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 Half 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.

Thank you very much, operator. To all, welcome to our H1 2023 conference call. 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 comments during this call will include forward-looking statements, which involve risks and uncertainties. For a discussion of risk factors, I encourage you to review the disclaimer contained in our annual report and this presentation. All documents relating to our H1 '23 reporting are available on our website. And without much further ado, I'll hand over to Sebastian, who will kick it off.

Thank you very much, Christian. And also from my side, a very good morning to all of you joining us for the half 1 '23 results call. Yes, let me start as usual with giving you a brief outline on our key operational strategic developments and highlights, if I may say so, because looking back at this H1 '23, you can say it was a good one. We achieved a lot, made significant progress, and obviously, this is also reflected in our numbers. In a structured way, our order intake recorded just shy of EUR 1 billion, went down 8% to -- if we compare to the previous H1, but we'll come to that later a bit, but this is mainly driven by the development in China. So the development, there's a different dynamic in terms of regions. And so one reason is that. And the other reason is also that the order behavior that's more towards Q2 gets a bit more normal from the customers because supply chain disruptions have eased up significantly. Moving on, unit sales, we increased by 1.1%, selling our DEUTZ engines to 91,450 units. So that's also plus. And even more importantly, we raised revenue by 10% -- total by 10% to EUR 1.24 billion. So that is the highest figure we've had in more than 15 years. And if you combine order intake and revenue, we'll come to a book-to-bill ratio of 0.97. So yes, slightly below 1. But given what I said earlier when I spoke about order intake, this is, let's say, not a point of concern. And we'll see also later that our order backlog is still very, very high level. So we look very forward and very positively to the rest of the year and beyond. And backed up, obviously, by particularly positive development and profitability. Adjusted EBIT grew by another EUR 20 million in the first half to EUR 62.5 million, which translates into an EBIT margin of 6.1% for the Group, another 1.5 percentage points up. And where we are particularly funded is that the Classic segment, we went up to 8.7%. So that's another 2 percentage points up. And for the Classic profitability of almost 9%, I think we've shown here the proof that we are on a very good level with the bread and butter business of DEUTZ today. Free cash flow were also positive, EUR 33 million, up to EUR 8.3 million, obviously not in the same push as we had on EBITDA, and that's due to also the growth of the business, particularly in terms of inventories, you'll hear about that later. Looking at '23 guidance, we confirmed already earlier this year. We stick to that for the time being. We'll have -- we see a revenue of EUR 2.1 billion on a full year basis. We see an EBIT margin of 5%. We've seen already first half was a little up towards that, but I'll come to the outlook at the end of the presentation. In terms of strategic developments, achieved milestones, I want to focus particularly on the further expansion of the service network. We did acquire 2 service partners, one in South America, Mauricio Hochschild and another one in the Nordics of Europe, Diesel Motor Nordic, but I will speak a bit more detail about that in a few minutes. We also made further progress with our green strategy, the project pipeline, both in terms of electrification as well as in terms of hydrogen is continuously being filled. So we are getting positive that we can announce in the near future first specific projects also to the public. Moving on to the pillar of Classic. You see in a picture here left, I think that's our dual-plus strategy, Classic, Green and then as plus the Service, and let me walk you through, starting with Classic. Margin remained high, thanks to the success of our performance initiatives. And not only remains high, we're actually, as we said earlier, up 2 percentage points. And what's behind that, we're making operational progress here, particularly in Cologne, our biggest site. We've established a new logistic concept where we made substantial progress with the consolidation of warehouses. That makes us better in terms of speed and also reliability. And obviously, it also reduces costs because we are reducing the interfaces in this very important area of the supply chain. By that, we made further stabilization and we achieved further stabilization of the supply chain and also the production processes. We spoke a lot in the last 12 months when we talk to you guys individually also or in part of conferences on that very strong demand for the sub-4 liter engines. And in the last 1.5 years, demand really exceeded what we could supply in our current production configuration. That's why we have now initiated ramping up the third shift on our assembly line 5 here in Cologne for sub-4 liter. That ramp-up has been performed fairly successful -- not fairly, very successful actually. Got the people aboard and we're slightly ahead of the KPIs here. So that's good. And with that, we are very confident that we can further improve our delivery performance and do what we want to do, making our customers happy with our products and also the delivery. We also further rolled out our fixed volume program in line with what I just said, the demand for sub-4 liter exceeded supply significantly. We were able to agree with a lot of our most important customers fixed volumes for this year, almost in a take-or-pay situation. And with that program, which we coupled also with our pricing strategy, we achieved that roughly 75% of the now expanded capacity, i.e., including the third shift in the second half of the year is now booked and that clearly backs up and supports the high order backlog which makes us looking actually very, very comfortably to the rest of the year. So to sum it up here, our Classic business provides a very strong foundation for also the implementation of the green strategy because that's what we need. Well, we're very convinced of this Classic business to play