DEUTZ Aktiengesellschaft (DEZ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the DEUTZ AG First Quarter 2023 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. Please go ahead.

Thank you very much, operator. To you all, also warm welcome from myside. Please note that this call is being recorded, and a replay will be available on our website at deutz.com later today. Your participation in the call implies your consent with this. Joining me today are our CEO, Sebastian Schulte; as well as our CFO, Timo 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 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 and annual report in this presentation. All documents relating to our Q1 2023 reporting are available on our website. And without much further ado, I hand over to Sebastian.

Thank you very much, Christian, and also for myself, good morning, and welcome to our Q1 '23 investor presentation. It's great to be with you and talking to you again about our progress. Let me start with the highlights so to speak, key operational and strategic developments. And of course, we appreciate that last week when we had our AGM -- our virtual AGM here in Cologne, we already published or had to our publish preliminary results for the first quarter and gave already some insights on our outlook this year. So not all of it what we're talking today is big news, but we believe it's worthwhile spending some more time on that and going into the details. So with that in mind, let me start with the new orders in Q1, which went up roughly 3% to EUR 526 million. Starting also or basing on quite a strong Q1 last year, that's why the increase is not that impressive. But as I said, it's on a high level. And it shows also book-to-bill 1.02. So still slightly, but still above 1. So that means the growth path is still intact quite on a fairly high level given where we came from. Unit sales, DEUTZ engines up 6% to now 46,110 units in the first quarter and very important, obviously, the revenue went up by almost 60% EUR 517.2 million. So we're continuing that path that revenue increase exceeds unit sales increase, which typically is a good sign of profitability as we'll see later in the bottom-line figures. And yes, bottom line figures, you see the point. So adjusted EBIT pretty much doubled if we compare to the comparable quarter last year from -- now to EUR 32.1 million, up EUR 16 million, translating into an EBIT margin of 6.2%, also up almost 3 percentage points. And very important for us, and we'll come to the strategic implications later, is that our Classic segment, which currently is the backbone of our business here, and now yielded an EBIT margin of 8.8%, up 3 percentage points. So we have here like arrived on a newer higher and very, very good level. Free cash flow. So cash conversion is all right, plus EUR 10.8 million in the first quarter. Not a bad number. Typically, the fourth quarter is always bit of challenge. And sometimes you have like have a reversion, so that's a very good number for first quarter. And with that in mind, after we looked at these preliminary Q1 numbers last week, we also defined or refined, to be precise our full year guidance slightly. And we'll see revenue for '23 now in the range of -- or at the level of EUR 2.1 billion in EBIT margin now at 5 percentage points, so pretty much on the upper end of the guidance, which we published earlier this year to the market. Strategically, certainly want to highlight regarding our cooperation with Daimler Truck, we announced that the signature of that deal at the end of January and now the closing has occurred. So everything is well prepared now and as a result, Daimler Truck is now a shareholder in DEUTZ with a stake of roughly 4.2%. And also, I'll talk about our service strategy a bit more later in this call, we made further progress in expanding our international service network, just to name one of the milestones we achieved. We opened the 9th DEUTZ service center, DEUTZ power center, DPC, in the U.S. And so that's another proof point how we drove here in that, in particular, in terms of profitability, very important field. But let me go structure through our 2 or 3 pillars of the Dual+ strategy. Just keep in mind, Dual+ is on the one hand, you had the Classic DEUTZ and the Green DEUTZ and plus is going to be the service DEUTZ because it supports perfectively both Classic and Green business. So as said, Daimler Truck is completed, integration roadmap defined and implementation started and I will spend some more minutes in a few pages on that. We do -- we are making progress in our supply chain production processes. It's still tough. It's still challenging at times for us, it also for our customers. We'll hear later that market currently is not really a limiting factor, but supply chain is. So we're becoming better at managing this. And that's certainly a plus, and that also is reflected in the numbers. And with that in mind, we have a strong demand, particularly in our compact engines below 4 liters. And that's why we decided to implement a third shift here in Cologne in our production plant in the highly automated line for -- assembly line for sub-4 liter. Most likely, we're going to start that in the beginning of the second half to really meet the very, very healthy customer demand and