in green, we're still loss-making, but that is due to the fact that we are here from facing still an increasing ramp-up costs, particularly due to the higher R&D cost when it comes to our hydrogen and electrification business. Before, so I'd like to look a little bit ahead and here in terms of strategic vision going forward in the mid and long term, because that's a picture we've been using internally, externally to show how we are seeing the marketing technology perspective for DEUTZ. Today, you see on the left side, we have the capacity of roughly give or take, 200,000 engines, depending on shift models can be a bit more, can be a bit less. And obviously, as we all know, that's predominantly a combustion engine with diesel as phosphor fuel. If we look forward, if you fast forward here, we see that for our areas for our customers, in our industries, we still see an increase in the combustion engine of demand and thus also our production and sales , that's the blue layer here. But we see that by the mid of decade certainly during -- towards the end of the decade, we will get much, much stronger in adapted combustion engine that may be combustion engines, which are then run with still having on e-fuels, but also with hydrogen, we talk about the hydrogen strategy a bit later. But on top of that, we are also seeing an increase in our technology chain, whether it's going to be electrification and battery electric solutions for the fuel cell. But the big picture is here, combustion technology is going to be around for quite some time in our industry for our customers and jointly with the adaptive use of combustion engine and the technology change, we see dots on a growing path in the short, mid and long term. We want to spend a few moments also on how we're positioning ourselves to. So first of all, it is our ambition that we continue to provide powertrains that move vehicles and machinery around the world. And when we say around the world, we mean particularly in the off-highway construction sites, roads farmland. And that's, as I said, just a few moments ago a bit ago there, we need to continue to work with the combustion engine. On the other hand, it's extremely important that we also set ourselves the target to become climate retrial for 2050 because we want to enable our customers to successfully master their own transformation. We are here in the same boat like our customers. And in order to do so, we will continue to use our innovative strength, in particular, with an open-minded approach to technology. that became very clear for me made on the previous chart where we see what will be different ways of technologies done. We are moving forward extremely important for us as DEUTZ, we also grow as an organization and keep promoting a culture which puts neural action innovation first because providing completely new technology, new solutions requires a different mindset, and that's something where we as organization needs to grow. And our claimants, we've been using that since the beginning of the year with our new strategy. Our claim and ambition is we ensure the world keeps moving. And we have a huge heritage for almost 160 years. Next year, we'll celebrate the big birthday that they come 160-year celebration. And it is our ambition that we also ensure the world keeps moving that in the next years, ideally in the next 160 years. So that's a bit the big step going forward. Let me reiterate our dual strategy, which we introduced earlier this year. So we have the 2-plus elements. The one element is the classic DEUTZ business, which we want to grow base which we want to grow significantly based on strong performance, but also on market consolidation. Then we'll have our Green DEUTZ segment where we want to build a green ecosystem with relevant products, technologies and also business models. And that will all be supported by our strong service ports business, which is already strong, which we grew already over the last years, but where we want to intensify the growth path in the years to come. We need to expand that highly profitable service business around the world. And let me talk a few words about Classic DEUTZ. Here, it's very clear. The goal is very clear performance and growth, right? First of all, we continue to improve performance. We've done quite a lot in the year '22. We need to make more efficient use of the existing capacities. We need to simplify our processes. We need to optimize our portfolio, and we need to also and that was certainly improved delivery performance and becoming even more trusted partner for our customers. Part for that improving performance is also our pricing politics, which I will tackle in a few moments. But beyond what we do internally, one big element for classic good oil growth is also consolidation and growth because we know that in the field of the combustion engine, there are a lot of players who are leaving the market and we want to position ourselves in a different way. We clearly say we are going to remain, we're going to be around in that field. And by doing that, we will also focus on acquisitions and takeovers and partnerships in order to continue the or growth position. Our objective for Classic DEUTZ is very clear. We want to become a top 3 producer in the field of the non-captive combustion engines by 2030. And first proof point on performance in the classic business is the situation in terms of pricing. The environment in '22 was extremely challenging. We were all not only we, but the entire industry was based with energy price with raw material price hikes with logistic costs ups and downs, unfortunately, mainly ups. And thus, our production costs were significantly negatively affected in '22. But, and that's something which is extremely important and has been extremely important as a basis for the results we achieved in '22 as management, we reacted very early and very, very strong already in the second half of February to systematically tackle this challenge. We announced pretty early our objectives to increase our prices in the range between 8% and 12% for the end of '22. And we managed to do so, but not only did