a very important role over the next 5, 10, 10 to 15 years, depending obviously on the displacement of the engines and we're going to make best use and all the best out of that to turn this business really into a profitable pillar of DEUTZ. Let me move on towards green. And in green, we're growing. We're growing in terms of project pipeline. We are not yet translating that into top-line numbers significantly. But there is a lot going on, both in the field of battery electric technology where we're currently pursuing 10 very concrete projects with OEM partners across several areas of applications. Here we are currently bound by confidentiality agreement not to be able to name or to provide names and details of these partnerships. But as soon as we can, we will obviously announce. Also with hydrogen pretty much built around our hydrogen combustion engine, the TCG 7.8 H2. We're pursuing 5 projects, not only in stationary energy generation, but obviously, with a strong focus on that, but not only also in terms of mobile solutions. And we did we informed already earlier this year, we did sign an LOI for a small-scale production run of H2 gensets towards Asia. And that's something we're pursuing here with high efforts. And as soon as we can provide more information, we will do so as well. Important is, obviously, whenever it comes to the transformation and developing not only new technologies, the new markets, new business models that we have now established a process to evaluate such models and partnerships and that's going well and that involves more and more people in the organization to really build here the future of DEUTZ. As an example also, that obviously has impact on the supply chain and here we teamed up with MAHLE, German automotive supplier where we are -- where we have achieved an agreement for parts for our hydrogen product, which is great news for both MAHLE and DEUTZ. When it comes on numbers and commitments, we are happy to reiterate our commitment that we're going to invest more than EUR 100 million between '23 and '25. And when I say invest, that's a combination of investment in the strict terms of the world, but also focusing in R&D, mainly on battery electric and hydrogen. And I think that's clear, that's a very strong commitment of us that we are building here in the future. So because with all the focus on the current Classic business, which as I said earlier, is very important, we also want to play a wider role to establish and bring emission-free technologies into the market that's why we committed here to be emission-free across the entire process chain no later than 2050. Let me move on the third pillar of our strategy, the plus of the dual-plus, the Service DEUTZ. Here, first report back on how the numbers were. First half year was very, very strong. Revenue rose further to EUR 237 million, up 6.4%. Order intake also went up to EUR 241 million, up 5%. But you see here order intake revenue pretty much on par, showing it's a stable growing business, and that's exactly what we want of that because it's -- and you know that it's a very profitable business. And it's not only a profitable business, it's also a business which is so far very important for us to really underline the important -- the USP of DEUTZ towards our customers because what they want to have is not only the engines, but also the certainty that if there is a problem with the engine, DEUTZ is there to fix that. And we get very, very positive feedback from our customers also on our recent growth path. And the volume rose significantly, particularly for parts sales and the DEUTZ Xchange product line. And we have also made further progress on the expansion of the service network. I will speak a bit about these 2 acquisitions in South America and Northern Europe in just a moment. And these 2 acquisitions is not the end of the line, we have quite a few projects here under evaluation right now, and that's a good thing, because with a lot of projects under evaluation, we will ensure that we pick the right ones for implementation. So let me sum up here on Service. We are well on track to achieve our EUR 600 million revenue objective for '25. We closed last year with EUR 450 million. We are significantly above that, as you see with almost EUR 240 million after the first 6 months, so well on track for this profitable business of ours. And let me say a few words on our expansion, our sort of inorganic expansion. So first of all, you see that on the left, we did manage to open another DEUTZ service center, DPC, called DEUTZ Power Center in the U.S. The U.S. is currently our strongest market. So we've done a lot over the last 2, 3, 4 years here, and the 9th DPC is really another success point at the Great Lakes. Revenue -- the DPC revenue in '23 we'd see around EUR 50 million, profitable business. And now we are really in a position that wherever you are in the country in the U.S., it takes less than 90 minutes that you can have access to a DEUTZ technician or vice versa, and that's a very strong promise from us to our important customers. Let me move on to South America. We did sign a share purchase agreement to purchase a long-lasting long-term service partner of us, Mauricio Hochschild in Chile. And the transaction is also completed now, closing has occurred end of July. And with that acquisition, we will grow, on a consolidated basis, the revenue by EUR 15 million per year on a consolidated basis asset. So that is another pillar to move here further towards the EUR 600 million. And on top of that, we pretty much just signed a contract for the acquisition of another long-term service partner of DEUTZ called Diesel Motor Nordic with the presence in Sweden, Finland and Denmark where we also expect on top revenue on a consolidated basis, profitable business, EUR 10 million per year. So this acquisition is not closed yet, but we expect it to be closed in the course of the coming months. To sum up here, we continuously expand our global network. And we also -- and as important to mention, we also include here some third-party business. All the acquisitions have a strong DEUTZ foothold, but they also have third-party activities and that really opens up another part of that very attractive service and parts market for us. So having said that, I would hand over to Timo, our CFO, who will walk you through the numbers in a bit more detail. Please, Timo, go ahead.

