DEUTZ Aktiengesellschaft (DEZ) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome and thank you for joining the DEUTZ AG 9-month 2023 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Christian Ludwig, Senior Vice President Corporate Communication and Investor Relations. Please, go ahead, sir.

Thank you very much. To you all, welcome very much to our 9-month results 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'll provide some more details on our financial figures. Sebastian will close the presentation with our current market outlook and our guidance. After the introduction, we'll 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 the discussion of risk factors, I encourage you to review the disclaimer contained in our annual report and this presentation. All documents relating to our 9-month 2023 reporting are available on our website. And without much further ado, I hand over to Sebastian.

Thank you very much, Christian, and also from my side, good morning to everyone who dialed in for our Q3 or first 9 months result 2023. It's a pleasure to have you on the call and it's a pleasure for us to walk you through what we achieved over the last 9 months and to also give you a bit of an outlook how we see the future for us as a company. As usual, I would like to start with looking back on the key operational and strategic developments which we achieved. And as usual, I would start with some numbers which also as usual, Timo will later elaborate a bit more in detail. Looking at -- starting at top line. So new orders went down a little bit if you compared to the previous 9-month period, went down by 5.5% to a level of EUR 1.4358 billion, that equals to book-to-bill ratio of 0.93. So what we can see is obviously that very strong growth trajectory is slowing down a little bit, but -- and you will see that in a couple of minutes, we're going to spend a bit more time on the development of new orders as well as order backlog because we believe there's some more to be understood behind that KPI than just looking at the KPI. But I'll come back to that in a few minutes. If you look at unit sales, here again, as usual on the DEUTZ engine, so we increased unit sales by a bit more than 5% to almost 138,000 engines. So that's a positive development, still benefiting, obviously, from the strong demand we experienced in the last couple of years. And we increased revenue even more by a bit more than 10% to EUR 1.54 billion and that's another proof point of our successful pricing politics that we implemented early last year. And this of course also translates into another growth in EBIT. We grew EBIT further up by almost EUR 27 million to now a level of EUR 92.7 million after 9 months. So we're pretty much equal to the full year results from last year. And that means in terms of margin on the group level, we yielded an EBIT margin of 6%, so up 1.3 percentage points. But even more importantly for us to also see what is the long-term comparison in our classic business, we are now stable at a level of 8.8%, stable when that compared with previous quarters and up almost 2 percentage points compared to previous year. Free cash flow, we're still a little negative after 9 months, minus EUR 13.4 million, but comparing to the 9 months of last year EUR 56 million better, so that's also a positive sign. And based on that and obviously also based on the much, much better visibility for the last quarter now, we were able to rise -- to raise the earnings guidance for '23 a little bit, revenue we keep it constant, our expectation for the year on the level of approximately EUR 2.1 billion and the margin where we previously assessed it to be at 5%, we raise it up to our range from 5.3 to 5.8. percentage point. We're particular fond of being able to announce an important milestone when it comes to our Green business. So what we achieved earlier this week, we received the first serial orders, small-scale serial orders for 100 units of the Genset power generation set using our DEUTZ hydrogen combustion engine. We received this order from China and I'll elaborate a little bit later on that later in the course of this presentation. As most of you know because many of you were part of that presentation of that event. Earlier this year in September, we did present our Dual+ strategy at the DEUTZ's event week, both to investors and analysts, but also as part of our business partner meeting of Business Partner Day to our numerous European and American partners which work together with us. But let me start with a bit of a deep-dive in our Classic segment. So first of all, the margin as I showed earlier, remain on a high level. And that's due to the success of our various performance initiatives. To name a few we have established our new logistic concept here at the headquarters in Cologne. It's about consolidating the different warehouses. So our multifunction warehouse is up and running. So that's a very positive news for us, makes our process much, much more stable. Supply chain production processes, in that sense have stabilized significantly. Also you know the supply chain situation from our suppliers has calmed down, has become more stable. So delivery performance of us towards our customer is growing rapidly. And what was a particular challenge initially was that we implemented -- by the end of July, we implemented a third shift for the production of our compact engines or our sub-4 liter engine. That ramp up has worked out successfully. So over the last month as we are working with a higher capacity, more efficient way of working for sub-4 liter so that we are able to fulfill the strong demand and to work up to work on our high order backlog. So that means that's exactly in line with our strategy that our Classic business now