we manage to increase the prices in this range. We also benefited here in the situation that demand particularly for smaller for liter engines significantly exceeded the supply, which we could do. So there, we introduced the so-called fixed volume program based on which with our customers for this year for '23, we implemented a fixation level of more than 70%. So we're almost sold out in the engine smaller folios for this year. So that's very important how we work here with the stringent structured approach to secure the profitability of DEUTZ Classic, and that has been the beginning. When we talk about consolidation, as I mentioned at the first page, first proof point here is the cooperation with Daimler Truck. That cooperation showed or includes that we DEUTZ take over IP and licenses of the medium duty, the ended the heavy duty, the HR engine platform from Daimler and we'll bring that into production while in the second half of the decade. With that, this cooperation allows us as do to tap to new customer groups, of course, primarily in the Off-Highway segment where we are already strong, but prospectively, we can, in particular for the medium-duty engines also approach on-highway customers and expanding our customer base. We get a fantastic engine, a future-proof architecture and design. It's a proven modern platform. And that's particularly relevant for us. We can also bring that into technology developments such as hydrogen fuel ready. And as a part of that corporation Daimler, as soon as that transaction is closed, it will become a DEUTZ shareholder of 4.19% stake. But Classic is one very, very important aspect, but who need to increase speed when it comes to our Green DEUTZ because Green DEUTZ in the end will guarantee the future of DEUTZ. And here, first of all, we're going to build on the capabilities we already have. We built out a lot of things over the last years, the acquisition of Torqeedo, our product development in terms of Green DEUTZ and also the Hydrogen engine. But we need to see we need to explore where we can improve and where we can scale here our growth in a profitable way. We need to also and that's one of the findings in our strategic strategy development. We also need to pursue here the structure rate M&A and partnerships were necessary because that's such a wide field where no one can do everything alone. So here, we are in a structured approach of searching the right partner. But in the end, and that's something very important. It's not only about the engine or a new system for the engine. It's about creating the right structure and also the ecosystem. We will adjust our structure to make sure we have the right setup for the ecosystem. And when I say ecosystem, I mean that we are also approaching products around the engine, whether it's going to be storage of energy, whether it's going to be tanks, we'll see about that. But that's something because we need to have need to progress together with our customers in their transformation part, and there's lots of uncertainty in what is the final and the right solution for that. And here, we will be there to support our customers in mastering this transformation. We are not committing here to top line or bottom line, a number for Green. There's too much uncertainty still in there. But what we are committing is very clearly, we invest more than EUR 100 [ billion ] in Green in '25, whether that's going to be related to partnerships in terms of M&A or whether it's going to be increased and continuous development cost for hinted and electrification. We have already achieved good progress in green, a few -- most of the topics we have reported throughout the year. So the first time in genset in the pilot application in Cologne, which will happen in the first half of the year, we joined a Deutsche hydrogen combustion engine truck project, the Riser project with Volvo, BMW, in which we will introduce one of our hydrogen engine in a truck we have received the first power 3 serial order for our mobile charging station. At Bauma, we introduced a prototype of the first concrete EPump. And recently, we also signed an LOI for a small series of timing gensets for the Chinese market. For Duals strategy, the plus part is our service business. And here, very, very relevant. Obviously, the growth path in our service when we see where we came from in 2019. Our service revenue was EUR 350 million. In '22, we closed with EUR 450 million service revenue that was beyond our own expectations. And now based on that and based on our new in our new midterm guidance, we wanted to achieve EUR 600 million service revenue by the year '25. How are we going to do that? We're further pushing our inorganic expansion via acquisitions and alliances will take over maintenance activities on the market in '22. We closed 2 smaller M&A deals in Ireland as well as in the Netherlands. But organic expansion. So we launched, for example, last year, our DEUTZ Deutschland GMV, which is within Germany. We are open new DPCs in the U.S. We continue to do that in the future. And the ramp up here, our service network, we want to really build up continue to build our one-stop shop for across the regions where we're not only focusing on DEUTZ engines, but also on products of competitors because we want to be there for the customers regardless for which part or which product we support. And for more medium and long term, obviously, we need to address new areas for growth, in particular in the upcoming green business and when it comes on new sales channels and solutions, including digital. Let me close my first part here with summarizing the new midterm guidance based on our duals strategy. Midterm guidance means the guidance for the fiscal year '25. So first of all, we'll see our new revenue target of about EUR 2.5 billion by '25 based or according to which service will contribute with a revenue of roughly EUR 600 million and for the group. So including green, we see here an adjusted EBIT margin in the range of between 6% and 7%. With that in mind, I would hand over to Timo, who will guide you in a bit more detail for the '22 numbers. Thank you.