Yes. Thank you very much, Sebastian, and a very good morning to everyone here from Cologne. Let me start with our key KPIs on the sales side. And we'll today start on the right side with the revenue numbers. I think it's very important to mention how good the year so far was on the revenue side with a little more than EUR 1 billion in sales. We do have a new record sales for half year. So that was a very good start. Revenue is up, therefore, by pretty exactly 10%, which is driven by 2 main factors. One is the price increases, which we have done in the last year. The other one is also a mix effect. Having said mix effect, if we look at the unit sales, unit sales in total would do look a little bit going down with just minus 1.3%. But if we look into it in a little more detail, we can see that our Classic business, the engine business of DEUTZ with 91,400 compared to the 90,400 of the previous year is actually up. So this means we did have a slight increase compared to the year before, which was mainly limited by our own capacity if we produce in a 2-shift system, especially here in Cologne. So there were no big issues on the supply chain anymore, which was a good thing. Last year, we were a little bit constrained on that side. But so far, we could pretty much produce on next capacity. So that is very good, especially since Sebastian said that, we are going or we did start the third shift now beginning of the month. So we will have additional capacity available, and therefore, additional possibility of higher sales for the upcoming months. The reason why unit sales is down a little bit is due to our Torqeedo business. We can see it here, last year, we did still had 18,300 roughly pieces, down to almost 16,000 pieces. Here, we do have 2 effects. One was the very strong years, especially in consumer goods during the COVID time, which is slowing down a little bit in this year, but there's also some change in technologies where some new products need to be or will be introduced and we're just in the time of the change of these products. Looking at new orders, new orders, yes, has gone down by 8%, but with an order -- with a book-to-bill rate of 0.97, we can say that we are very, very close to 1. So that is still an extremely high number for us. And if we look here in a little more details, then we can say that Europe is still doing good. America is doing very good. But the main reason why we do have a decline here is coming almost exclusively from China. China is down by a little more than EUR 80 million, which explains almost the whole difference here. Important to notice is though that our orders on hand remain on a very high level. So we have EUR 740 million as of June 30. If we look into the last 5 or 6 years of pretty much probably whatever number we've looked in the past, that's still one of the highest numbers we ever had. So we are very well positioned for the next months coming up. Let's now look into it in a little more detail on the revenue side. There is really one key message. And this is that it doesn't really matter if we look at it by regions or by application segments, in all areas we're up. So that is a very, very positive thing to say. We see on the left side, the revenue breakdown by region that we have -- if we look at Europe without Germany, we're up 7.6%, Germany 7%; Asia Pacific, still plus 3.5%; Africa, Middle East, plus 19.5%; and then the Americas, which is the strongest growth rate right now as it has been in the last years with again 20.4%, up compared to 4% the last year, which is extremely good for us. Looking at the segments. And that's also, of course, always very interesting. Are there are some segments where we see a decline or not. As I said, no, there is no decline in any of these, but of course, there are differences in some of them. We can especially look at Material Handling, which is one of our bigger segments. And here, we're up 26.7%. So that is going very strong. But also in the Stationary Equipment, for example, we're up 17.4%. That's very good. And then the ones that are not growing as much anymore, but still growing, Construction Equipment being our biggest segment with 3.3%. We still see growth here. Service segment is a little special, Sebastian talked about it. It's extremely important for us. There is a lot less volatility in general in this market. And the Service segment is up 6.4%. Even though there is no consolidation so far of the 2 acquisitions Sebastian has talked about, we are going to see this -- the first one for sure in the next quarter and the second one hopefully then by the end of this year. Looking at profitability, we did have an extremely strong first quarter, EUR 32.1 million. So an absolute record quarter. And we can say with some pride, I would say, that also the second quarter was very, very close to that. Another, again, over EUR 30 million in profit even compared to the very strong