provides really the strong foundation, also for the implementation of the green strategy in terms of our cross-financing strategy. But let me spend a few words on our outlook for '24. I mean it's a mixed picture here. You see a lot of yellow, you see a bit of green. Fortunately, we do not really see a decline in any of our segments and our regions, always comparing with the current utilization of the current view. We need to be a little careful because, obviously, looking at APAC, you see the 3 green arrows, so which indicate an improvement. But to be also fair, that is an improvement compared with a fairly low level and because China has been fairly difficult this year, after the initial, sort of, pickup after relaxation of COVID rules. But now we saw a difficult development. So we see a positive outlook going forward, but still based on a relatively low level. But our bigger market, as you know, in terms of geography, Europe and the Americas. And in Europe, across all segments, we see a fairly flattish picture. Agri, construction equipment, material handling and stationary systems, so fairly flattish. Americas a little more positive. Agriculture machinery is definitely positive. So -- but also let's say, material handling, even though we showed it as flat, it's flat on a very, very high level. We are here represented with 2 major customers, both of them benefit or their customers benefit also from many, many of the initiatives under the Inflation Reduction Act and that still shows some boost performance and boost market development here for us. So let's say, it is a stable outlook which we see. And now we came from a very, very hot market and now it's still a good market, but obviously, the growth speed is going down a little bit. When we look at order backlog, order backlog, of course, as you know, is the function of order intake. And over the last weeks and months, we have reported a slight decrease in order backlog because also order intake has not been on that level that we've seen over the last 18 months, indicated also by book-to-bill below 1. So that's clear. But if you look at that picture and I think it's fairly important, in order to understand this KPI for our business to look a bit further back. So we show here a 5-years perspective or 6-years perspective, but we've taken out 2020 because due to that the pandemic situation, the numbers were all over the place. But if you look at 2018 where our DEUTZ sold some 200,000 engines, in 2019 we sold 190,000. And so levels actually slightly below what we do today. But back in those 2 years, we had an order backlog in the range of EUR 400 million to EUR 500 million, dominated by the Americas, of course, by Europe, of course, because of the biggest market, biggest market. And then in 2021, customers, because of the shortage of supply, ordered longer, ordered more, sometimes even ordered more than they actually needed to secure the limited capacities. That's a behavior which we observed through all areas, through all steps of the value chain. And that behavior continued in 2022. And in 2022, as you see on that chart, our order backlog reached a record of almost EUR 800 million for the same number or even less -- even lower number of units sold than what we had in 2018 and 2019. And now the arrow going a bit downhill indicates that this behavior normalizes again because supply chain is much more better under control. And demand is approaching supply, both because demand is going down a little bit, but also supply, as in our case, with increasing capacity on the sub-4 liter field is being ramped up. So we are moving more towards an equilibrium. That means, in other words, that the behavior normalizes and it also shows particular based on historic comparison, our order backlog is still on a very high level. If we look at that in more -- in a different format here on this chart, the left bar indicates what was our outlook at the end of '22 for '23. And you see here this bar chart, you see that, let's say, some 39% were at that point, fixed orders, whereas 38% were contractual orders. So orders for particular, for our larger customers who have a long-term contract with us in place and only 23% were planned. So that doesn't mean it's just invention by our salespeople, not at all, but these are just assessment by -- mutual assessments within our sales force and our customers. And the picture now at the end of '23 is different. So we don't have that high share of fixed orders. We have fixed orders of some 20% and contractual orders of 45% and there is a bit more open in the gray at 36%. But going in line with what we see earlier and let me give you a couple of examples. So we have a few particularly large customers who give us a forecast for the next 12 to 18 months, but they only order -- they only place fixed orders for the next 3 weeks, right? So that's the normal behavior and particularly our largest customer in construction equipment, that's exactly the way he does it. And if this customer, we have a good visibility for the next 12 to 18 months, places an order, you only see an order reach of 3 weeks, right? And that you only see in the red color part of the column. Then we have other customers, one of our big American customers who, in principle, places orders with a period of 3 to 4 months before delivery, right? That's the way we see them also in the red part. But these customers -- you will remember, we introduced the so-called fixed volume program last year, where we presold at in the end, 70%, 75% of our capacity for sub-4 liter for the entire year of '23. So these customers who typically only place orders for 2 to 4 months, in that case, placed actually fixed orders for the entire year. So that sort of reduction in the fixed order share of 39% to 90% is