Yes. Thank you, Sebastian, gentlemen, and a very warm welcome also from my side. Let me now take the chance to guide you through our financial numbers in a little more detail. 2022 was, for sure, a fairly hard year for everyone in the business. But I think it's fair to say that we navigated those rough waters pretty well. Our order intake, again, was higher than EUR 2 billion. That is up 1.1% in comparison to the already very high level of 2021. Q1 and Q2 were already above EUR 200 million in order intake. That was up 3% in the first quarter compared to the year before and 8% in the second quarter. When we then saw quarter 3, it seems like the market got a lot more cautious. And we only achieved EUR 442 million in order intake, so a significantly lower number than the 2 quarters before that. While it's normal that the summer months are usually a little weaker, it was also down 1% in comparison to the year before. So again, everyone was a little cautious, but partly, we can say it is completely turned in quarter 4. Even though December is also usually a weak month, we achieved the second highest order intake of all 4 quarters with EUR 514 million in order intake, and that is up 18% compared to the year before. So that works very well. Unit sales, again, not quite a new record, but extremely high. Our production did a great job to further optimize our production, and we could have sold even more. But everyone knows there was a lot of struggle in the were around the world. So the limiting factor here was in our production, but the components we could get from the market. But we indeed did a good job on the pricing side. You can see if we look at the growth rate of sales, which was 20.8% compared to the 16.6% in unit sales. If we look at that from a price per engine level, that is now up from 7,300 at the beginning of the year to 7,800 at the end of the year. Of course, there are also mix effect sometimes in that, but we can see a steady growth over the years. So that went very well. Yes. Service growth after we made the EUR 400 million, just a little bit about that. The year before, it would have been, of course, now nice to hit the EUR 450 million, which unfortunately, we are 200,000 short. But anyway, that's, of course, a great achievement to again have an increase of 11.6%. And here, we have to say it's a very nice mixture of organic growth, which we did by ourselves and some of the inorganic growth with the 2 acquisitions we did, but also, of course, due to pricing increases, we were able to have in the market, and we can say that we were able to keep the margin at a similar level than the years before, which where this growth is a great achievement. Let's now look to the revenue development a little more if we look at the different regions. Our biggest one, for sure, is Europe, including Germany. So 58% of our sales comes from this region. So this is super important. And the second most important region is Americas. If we look at the sales development, Europe, yes, fairly well in total, a little above 16%, but the really, really big increase, at least in euros came from Americas with a little above 50% of sales increase. Some of that, a little of that is also driven by the exchange rate, but in general, the market went very well. Asia Pacific, in comparison, it's our third biggest region. It was only up almost 7%. This was due to the struggles in China. So China, of course, was hit later with the lockdowns last year, so that had a very big impact, but also construction industry didn't have a very good year in China. Luckily, we see some positive signs now on the horizon for this year. But last year, it was hard. So in China, we actually had a fairly tough development. Looking at the revenue breakdown by application. Construction equipment is about 1/3 of our total sales, almost with 30%, followed by service. We already 25%. Both of them are nicely developing construction equipment was 17.6% up. Then now we're getting to the higher increased parts, Material Handling, which is 18% of our revenue, roughly EUR 355 million was up 25%, already very nice, but even better if we look at the agricultural machinery, which was up 36% and is now 14% of total sales of our business. Stationary equipment had the total highest increase in percentage with almost 50%, but this on a still fairly low level with 9% of total sales. Okay. Let's now focus a little bit on EBIT. So in absolute numbers, we achieved an EBIT of EUR 89.4 million, which is EUR 52 million higher than the year before. Some of that, of course, is due to the higher sales volume, but margin also doubled from 2.3% to 4.6%. That has different reasons. One, again, is also economies of scale. So we could cover our fixed costs a little better with a higher sales volume, but one of the major country the to were the price increases. And that we acted very quickly. You can see if you look at the margins by quarter. So in quarter 2, we achieved a very