second quarter we had last year, which was the strongest of the year. We are still up by EUR 3.5 million. And then if we look into this for the numbers for the first half year in total, we did achieve an EBIT of EUR 62.5 million, which is EUR 20 million more than the first half year of the last year. What were the main reasons? Yes, a little bit, of course, because of economies of scale. We're still up a little bit on that one. But then, of course, mainly our performance programs now really kick in, in profitability. Pricing was part of it in all directions, keeping costs down of course. And the expansion of our Service business always helps also on it. So looking at the margin, 6.1% in total is a very, very solid number also compared to the last year, which where we already were pretty happy with the 4.6%, but again, a good increase, and we're well on track there for our guidance for this year. Looking at some of the spending, starting with the R&D side, which especially if you're in the transformation, of course, is an important number to look at it. And we can say that we again increased our number in R&D spending in the first half year. We are now very close to EUR 50 million on the R&D side for half year, up by another EUR 2 million. So we are still significantly investing in our future. On the capital expenditure side, if we look at the, I would say, call it, normal capital expenditure, then we are very close to the number which we had last year. We did have the big acquisition of the IP and license rights from Daimler Truck, which made a EUR 52 million, which we see here in this white red numbers, which put capital expenditure in total to EUR 88.5 million. Working capital is up almost EUR 40 million. We mentioned that earlier, we did start our third shift. So therefore, we did have to build up some stock for this. And this is mainly the reason what is reflected here in these numbers, but there is also some other smaller topics like, for example, that we are increasing our business in the U.S. We do have then, therefore, more parts on the ships going over to the U.S. And therefore, a little more inventory on hand because of that. [indiscernible] that's also another very good number. If we look into the cash flow, we are positive, EUR 8.3 million, a significant jump compared to last year, up EUR 33 million. So whatever we just saw in the net working -- or in the working capital increase, of course, always has an effect on the cash side, but we could overcompensate that by far due to the much higher EBITDA that helped support the free cash flow. On the net financial position, we're a little below where we had been for the end of the last year. Of course, we do have the dividend payment always going out in the first half year -- in the part of the first half year. So this is reflected in this number. Balance sheet, there's really not much to say to that because we are in a very comfortable level and still with an equity ratio of 44.6%. Our balance sheet in general grew. So there is a slight decline in the percentage, but in general, a very strong number. And also, if we look at our credit lines, we do have EUR 180 million available here in unused credit lines. So even if there would be any opportunities in the market or any downturn, we are very well financed and don't see any risk in these numbers. Some short comments also to our segments. Again, I think on the Classic side, there's really one main thing we need to look into it and that is the EBIT and especially the EBIT margin, 8.7% is what we reached compared to the 6.8%, which we had last year, a significant increase. So our Classic business does really support the business here, and therefore, also gives us a good foundation for the transformation that we are having in front of us. Revenue is up almost 11%, unit sales still 1.1% up. So here again a mixture of price and mix effects that are very positive. And the order intake is pretty much what I've already talked about on the first page. Green segment, order intake and unit -- order intake is still up, unit sales and revenue is down though. So this is what I mentioned earlier, the Torqeedo side, there is a little less sales in the first year. But as we see on the order intake here, it's compared to the year before. So we might see some improvement there in the upcoming months. If we look at the EBIT number, that in the first respect, looks like a fairly high number with a loss of EUR 24.4 million. Unfortunately, yes, our Torqeedo business has a big stake in that one. But the rest of it is mainly driven because we do spend a lot on R&D in our Green segment and we are not capitalizing this. So this goes directly into our EBIT, and therefore, we see it more as an investment into the future than a loss-making business here. So that's all from my side for the details and to the numbers, and I would give back to Sebastian for the outlook.