mainly explained by the fact that we're going back to the, sort of, normal order behavior that we had before we used this fixed volume program to meet this extraordinary situation in 2023. So that means we have a stable outlook just with different order behavior. If we move on, on our Green segment. Our project pipeline is being added all the time. Currently, we are pursuing 10 battery-electric system projects with, sometimes, really big names, big OEM partners. We placed -- we received a first small order for battery systems with Karcher. We are currently pursuing 5 H2 projects and I will talk about that in a bit more detail in a few minutes. We received earlier this week, the first order for 100 Genset from China. We have, earlier already this year, established an ongoing process to evaluate new business models and potential partnerships. We have initiated the establishment of a separate green organization, more information to come as soon as we are able to also announce respective names, who are leading this organization. And we have initiated, earlier this year, a process to sell our Torqeedo business and that process is progressing well. We made no changes in our ambition and our plan to invest over EUR 100 million in Green business between now and '25. And when I say Green business, I mean, not only investment in assets or in M&A, but also investment in research and development. And it's really great that the high investments we place, particularly in the hydrogen combustion engine over the last years, begin to pay off by having received that first order from China and in this case, for H2 Gensets. Let me talk a little bit about that China order for H2 Gensets. So as mentioned earlier, we received this first order. We're talking about 100 hydrogen-powered Gensets for the Zhongguancun Summit Enviro-Protection Company, which is often -- which is often referred to as the Chinese Silicon Valley. Obviously, you can't really compare it with the Chinese -- with the Silicon Valley in the U.S., because it's not a private company. But what are they doing with these products? So there is an area in Yulin province in China that's located in the inner Mongolia, so the western part of China and the eastern part of Mongolia. And it's an area where over the last decades, a lot of heavy industry has been located to particular for coke production. So there's an area of more than 40 square kilometers, where more than 100 coke plants are. And one of the aspects of coke plant is that they produce gas as a byproduct, coke oven gases, which consists about 25% of hydrogen. And this hydrogen is currently -- they're not used, so these gases are not used. And the concept, which is being pursued here, with the strong support of the Chinese government, is that they will install Gensets, which use the hydrogen, which is being taken out of that coke oven gas to produce electricity. It is obviously not green hydrogen, which is being used. It's fairly the opposite of that. But it's hydrogen, which normally would not be used at all. So it would normally be put directly in the atmosphere. And that's even more important, it's a starting point for them to subsequent development of a plant neutral hydrogen infrastructure in China. So the infrastructure is being installed. And over the next years, they will also roll out, here, the use of green hydrogen and then as I said, the infrastructure there. So these engines, we produced the first 4 or 5 already at our site in Cologne and the next 95 will be produced in the course of next year. And of course, it's -- this should not be the end, the 100, this is a starting order and we see much more potential going forward. Why are we particularly proud of that? Because traditionally, DEUTZ is an engine company and we produce engines traditionally for mobility solutions. But here we show clearly that with our technology, we are also able to offer suitable solutions beyond just the classic drive portfolio, in this case, for the field of power generation. Let me move on with service. Service has been a really, really successful stronghold of DEUTZ. We managed to grow it significantly over the last years. But with the implementation with the initiation of the Dual+ strategy, we clearly increased the pace of building up of further sharpening our service business. And if we look back at the first 9 months, we can look back on a really strong period. We further increased revenues by 7.2% to EUR 360.5 million. New orders climbed to exactly the same level. So that shows also that business is growing very healthily. And the growth of that business came pretty much across everything we're doing in service, both parts and also our Xchange business. So that's great. We managed to further expand our in-house service network by also pursuing 2 acquisitions. One acquisition is the long-term DEUTZ -- dealer DEUTZ partner in South America, a company called Mauricio Hochschild, which is located in Chile as well as in Peru. And the second acquisition we completed in the next -- in the last month, this was the acquisition of Diesel Motor Nordics, which is also a long-term DEUTZ partner in dealers in the Scandinavian countries, and in that sense, we were able to further expand here our presence. And this organic should not be the end. We have further acquisition targets in the pipeline for pursuing them in a structured process, so that we can continue this buy-and-build revenue for service over the next quarter as well. I mean, in terms of service, we are clearly here on track to achieve our target for the service business, EUR 600 million by 2025. And with that first glance in our strategic progress, I would hand over to Timo, who would translate what I just said into numbers and provide more detailed explanations.