high margin with 5.6% because during that time, we were already able to increase some of the prices, while not all of the costs have increased in a similar way. Next slide, please. R&D spending. That's also, of course, a part of what's in our EBIT here. We again increased our spending. We're now roughly at 5% of revenue, but we increased it by 10%. So we came from EUR 82 million now to almost EUR 91 million. That is of great importance to us because, of course, the R&D is going to be our future, and especially with the transformation in the green segment we have ahead of us. We need to talk here. Capital expenditure is also something where we invested -- keep investing in the future. So if you look at typical increases on investments, we're a little above the year before, but we also did a big leasing project, which you can see here, which is about the consolidation of our logistic centers in Germany, which is actually going to give us a cost saving on the rental part over the long term, but on top of that, also efficiency increases in the work process. Working capital is something we did on purpose. Of course, it looks a little tough when we look at the absolute numbers here from EUR 253 million to EUR 346 million. There was a significant increase, EUR 77 million out of that came from an increase in inventory, and we did that on purpose. So it was a very, as we said already, it was a very hard time to have a stable supply chain. And so we decided during the year to rather have a little more inventory on hand to also make sure we can produce parts but also have the production running a little smoother. The highest effect of that you already saw in last year that was in September, where inventories were actually EUR 50 million higher. So when you saw that it's a little more on the stable side, we were able and especially in quarter 4 to decrease the inventory by EUR 50 million. So if we look at the DIOs of the end of 2021, we were at 85 days. the highest point in September was 100 days. And at the end of the year, we ended up at 84 days of even a little lower than the year before. So inventory management is on an okay level again. That, of course, also had an effect on our cash flow. So EBITDA was EUR 183 million. So that, of course, had a very big effect. But again, the working capital increase of EUR 89 million, then had the opposite effect of it just all the investments, which we did. And so in the end, we ended up at minus EUR 16.6 million of free cash flow, which is unfortunately, of course, a negative effect. But if we compare it to guidance, where upper part of the better part, the better end of our guidance, which was a 2 digital low to medium level in the expectations. So that also went very well, especially if we look at the Q4 numbers. So let's look a little bit at equity. And we can say 45.3% compared to same 45.6% is, I would say, stable and on a very healthy level. So that is doing well, especially if we think about the cash flow situation and the buildup in the working capital. So there is no bigger problem in that area. We were also able to have additional syndicated credit lines, at the end of the year, we were a little worried that we run into a recession in 2023. So we added another EUR 75 million, which we are going to have for the next 2 years. So if anything is going to happen from a recession perspective, we are very well positioned here. But since we're not expecting that at least in a very strong way anymore, I think the total group credit line of EUR 140 million, which is available, which we are not using right now also gives us sufficient financial headroom to further develop all the business, maybe even through acquisitions. So what we're proposing again per share as a dividend, which is going to be done on the same level as last year. So a quick look at our 2 segments. The classic segment still makes up the absolute majority of our business. So I am not going to go through all the order intake and revenue numbers because they are very similar to, at least from the explanation to what I've said before. But it is very important to see where we develop our EBIT margin with a so with 6.8%, I think we are very well positioned, and that is crucial for our dual classic strategy for the future because we believe this is going to finance the transformation of our business over the next years to come. And this is what we need, place a little bit of the money for. So if we look at the results of the Green segment with EUR 39.2 million negative. This Sebastian talked about that already, is where we spend a lot of our R&D money. So our R&D money here is not capitalized on the R&D side, so it all goes to the P&L. And so the biggest portion of that is really development for the future. Torqeedo business is also [indiscernible], which unfortunately had a negative result again. But the total number is still doable for us. So thank you for that, and I'll hand over back to Sebastian.