Thank you very much, Timo. And yes, before going to the outlook on '23 as well as on the mid-term targets towards '25, I mean, let me really look back at the first half year and conclude that we're actually very pleased with the first half year because we have recorded very high revenue, the highest revenue in more than 50 years. And despite the small backlog and order intake, still a very, very high order intake, both organic and revenue roughly EUR 1 billion. So yes, it's true that book-to-bill on a half year basis is just below 1. So the dynamic may have slowed a little bit, but we also know, as we heard earlier, it's very clearly associated with the China situation, EUR 80 million down year-over-year. And so is that a point of concern for us? I mean, unlike many other industrial players or in the automotive segment, for DEUTZ, China is not a strong basis. It's more that we obviously want to participate in the chances China brings. But at the moment, our strongest regions are Europe and particularly the Americas. So it's not a point of concern for losing business, but obviously, we want also to participate more in China in the future when the market picks up. So this is the way we look at China. For '23, and that makes a lot of sense when obviously looking at the current year, we are pretty much fully booked, especially sub-4 liter with this high order backlog of 740. And then going beyond particular in America, as I said, is our fundamentally strong market backed up by the various governmental programs, that's also supporting, and there are some really mega projects ongoing in semiconductor business, LNG, there's a new airport terminal at JFK. And this all drives further up the demand for rental equipment, and that's exactly where we are strong positioned in the U.S. as a supplier of Terex, TLD and other players there who themselves serve the rental company. So that's why for '23 as well as for the year beyond, we are fairly optimistic. And -- but now let me really go through the guidance for '23. Unit sales, we're sticking gear to our earlier this year announced guidance that we are seeing 195,000 DEUTZ engines to be sold after the 181,000 in the previous year. We're seeing here still the revenue of EUR 2.1 billion to be achieved and we see the EBIT margin of approximately 5%. Looking back at H1, again, we were already at 6%, right? So we are quite substantially above that. So maybe there is some room for improvement in the rest of the year, but looking still a little bit cautious on that. On our free cash flow, we confirm the outlook of mid-double-digit million euro amount excluding M&A. And so here, let me conclude that the guidance for '23 is confirmed after this very successful first half of the year. If we move on to the mid-term targets, also the outlook for '25. In '25, we aim at the top-line of exceeding EUR 2.5 billion. And out of which Service business growth -- takes a substantial growth path going to the EUR 600 million, as said earlier. And we do that organically as well as inorganically, and you see increasingly our proof points, like today, I mentioned the 2 acquisitions. EBIT margin, we see a range between 6% and 7%. Yes, we're already at the lower part of this range in the first half. So I think what you also see here that these are, let's say, ambitious but yet realistic targets where management is fully committed to achieve them for '25. So we confirm also the mid-term targets for '25. And yes, what's out still this year, looking briefly at the core parts of the '23 financial calendar. So we'll have planned a couple of road shows, the virtual roadshow in August and to 2 -- 1 in Munich and 1 in Paris, where we'll probably see most of you. And what we also have planned, as a highlight, is September 12 the Capital Market Day here in Cologne this time, which is under the title Moving Value, moving connected to we ensure the world keeps moving. And so obviously, we want to also move upwards the value of the company for our investors. And that's why we really hope to welcome all of you at the Capital Market Day here in Cologne in September. Having said that, thank you very much for dialing in and listening. And let me hand over to Christian. Thank you very much.