benefit more from scale later on. So that's all on the preparation. And in that context, and that's -- actually, that was also one of the reasons why we decided to increase capacity here. We managed to further roll out our fixed volume program with most of you. We've been talking in various roadshows and conferences on that fixed volume program, on how that has been a success. So just to keep a note just to bring back to mind where the demand in these compact engines exceeded pretty much supply. So we are well managed here to combine fixed volume commitments from demand offtake commitments from our customers with respect to price increases. And now if we consider the increased capacity for sub-4 liter line, we now have sold pretty much 75% of the yearly capacity. And we are at the moment already talking to some first customers in expanding this program into 2024. So summarizing here, the Classic business continues to provide strong foundation also for the implementation of green strategy or making good progress. A few comments on Daimler Truck cooperation. As you all know, following our earlier communication this year, we at DEUTZ have acquired IP and licenses here for development and also production of the medium-duty and the heavy-duty Daimler engines initially for the off-highway application, but prospectively also on-highway. This transaction has now completed, so the closing has occurred the end of March. As a result, Daimler has taken a 4.2% stake -- shareholding stake in DEUTZ. And now it's obviously important to bring that cooperation to life. So we are now, first of all, a technical point of view, we have done all the kick-off meetings. So to transfer the other technology also physically to DEUTZ, we have initiated talks to the most important customers for those products. We want to make that -- we're spending always some time on that because we want to make that really clear. Here our commitment at DEUTZ we've take an active role in the consolidation of the combustion engine market. And that certainly after our partnership with John Deere on 3.9 engine, which is already running for a couple of years. This is the second big step, and there's more to come. If we then move on our Green business. At the moment, still, as you know, fairly small in terms of top line. But we need to -- we will and we want to invest in the future of the company. So here, the project pipeline is growing. At the moment, we elaborating on 10 battery electric systems projects with OEM partners. Some of them actually very, very large and relevant OEM partners. We have all -- we are also working on 5 hydrogen projects. And as soon as any of those projects, we are able to disclose, we will do so. But at the moment, that's still in the background. And we also initiated -- an established a process to evaluate new business models and potential partnerships, which brings us also going beyond the engine, beyond the drivetrain, establishing us more working and thinking in ecosystems as well. So that's internal cooperation we're well on track here. And as you know, part of our commitment of our Dual+ strategy is that we at DEUTZ will invest more than EUR 100 million into the Green section by 2025. We're going to say investing, I mean, it's a combination, obviously, of R&D in terms of battery electric technology, hydrogen potentially, but also M&A and partnerships. So here the objective is clear, long-term objective is clear. We want to become emission-free across the entire process chain no later than 2050. And when we say 2050, I mean it's a while, but we also need to be aware that obviously, our CO2 emission and the products we produce like more than 98% is in the use, and that's really the big lever in terms of production. We are going to be emission pretty much, much sooner. Jumping to service, very proud -- that we are very proud that we've recorded a strong first quarter. Our revenue rose further to now EUR 121.3 million. So that's another significant increase by almost 11%. Remember, we came last year, we closed roughly EUR 450 million over the full year profitable business. And now after 3 months, we are already at higher than EUR 120 million. So well on track here. The orders are up EUR 128 million. So also book-to-bill in a healthy way. And where does it come from? Yes, volume effects, particularly for parts and our exchange business. So that's great. We'll see some details later. And as mentioned at the beginning of the presentation, we are continuing our expansion of our service structure. We opened now the 9th DEUTZ service center in Michigan. And you see here on the map how we continuously rolling out here our footprint in the United States. And there are more acquisition targets in the pipeline. So we will -- we are very confident that in the next months and quarters, we will announce -- we'll be able to announce here further rollout. And very important, one part of our strategic ambition objective is that we want to grow the service business. Top line is EUR 600 million annual revenue by 2025, and we are here with our measures and activities well on track. So with that said, on the operational strategic highlights, I would, for the moment, hand over to Timo, who will translate that a bit more into numbers, which is obviously very important in this call.