Yes. Thank you, Timo, for the details. View on the numbers. And I think we can see very clearly that it's been a solid year and we'll really make progress, particularly when it comes to not only stabilization, but really, really pushing forward our classic step by step, but that's something which gives us a good basis for the next quarters and years. So yes, coming from a solid year '22. Now looking a bit what is [Audio Gap]. Let me first talk a little bit about both our industries as well as our region split here. We heard a lot about in the last month, is there going to be a recession or not. And I think the cloud has cleared a little bit. Certainly, that's what we hear when we talk to our customers, as Christian said initially, we're currently the connectible in the U.S. and having a lot of conversations with our customers. So yes, as I said, plans seem to be clearing up a little. If we look at the European and the EMEA region, we expect for '23 a fairly flat development in Ag, but certainly an increase in construction equipment, material handling. Similar picture in the Americas, relatively flat on a high level in ag, but construction equipment and particular material amping is booming. We talk to a lot of those customers here in the states. And most of them are sold out for '23. Some of them are already opening the order book for '24. And obviously, if the customer has this phases, the strong demand, that's good news for us as well. APAC has been a bit of a mixed bag in the past year, in the past months, particularly due to the development in China. Also year development in ag expected flat construction equipment, material handling were clearly, clearly upwards. And heavy-duty truck, which is relevant for China for us is also we also see slight sober lightings. Particularly China, obviously, as Timo mentioned it earlier, the lockdown has been stopped and obviously, not the whole country is waking up when it comes the to their economic activity. So that's something we believe to participate for. Positive outlook underpinned by all the end markets. So yes, at the moment, no really no concern on the market drop in terms of any sort of recession right now, and that's certainly good news. And particularly if you compare it to the sentiment we had for the end of '22, right? What does it mean for our numbers for our guidance? I mean traditionally as today with releasing the '22 numbers, we're also releasing the first guidance for '23. And let me summarize it, it's cautiously optimistic, We expect moderate growth, units there is 175,000 to 195,000. Revenue would mean EUR 1.9 billion to EUR 2.1 billion. So yes, a little uptick on adjusted EBIT. At the moment, we're still a bit cautious, as I said, 4% to 5%. Free cash flow, we expect to be mid-double-digit min euro amount. Yes, right, we're growing. And obviously, we've increased the business volume already in the last quarter, but there's still a bit of an increase to come. So that's why we are on that red range and extremely important and relevant with that high order backlog, almost EUR 800 million, in particular in the smaller foliar business with a high fixation, we have a very, very good visibility for the first 7 to 8 months. So that's good news. Price increases we've done in '22, and we are currently in the smaller next wave that should have a positive rollover. In fact, not all of these price increases were effective January '22, of course, some were effective in July, some even in the be a rollover effect. But that's part of why we're also a little cautious to the cost increase that is not all done yet, inflation's going down, and obviously, we'll see that. And the negotiation position towards the suppliers has increased significantly now. So that's good. But there's still going to be a bit of a rollover at the first side, yes. So that's pretty much it. We're looking cautiously optimistic into '23. And we obviously are also looking forward for the first quarter results, which we will announce in the beginning of May. But with having said that, I would like to thank you for your attention. I'll hand over to Christian, who's going to manage that. Thank you very much.