Yes. Thank you very much, Timo and Sebastian. Operator, we would like now to open the line for questions.

[Operator Instructions] The first question comes from the line of Jorge Gonzalez Sadornil with Hauck Aufhauser Investment Banking.

First of all, congratulations on the results, Sebastian and Timo. My first question will be around the guidance. Although you have just confirmed that the guidance is unchanged on some taxes view for the second part of the year, still you are keeping the 195,000 engine productions that obviously is pointing to a stronger second part of the year compared to the first one. So can you help us a little bit to understand if there is any different mix or different cost base in the second part of the year to be more cautious or if on the opposite, if anything changed, there is good room to improvement to the adjusted EBIT margin target? And my second question will be around the order intake. It will be interesting if you can guide us for the rest of the year what is your view? You can keep the 1x -- or close 1x book-to-bill, especially taking into account that after the summer is normally when the construction companies put more orders for equipment or if this negative trend in general in construction, especially in Europe, might still impact you a little bit in the second part of the year? And what can you tell us about this? And finally, on these acquisitions that you completed and you are in the way to complete for the Service business. Can you give us an approximate figure for the total investment?

First, on the outlook on the 195,000, and you said correctly or you asked the question, if I got it correctly to compare it with the numbers in the first half in terms of production output, but then also in terms of profitability and cost base, right? So first of all, I mean, what changed in terms of our production outline is, for the second half, we actually started operating with the third shift here in Cologne now. So that enables us to bring up a stronger second half than the first half, particularly on the sub-4 liter production where we actually will simply increase capacity significantly by adding a third shift. We do not increase capacity, let's say, by 50% for that because we will also be able, at least that's the plan, to optimize a little bit of the shift. So we use fewer weekends and fewer extra hours and so on. So that helps us driving down, so to say, the base 2 shifts. But on the other hand, the third shift is a little more expensive due to the fact that it happens at night, right? So that gives -- that changes the cost structure to an extent. Obviously, in terms of margin, yes, we are a little cautious still because we have now -- we're in August, so July, August are typically the weaker months because of the vacations and holiday, stoppages also at some customers and we are ramping up that third shift right now. So when you ramp up an additional shift, you cannot expect it to work immediately from day 1 at the same efficiency as the base shifts. But what I can say already that the ramp-up so far is slightly ahead of plan. But it's only 1.5 weeks. So it's too early to call it this summer. So that's sort of the view on the production cost side. And then we are still -- and that's I think also a known topic that the tariffs, the salary increases of the [ EB Metal ] in Germany, they did not start immediately with the beginning of January. So they started slightly delayed. So sort of the blended salary costs are in the second half, a little higher than the first half. I hope that answered briefly or that answered essentially the question on the production capabilities as well as cost structure and thus margin. Moving on to order intake. It's a different dynamic in different regions. Most cautious we are really at China. China after the lockdowns stopped in February, March, there was a brief period of boom, but only a very brief period. And since then, it went down very significantly. So I would not be really in a, let's say, solid position to say, okay, in Q3 or Q4, we expect here a strong order intake. We do have to say that we have a fairly long order range, I think 40, 41 weeks in Asia at the moment. So that's -- so we are still, let's say, solidly positioned. But China, we need to -- we continue to look carefully at that. And EMEA is a mixed bag, both in terms of industries, but also in terms of product lines. So for sub-4 liter, in particular, we are still seeing strong demand and we also expect the customers to position themselves still bullish when it comes to '24, because '23 is already booked pretty much there, in the sub-4 liter fully booked. And in the larger engine series, we see also a little bit of a mixed picture. Yes, there are some older engine series, which we are phasing out. But that's, for us, actually a positive thing because these are typically older engine series with very low margins, some from towards our biggest customer where it's in the interest to actually not continue further with that anymore. But on the other hand, we also see in some low regulated markets quite a strong order intake. And so yes, it's a mixed bag in EMEA. Americas, I mentioned earlier, is really strong. What we see here, particularly from Q1 to Q2, we saw initially a little drop in order intake, but that's not structurally. That relates to our fixed volume program that our American customers place due to our fixed volume program. They placed orders for almost a full year in the first quarter. And that obviously means they do not place these orders in the second and in the third and in the fourth quarter. Before we introduced a fixed volume program, they typically placed the orders, let's say, 6 to 8 months before production. And obviously, that has just stopped right now. But depending on whether we're going to continue with the fixed volume program for '24, we have not made that decision yet. We may either see another strong order intake in, let's say, December or January depending on when we get out with that program or we will return back to the typical order behavior of the customer. So that's, I would say, the key view on the order intake situation ahead of us. M&A -- sorry, the third question, M&A. Yes, we do not disclose the sort of the detailed numbers on that level. But if you look at both together, it's somewhere between EUR 25 million and EUR 35 million.