Yes. Thank you, Sebastian. Let me also welcome you to our Q1 call and we're happy to show you a little more of the numbers for the first quarter. We indeed started out very strongly into the new fiscal year. The Q1 with the sales of higher than EUR 500 million with the strongest Q1 DEUTZ had in the last 15 years. So that's something I think we can be fairly happy about. We saw increases in new orders, unit sales and revenue. So this does give us a strong base for the rest of the year. So therefore, we can now say that we are expecting to end up at the higher end of our guidance of EUR 2.1 billion in sales. If we look into the different parts in a little more details. The book-to-bill ratio was 1.02 a little higher than one. So that means we're still growing. Looking at new orders, plus 3.2% compared to the first quarter of 2022. It doesn't look too much, but we have to remember that the first quarter of 2022 was indeed a very strong quarter. Unit sales up, therefore, at 10.6%, revenue, up 15.5%. Means, yes, we do have some benefits from mix effects, but also from the very strong pricing effects we have seen. If we look into the different regions and also applications, we can, first of all, say that we did grow in every region and in every segment. So that's a very strong statement from my point of view. A little more specific. If we look into Americas, where we had the highest growth rate with roughly 35% growth. And very especially our material handling business, which is strongest, supported by the investments that go into infrastructure right now in the U.S. grew the most. The other regions if we're looking to how we grew in Europe, including Germany in 2022, we had a growth rate of roughly 16%. Now we are closer to 10% if you combine those 2. Therefore, still the strong growth, not quite as much so as in the last year. The Asia region did grow the least, 6.2%. We're still having -- we're only seeing slight growth in the -- especially in China after all the lockdowns are now over, but we're expecting a little more growth for the rest for the second quarter of this fiscal year. On the different segments, as I said, growth in all areas, Sebastian already talked about a little bit, but it's for us very important that also the service segment grew again by 10.5%. We did grow 10% last year. So that did go well. And if you now take the first quarter with EUR 121 million, then we should be in line with what we are planning and well above the EUR 450 million we did have in last year in sales. EBIT, of course, also a very nice first quarter, especially compared to the weak quarter we had in Q1 in '22. So if you look at the absolute numbers, we pretty much doubled it, EUR 15.8 million we made in Q1 in 2022, now we're at EUR 32 million, with a margin of 6.2%. There are different reasons for it. Part of it is, first of all, scale effects. As I said, sales was very strong. So that, of course, help but also positive mix and positive price effects. We do have to say there are also some onetime effects in it, not too much, though. But a little bit. And for the rest of the year, we want to see a little headwind potentially from the wage increases we are expecting over the year, which especially in Germany are going to hit us by mid of this year. But on the other hand, we're also hopefully going to see some scale effects. Net income before exceptional items is also up very nicely. We can say there were no exceptional items in the first quarter, so just normal business. And earnings per share, which, of course, is in line with EBIT is now at EUR 0.20 compared to EUR 0.10 last year. Looking in a little more into the details on the R&D side, we are very well in line with what we are planning, also very much in line with last year. If you look at the absolute numbers, last year, we spent EUR 23.7 million, now EUR 24.1 million in R&D. So investing have increased in our future that -- and we're on track. So very a little special thing is if we look at capital expenditure here. On the capital expenditure side, we are not looking just into cash out for investment but into the addition to fixed assets. And here, we especially have the Daimler increase in the intangible assets that hit us or has a big effect on this number. If we look at the normal -- effects of normal investment, let's say, then we are slightly above the last year, so also in line of what we had planned. Working capital is also -- we're at 17.7% in the last quarter of last year, and now we're at 17.8%. So no big effects in this area. Cash flow situation is from a high perspective, very simple. Right now, we did increase a significant EBIT and EBITDA. Therefore, also, we have the operating cash flow and therefore, the free cash flow effect. Free cash flow positive now again with EUR 10.8 million, also fits well to our guidance, which is in the mid-2-digit area for this year. Balance sheet remains very solid. We are still at an equity ratio of 45%, the dividend of EUR 0.15 for the last year per share was paid yesterday so that is also in line of what we have announced so no big effects or issues here. A little deep dive into our 2 segments. We have the Classic segment and the Green segment. When we start out with the Green segment first thing we should look at here is the EBIT margin, 8.8%. This is where we think in this area, we want to be with our business in the Classic segment. So a very big jump again from the 5.8% last year. That is super positive. The rest is pretty much in line of what we have already said in the first slide. So new orders up, unit sales up, revenue up 16%, again maybe be because of price and mix effects. If we look into the Green segment, we do see on the new orders, a little bit of a decline. This is especially due to our growth engine from Torqeedo, that's a -- we did have some special effects in the last year because of still COVID crisis, a lot of the leisure department or the people for their hobbies did buy engines. So we see a little bit of a decline there in new orders, but units are still up, revenue are okay. If you look at the EBIT in this area, a good book -- we had. But just to remember that, we are not capitalizing our -- most of what we're spending on R&D in our Green segment, it goes directly into the EBIT. So what you see here is 100% investment into the future of our business. That's all from my side for now. I'm looking forward to your questions. But now I will hand over back to Sebastian.