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

[Operator Instructions] The first question is from the line of Tore Fangmann with Berenberg.

Congrats on the good results. One question from my side. Could you give us a split of growth maybe into price and unit increases or like organic, inorganic to reach the goal of over EUR 2.5 billion in revenues in 2025?

Yes, sure, we can do that. I mean one aspect or one part of that growth is the service business. We're coming from EUR 450 million to EUR 600 million. So that's going to be EUR 150 million contributing. And then in last year, we've been in the range of 180,000, 185,000 engines, and we expect a level of just above 200,000 maybe 210,000 a bit of a mid-cycle picture. And so pretty much it's all in the new engines. That's all going to be organic, inorganic moves will have a slightly longer horizon because they're both transactions, which may be fairly complex, and we have not planned that actively into that guidance. So cut a long story short, service is a part, volume is a part and then obviously a little bit of price as well when it comes to the engine sales. And yes, also a slight pickup in re-business, but you were not talking about double-digit growth rates. I hope that answers your question.

[Operator Instructions] The next question is from the line of Jorge Gonzalez with Hauck.

Timo, good on your new role. Looking forward meeting you soon in roads. Well, my first question is regarding the free cash flow target for '23. It will be interesting if you can share with us your assumptions for the working capital levels. Just to understand better the number. Also, it will be quite useful, if you can comment a little bit on your assumptions for Turkey and China, in both '23 and '25. If you can give us some color on the volumes that you are expecting in both cases? And maybe also regarding the midterm now that you have commented 200,000 volumes. Maybe the question will be if this is for you, some kind of mid-cycle situation because of some prebuy effects maybe because of the change of regulation in terms of the synergies? Or how do you see this level of production for '25 200,000 levels?

Yes. Well, thank you. This is Timo. Thank you for the kind words. I'm also looking forward to meeting you, of course. If we look at the free cash flow low for this year, especially in the working capital development here, we think we're now in a, let's call it, fairly stable situation, at least over the year. So there shouldn't be any huge effects coming out of that. But having said that, we are planning to most likely increase production in the second half of this year. In order to do that, we are going to have to increase the component parts, at least a couple of months before that, and we're going to see an effect of that probably in the second to third quarter.

Right. When I take over on the question on green at Torqeedo. Indeed, we haven't actively mentioned it, but what we see in our green business for '23, we're coming here from a revenue of EUR 64 million. And we're expecting for '23, range between EUR 60 million and EUR 100 million, obviously mainly driven by a further ramp-up of Torqeedo. So that's clear. Then your third question related to the 210,000 units or to the revenue in '25 and yes, it's a mid-cycle assumption, right? I mean at the moment, we've said it a lot of times, and we feel every day that demand significantly exceeds supply. So I think Timo said it also, we could have sold much more last year, but we just weren't able to produce it due to the short visit supply chain. This picture is relieving a little bit already this year. So we are considering increasing capacity in the second half of the year. And if we do that, we managed to do that. And once more. At the moment, it doesn't look like demand is constrained. It's more like parts. But if we manage to do that, will actually wear quickly on a full year basis higher than '25. But this is why we cannot commit or not give a prognosis for '23 in that range because it will take a while until we're able to increase capacity, yes. But yes, mid-cycle picture in that range. And that's also prouder as we explained, and that sort of chart at the very beginning with that layer. So that fits very well to the question you asked.

Thank you for the import interest. Maybe if you allow me 2 quick follow-ups on this. The first one is if you can give us, I'm sorry if you have already answered this because the line is not working well for me. If you can give us a reference for the research and development cost in '23, if we should expect something similar to '22, maybe? And looking through the annual report, it was very interesting. This works that you have performed in China. I was wondering if this also has affected the China contribution in '22? And maybe you can give us some color on that, too.

Yes. So the first question was about the R&D. So we are going to see again a little bit of a [Audio Gap] So almost again 10% increase or we are planning to spend roughly EUR 100 million on the R&D side. On the China business, we ended up China with negative EUR 5 million in the last fiscal year in the joint venture. Sebastian and I went there a couple of weeks ago, I had a long discussion with everyone. As I mentioned earlier, we do see, well, some light on the horizon on the sales side. Hopefully, this is actually going to happen. It's very hard to say so shortly after the lockdown ended or everything a little special, we can say. But again, we do see some options to develop the business further over the next months there. But it's very hard to estimate right now where it's going to entity. And obviously, that was the JV in particular, but we also have our own production in Tianjin.