Only to follow-up on the order intake, your equipment is more or less, if I remember well, doing 30%, 31% of your sales. And although we were commenting that the order intake now is not very representative now because of the normalizing. But do you think that the growth in North America can for now compensate little bit the numbers you have seen and taking into account that you might not continue with the third shift? But it's -- the picture is enough to see at least a flat year next year or similar levels or is it still too early to comment on this?

Let me take that question. Of course, we are monitoring the U.S. market very closely. I do believe that a lot of the Inflation Reduction Act still has a positive effect on our business also for the upcoming years. So if you think about how many big or mega projects are in this business, a lot of them have just started or haven't even started. So a lot of the construction equipment that is needed for actually making that happen is going to be needed in the next years. Also, if we look at the bigger numbers for the U.S., it doesn't matter if we look at the labor market, which is still a good number, inflation is down on the other side, even though the interest rate has been increased. So we do, of course, as I said, watch that closely, but everything we hear from the market still is demand is high. We are going to also need it in the construction business for the at least near future.

[Operator Instructions] The next question comes from the line of Stefan Augustin with Warburg Research.

I want to briefly dig into the demand side again because I understand that you have placed the larger, let's say, for the fixed volume program orders in Q1, there is a shift between Q1 and Q2. But overall, if I would then strip Q1 a little bit out, you're definitely running slightly below the sales volume here and a lot of economic indicators turned down. So if -- the headline numbers to me look a little bit more, let's say, cautionary, yet I hear you that you are quite positive about the demand side. So again, could you help us to square that a little bit up from -- is there a lot higher frame indication to, let's say, for the tender that you see than the actual call of the order intake implies to always that little difference coming from? And maybe also here, how is currently the pricing situation? We have the increased prices now in the sales side, but how does the order intake currently developed? Is there anything -- is it still stable or do you see any, let's say, a slight movement here?

Let me ask -- let me start with the second part of your question, Stefan. So obviously, last year '22 was the year where across the value chain prices had to be increased significantly. That's where the biggest push came from our suppliers, but also from factor costs like energy, logistics and so on. So that's why last year, in the end, we succeeded of raising prices across the board, somewhere between 8% and 12% with some exceptions below and some others above taking into account also the profitability of various products. So that dynamic of cost increases towards us and price increases from us towards our customer has slowed down. I mean, obviously, right? So the energy prices are now on a higher level than they were in '21, but they are not in this -- we don't see these peaks anymore as we had last year. And so that means supply chain is in principle easing down a little bit. So we are still benefiting from the adjustment of our prices. We are still also negotiating with a few customers where -- and obviously, I will not disclose with whom on what level, I think that would not be the right forum to do so. But there is certainly still the necessity to pass on increased costs which are affecting us, but the results show that we're doing that, let's say, in a good way. But we still have a few product lines, a few products where the profitability is not where it should be, but that's what we're working on. I do not expect for the next year in other range for -- I'm talking '24 now where I do not expect something at a very high level anymore. But we need to be here, in a sense, dynamic that if the frame conditions change, we do not wait too long to act. And that's why we were successful last year that we didn't wait 6 months or 9 months, but we started immediately. So we have learned a lot over the last 15 months to be very close to the markets and the factor costs and we continue or we expect to benefit from the knowledge and the process is also going forward. Order intake, I think I mentioned most of it and Timo also went on the previous question. Maybe one thing, obviously, on top is we have -- our sales force is out also for future projects. Now this is nothing we'll see in '23 or '24, but after the acquisition and the partnership with Daimler Truck on the medium and large and making HDEP engines, our teams are out in the market to hunt customers and projects for those engines because the big new contracts are being won pretty much in the next 1 to 2 years. So here we make substantial progress. But well, there's nothing which will lead to production for next year or even '25. And other than that, what I said earlier, is just to be confirmed. Americas will drive very strong on the new engine side. EMEA will have mixed bag. And on the service side, we have not talked a lot about that. But on the service side, we see here an unbroken record of demand and also order intake, which we back up with the inorganic expansion as, for example, mentioned today. I hope that answered both the 2 of your questions.