Yes. Thank you very much, Timo, for that update on the numbers. And let me continue with a bit of an outlook for '23, the guideline -- or the guidance, sorry. And as we said already at the beginning that we announced last week, we'll see now the unit sales in the upper end of the range we had earlier this year announced. And very clearly so demand is still strong, particularly in the U.S., particularly also on the smaller engines at the moment. So that's unchanged to what we have explained over the last months. But -- and that is one of the reasons why we went here on the upper end. We made the adjustment to capacity in the second half. And obviously, that brings us more in line, more in the ability to actually meet the customer demand and that then translates to the 195,000 engines. Accordingly, translating in revenue of EUR 2.1 billion, according to our current estimations and also [ playing ] the EBIT margin on the upper end of the range as previously announced. Having in mind, we started Q1 with 6.2%. But having also in mind, there is still some uncertainties in the second half of the year, which brings us to that sort of cautiously optimistic view. Cash flow, heard from Timo already on the Q1 performance, and we expect for the full year a mid-double-digit million euro amount. So yes, strong start in '23. We expect the results to be at the upper end of the previously forecasted full year range and are looking quite optimistically into the remaining 9 months of that year. Moving on, on the medium-term targets, which were derived -- based on our new Dual+ strategy. Revenue, '25 -- planned revenue in '25 to exceed EUR 2.5 billion with the growth coming also from the service business, EUR 600 million is our new target coming from the EUR 450 million last year. And keep in mind, that's a very profitable business. So that's great. And everything else will come mainly also from scale effects and obviously, a little bit of continuation of our price policy. Translating then into a range of the adjusted EBIT margin for the group, including or considering continuous ramp-up of investing in Green, which from a pure market point of view is dilutive. But for the group, we expect here the range for the margin between 6 and 7 percentage points for '25. And last point, like overall, obviously, we want to keep in touch close touch with you in various physical -- mainly physical, but also partially virtual meetings. So we're going to be present in roadshows in Frankfurt, Munich throughout May. We're going to be at the conferences in Frankfurt, Hamburg throughout June. In August, we will hold then, as usual, announce the H1 figures. We're planning another virtual roadshow in August. And a bit of a highlight in September. We're going to host the Capital Markets Day here at the facility in Cologne, where I'm going to obviously talk in detail about all our aspects of our new group strategy, but we also want to combine it with being able for those who participate and to feel the products, see the products we have within Green and in Classic. So that's a bit of an outlook. And with that in mind, I would like to also thank you for your attention to the presentation. And as usual, we're ready take any questions. I hand back to Christian.

Yes. Thank you very much, Sebastian. Thank you to operator. Please open the line for questions.

[Operator Instructions] And first question comes from Jorge González from Hauck Aufhäuser Investment Banking.