And that's something when you're making reference to one of the previous questions on the volume assumptions. [Audio Gap] there is still also potential to ramp up. And here we are now back on track when it comes on localization of parts, and that's another way in another part in our production network where we can at least starting late this year on fulfill the increased demand for smaller political. So that's another contributor to that ramp-up in overall volumes. I hope we could answer you because you said the line was not great, but I hope it was here, you were able to understand. If not, obviously, we can also do a follow-up in one of our next meetings.

The Internet line sounds better, so I will listen to it again later. Maybe one last, Timo, sorry about this. Regarding CapEx, this year, well, you had this investment in the logistics center. What we should expect for '23? Are the levels more similar to '21? Or should we expect still something about EUR 100 million?

Sorry, is too quick. We're not going to see a similar thing on the leasing position as we saw last year. But if we look into total investment, we have a guidance between EUR 70 million and EUR 90 million for the next year.

[Operator Instructions] The next question is from the line of Roland Konen with Value-Holdings.

I have some minor ones. First question would be on your real estate sell current nodes. When I read it right in the annual report, you're now saying that the snow firm date no firm date could be made because everything is looking for the improvement of the city of Cologne. Could you please elaborate more on that? What is missing there? Or why is this delayed and it will be my first question.

Thank you for that question. And as we already put it in our annual report, I mean, this is actually pretty much everything. Obviously, we are in very close contact with both the city of Cologne as well as the investor and quite frankly speaking, this situation has been turning in circles. Recently, we've got some positive signs midyear. That it's all about to be cleared. So what it's all about, in fact, is there is still the -- I use the German word briefly the bans and the Luton plant. So the plan for building and utilizing the facility. And there are some, I would call it, almost minor issues to be solved, but sometimes minor issues take a long time to be between the parties. It is in principle about how many square meters are being for nursery and for school and for how many square meters can be used for social housing and obviously, which has a very, very big impact for the new investor because he can sell the nonsocial housing part of the nonschool and nursery parts for much higher price. So that's going forward and back. We are doing our utmost to push a particular city of Cologne to bring forward that project. But realistically speaking, we cannot expect this to be solved finally within this year. And that's why we will continue to inform year-on progress. But in the end, it's the same contract. So it's not a question of if, it's a question of when.

Okay. Great. Next question would be on your midterm target. Your former EBIT target was 7% to 8%. Now it's 6% to 7%. The missing 1 percentage point is this the China strategy, which is not developing as you might guess, is this the green. The green segment, which is making more losses than maybe anticipated or what is behind the 1 percentage point missing?

Well, already, it is the China impact. 3 years ago, 3, 4 years ago, when this old midterm guidance was first released. They were very, very bullish assumption on the China growth, particularly coming to a joint venture. We did already a couple of years ago. And obviously, this was a top line correction. We did. This has an impact on the bottom line. Not saying we have given up to go beyond what we now guided, but we need to be realistic and we only want to promise what we truly believe and that's part of our, I'd say, new transparency. So yes, the call from a numbers point of view, that delta is due to China, absolutely.

Great. And then looking again at the green segment, you gave us an update on the 23 guidance we're talking that Torqeedo is picking up, looking at the intangibles and the goodwill of this segment, especially Torqeedo and [indiscernible], do you see any impairment needed because my feeling is that the earnings situation should be better or was guided better in the past.

Yes. I mean talking particularly on your question regarding impairment, we do not see any impairment risk here on the goodwill. That's also due to the fact that the goodwill, which initially entered the balance sheet as part of the acquisition of Torqeedo is not, as you know, a goodwill accounting. It's allocated to cash-generating units. And Torqeedo is not a cash-generating unit. We're talking here about the cash unit classic and green. And so the allocation of that goodwill has happened over the last years and several steps due to the change also of the segment structures in a way that we see sufficient headroom in the goodwill impairment test. I mean, as we obviously, this is why we're talking today, we just closed the both 422, and there's net risk in the accounting of the goodwill. Having said that, in the HGB financial statement for DEUTZ AG, so not the group accounts to be reduced partially the book value of Torqeedo, but that's not what you do that's nothing you see in the group numbers.