Would it then be fair maybe to have something like an implication, would you think that Q3 order intake differs significantly in any direction from Q2?

It is too early to say because we have only the July concluded yet. And in order to assess -- third quarter is always a bit of a difficult quarter to be assessed because of the holiday period. So July is always a rather low month simply because the third of buyers of the customers are on vacation or the customers have their production sites partially closed and they should be not pulling products. So that's why July is never a good month. What we typically do over the last years, if you look at July and August combined, at the end of the 2 months, then you have a better indication, but that we don't have yet. At the moment, we don't see any significant deviations due to -- compared to previous seasonal effects right there.

And then maybe a little bit on the inventory where you outlined that this is still increasing because you have engines in transit. Could you somehow quantify that element that is in transit? And will that be further increasing when we look into the second half or is it then staying roughly on the same level? And the last one is actually more or less a housekeeping question. Is there a significant ABS program or anything else lined?

So first of all, inventory, yes, inventory is high, as Timo explained it earlier. It's high for the 2 reasons of still having lots of engines in transit towards the U.S., but also components. I mean, we are ramping up our main production line from 2 to 3 shifts. For that, we need components. So inventories have gone up, DIOs have gone up, but not significantly. We are foreseeing here in the third and particularly the fourth quarter then normalization and going back to lower levels, that's right. And I think in terms of ABS and financing, I'll hand over to Timo.

If I did understand you correctly, the line wasn't 100% good. You asked if we do think about an ABS program. Was that the question, I assume on?

Yes, you have one in place.

Right now, we are using factoring as our main vehicle for this kind of financing where we can say that we have very good contracts in place. We are in regular discussions about our financing structure of course with our banks, have done a lot of workshops over the last month here. But so far, we can say that we are very well placed with the factoring program. In the long-term, with also increasing the business further, we do think about maybe changing that, but that would really mainly be a change which wouldn't have a big effect on the balance sheet, because right now, factoring volumes are already in the area of roughly EUR 140 million.

We have a follow-up question from Jorge Gonzalez Sadornil with Hauck Aufhauser Investment Banking.

Hello, Sebastian and Timo. A very quick one regarding China. I forgot to ask if you can give us some color on how much it was within China last year or if you can give us some data on this quarter that will be also great? And also if you can update us a little bit on SANY. [indiscernible] this morning commented that in the results that China is doubling for truck production. So I was wondering if this can also positively impact your production there or it is still to also linked to the construction and not yet linked to the transport and so you are not seeing any improvement so far?

On China, on the joint venture, it's true that heavy-duty truck business there from SANY is increasing, but it's increasing on a very low baseline. So that means for us also, I mean, our JV with SANY focuses both on excavators, which is the traditional or the main business of the JV and heavy-duty trucks. So we do see this effect, but it's almost marginal because the baseline is so low. And that's why we do not see a major impact in the China joint venture. It's still sailing on a, let's say, low level -- on a low level. And yes, the expectations in China we talked, I think we spoke a lot about in the last 2 years, they are not there or the reality is not where the expectations used to be.

And regarding the sales that you are currently having in China? The weight and sales of the region?

All right. So sales in total in China, if we exclude the SANY joint venture, we were in our first half year at roughly EUR 64 million, pretty stable to 8/1/22 where it was EUR 66 million. And if we include the SANY joint venture, we are at EUR 122 million compared to EUR 124 million. So pretty much flat.

Ladies and gentlemen, there are no further questions at this time. I hand back to Christian Ludwig for closing remarks.

Well, thank you very much. Thank you all for your questions. If any questions should be left open, please contact the IR department, we will be happy to help you there. We hope to see you either at our Capital Markets Day on September 12 or at the latest talk to you again with our Q3 numbers on November the 9th. Thank you very much, and good bye.

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