And the first one, I'm sorry if you have committed about this, because sorry, I connected to the telephone line at the beginning and then phone is much worse than the webcast, I don't know why. So firstly, regarding the service business, I was wondering if you can give us probably a early percentage of its contribution to the increase of the adjusted EBIT in the quarter. I mean it is impressive, the margin you achieved in the first quarter. So I was trying to understand how this is going to look like for the rest of the year. If this is like an exceptional quarter, and we see not take into account this contribution for the rest of the year? Or if there is any trend that is supporting an increase of service business in general for the year? Apart from that, I am also curious about the development of SANY joint venture. Looking to the equity accounted income, it should be at similar levels. But I would appreciate if you can give us an update. And also if you can also enjoy some tailwinds from the business in China for the rest of the year. What is your view here?

Thank you. Well, you were very difficult to understand, but I believe we covered most or we understood most of your question. Please feel free if we didn't answer the question then to repeat back. Service, what we got is you wanted to understand the percentage to EBIT in the first quarter. And probably we are fairly reluctant to disclose service margins. And I can just assure you that the service margin quality has remained on a constant high level like in the past year. So we grew the top line and margin quality has been constant, and that's one of the important preconditions also for service growth that we don't want it to be diluted. We do expect -- I mean, we closed last year with service revenue EUR 450 million. And as I said, in the midterm, we want to grow to EUR 600 million in '25. And we do -- we do expect a rather constant growth over those 3 years without disclosing any number yet, but we do expect the growth compared to '22 to remain constant. Well, that's going to be really 10% throughout the year, time will tell. But it's going to be a substantial increase. So that's what -- I understood was the question on service. The second question we understood was on the development of the SANY joint venture in terms of engine production and sales and probably contribution to net income, and that question, I believe Timo would take bite.

Yes, I'll do that. So if we look at the situation in China, as I said before, the -- we're only seeing a slight pickup. We did have negative numbers in China last year. We communicated that. So the first quarter did look a little better, so we are just slightly negative in Q1, if we do -- if we look into the situation. We do expect a better outlook for this whole for the second half of the year. Hopefully, everything we hear from the construction business, especially the market is going to hopefully pick up. And then we should also see that in the results.

And as you know, the numbers, neither the top line or the EBIT is fully consolidated. So when we're talking to me about bottom line contribution that's the equity income, which as Timo said, is slightly below the bottom line. So I hope we got the questions right because, again, you were not easy to be understood. Was that all right?

And the next question comes from Stefan Augustin from Warburg Research.

I will ask my question quite slowly because the phone line seems to be quite bad. I'd probably listen to your answer over the Internet, but there is a couple of second time delay. So if I respond a little bit later, please bear with me. The question I have is on the net positive price increase, I sense in the DEUTZ Classic business. So I fully understand that you expect that ranges increased by the second half and that diminished and that net price increase year-over-year, we have. But is there anything else we should take into account for diminishing of that net positive price effect going forward in this year?

Yes, thank you for that question. So yes, indeed, we did have some effects also in the first quarter that might -- we have an effect in the first quarter. The first one is that we did have some inventory that was still on a lower price level. We also saw of course price increases on the component side. So therefore, we are going to have a little higher cost in the second part of the year if we look at our components. That should hopefully then be partially offset by some of the things we do on the sales side, so price increases were still in the negotiation, and we'll see where we'll end up there.

And to add one thing, we are, as I said, preparing here the ramp-up of capacity for the third shift in our automotive assembly line 5 in Cologne. So once the ramp-up is complete, that will help us significantly to utilize higher scale. But obviously, when you wrap up a production line from 2 shifts to 3 shifts, it's not completely smooth process, the first 2 to 6 weeks will not be super-efficient and cost effective. So that's just something we need to keep in mind as a slight risk, let's put it that way. But I think you hear between the lines that we are fairly optimistic. But obviously, there are still some uncertainties around there. And we'll hope to manage these uncertainties in the best way, like we managed to do that recently.

Just a second, I'm still listening to your answer.

Okay. Great. Then, operator, let's -- do we have something else?

Yes, there are no more further questions at this time, and I hand back to Christian Ludwig for closing comments.

Thank you very much, operator. I thank everybody, for listening in. Thank you for your questions. If you should have any additional questions, the IR department is at your service. So please give us a call. And if not, we'll see you either at one of our roadshows or conference or at the latest at our Q2 call on the 10th of August. Have a great day and goodbye from Cologne.

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