Okay. Great. And then my final 2 questions, more housekeeping question. The first one is looking at the financial result on a quarterly basis, there was a much higher negative result in the fourth quarter. Are there special reasons? Or is the fourth quarter financial results, more or less a run rate for the fiscal year 2003 because of the increased interest rates.

Yes. I mean it is, as you said, I mean, we know our funding, our financing is with a syndicated loan. And obviously, the fund, the finance cost for that [ Sunon ] related to the current interest rate level. So we have 2 effects. We're not talking on major effects, right? But we have 2 effects, net debt increased a little bit throughout the year and interest rates as well. So that there is no more than that, yes.

Okay. And my very last question is on the write-down on receivables. You also mentioned in the press release, when analyze it right in the annual report, it increased from roughly EUR 5 million to EUR 10 million. This is a very conservative approach because your results are so good? Or is there anything special in this number.

Yes. So we have an ongoing dispute with one of our customers in Asia about a receivables position, and that's what we have put into the box for that. We are putting here, let's say, how is it correctly that it's a realistic but cautious view on that particular receivables. So that's the only reason for that increase.

The next question is from the line of Tore Fangmann with Berenberg.

Just a quick question on how the new year 2023 so far worked out for you? And do you see like orders coming through? Because I think in Q3 and Q4, we had book-to-bill ratios of below 1. And maybe you could just shed some light on how the first 2 months basically of the new year works for you.

Yes. I mean, it's always difficult we are in the conference for '22. You're asking questions for '23. We do obviously see already first numbers coming in for '23, but we will provide the full details in May. So I can only say one thing. It's looking all right. No need to market for management at this point.

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

I have 2 questions related to your midterm guidance. I mean, this EUR 2.5 billion by 2025 sounds a little bit ambitious at first side in the current macro environment. It implies their sales CAGR of at least 9% compared to 2022. So can you give us a little bit of bridge? I mean, we already know what your target for the services business, what do you target for the 2 divisions? And secondly, can you remind us which activities in China are consolidated at equity that is excluded in the sales guidance of EUR 2.5 billion and included in the EBIT guidance? That would be very helpful.

EUR 2.5 billion, obviously, yes, it's ambitious, but we are ambitious, and we don't want to set targets, but we believe it's possible. Otherwise, we wouldn't have put it here in the public. So and you mentioned already one part of that bridge. One part of that bridge is indeed the service. I mean we closed last year with EUR 1.95 billion. So the service EUR 600 million is already EUR 150 million. We said already earlier that we still have at the moment, significant limitations in terms of capacities in our classic business, significantly more this year -- sorry, last year, particularly on smaller for liters. And we expect this demand to remain strong reason for the year from all the customers we talk right now, obviously, focus is on '23, but also approaching '24. So we see room here to improve and to increase all areas in our classic business significantly fueled by capacity increase on German plant, but also by capacity increase on the Tianjin plant. And here, I'm already giving an answer to your second question. So Tianjin plant is fully consolidated, whereas the joint venture we have with Sony is not fully consolidated. So here, we only see the fair share part in the bottom line, but not the top line in the results. And then we'll see a little bit of growth in green as well. And these are pretty much the end last but not least, there is still an effect on price increases becoming effective on the full year. So we see 4 elements, pretty much service volume increase, price increase and green. So these are pretty much the elements of that bridge. And I think on China, it was a question what's consolidated, what's not. I gave them or I'm just looking to my colleague. I want to say something. No. Great. I hope that answered your question.

[Operator Instructions] There are no further questions, and I hand back to Christian Ludwig for closing comments.

Yes. Thank you very much, operator. Thank you very much all for participating and for your questions. Should any additional questions pop up, the Investor Relations department is at your proposal. And otherwise, we'll hear from you at the latest early May when we will report our Q1 numbers. Have a great day. Thank you, and goodbye.

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