Yes. Thank you very much, Sebastian, and good morning to all of you. I'm very happy to now have the chance to give you some more details on the financial numbers. But let me start with some key messages. We can report significant increases in revenue and earnings in the first 9 months and again, had a very strong third quarter. We are, therefore, very happy with the progress we are making in implementing our Dual+ strategy as well as our cost and efficiency programs. And therefore, we will now see, I think, a fairly good and stable outlook for the rest of the year. Let me look into some of the details. So Sebastian has already talked quite a little bit about the order intake. Yes, it is down compared to the year before. But what we saw on the graph, we can now see here in precise numbers. So orders on-hand remain at a high level at EUR 666 million. Yes, compared to September 30 of '22, where we had almost EUR 830 million, that's, of course, a reduction. But as was shown on the graph earlier, I would say a normal time for this amount of sales we are making would be in the area of EUR 500 million. So we still have a significant order backlog there, which should give us a fairly stable outlook at least for the near future. So that is, from our perspective, still a fairly okay situation for the difficult markets we see in general. If we look at unit sales, well, if we look at all of the DEUTZ, then the number has gone down by 2.5%, but it's important to note here where this comes from. And this is why we broke it down here, to the normal DEUTZ engine sales and then the Torqeedo sales numbers. So the units in the Torqeedo area went down from 38,000 to 27,000, there is where the reduction comes from. Luckily, of course, these are much cheaper engines than the one we see in our Classic business. But if we look at the numbers in the Classic engine business, then we can again report an increase from 130.8000 to 137,000. So that is still going in the right direction. And this is also what we see then in the revenue growth. We again grew the sales volume by 10.3%, coming from a little shy of EUR 1.4 billion to EUR 1.54 billion now for the first 9 months of this quarter. If we break this down a little more into how it happened in the regions and in the different application segments, then here really looking at the regions, the key message is that all regions grew. And I think that is, again, we've seen that for quite some while now. That is a very important message. Of course, not all the regions grew in the same level. The Americas by far were again the strongest area with an increase of 19.2%. And this is also something which gives us some confidence for the future because, as we heard earlier, the Inflation Reduction Act for sure and some other initiatives in the U.S. help us in this market and this still is a fairly good outlook. Asia-Pacific, in total, still, yes, 16% of our sales volume is also up 3.3%. Yes, China is unfortunately not giving us as much tailwind as we might have hoped at the beginning of the year. But in general, we are still growing. And the same is true for Europe and Germany as part of Europe, of course, we show this year in 2 separate parts in the area of 8% up, which is still strong growth. Looking at the application segments. Here, we see a little more of a mixed picture. Some of them have gone down, not significantly down, especially the Agricultural Machinery, 1.7% down. So a little smaller, but if we look at Material Handling on the other side, this is really the area that's been growing tremendously this year, almost 34% up. So that is very good for us. The other part that makes us very happy and also from a finance perspective helps me a lot with the outlook is that the Service segment has grown again by 7.2% and now is almost 1/4 of our sales volume. This is very important to us from 2 sides. First of all, even if we might see some difficulties in the market, in general, on the engine side, the Service segment is something that's not as volatile normally as other businesses might be. And so therefore, we do have some stable revenue here, but also that is, of course, for us a very profitable segment and helps us, therefore, with the EBIT. EBIT is the next thing we are looking at. So here, first of all, let us -- to mention that -- now after 3 quarters, we have already reached a higher EBIT level than in all of the year of 2022. And 2022, of course, was already a record year for us. So having now achieved that after 3 quarters, I think, is a tremendous achievement. And also if we look now at the different quarters, we can see that each quarter, we were a little above EUR 30 million in EBIT. So it is a really very, very stable operational situation, I would say, if each of the quarters looks so similar. Where does it come from? Of course, higher revenues in the Classic segment, also some positive product mix, then the things we've already talked about in the beginning of the year, the market-oriented pricing policy still helps here. Service business we've talked about, but also -- and this is very important, all the cost and efficiency measures we've implemented here in the company, they really bear fruit and help us with the EBIT. So having said that, we can now look at an EBIT margin of 6.0% after 9 months compared to 4.7% in the last year, so up 1.3 percentage points and we also see that in the net income, which is now EUR 66.5 million compared to the EUR 52 million last year. Earnings per share before are up to EUR 0.53 compared to EUR 0.43, so also a nice achievement. So did we spend money though? That's always the other side. Making money is great, but there's also some investments, we of course do to invest in the future of our company. The first part of that is always here the R&D part. If we look at percentages, we've gone down slightly because of the increase in sales. But for me, more important is that if we look here at the absolute numbers and absolute numbers, we are -- we've spent EUR 73 million compared to EUR 70 million the year before. Some of you might remember the EUR 70 million last year were already quite a big increase from the year before that. So we are continuously investing more and more in R&D. And one thing that is very important to us, it's here, not all of it goes into the Classic segment, but also a significant portion goes into Green here. And this is our biggest project now on the R&D side. If we talk about the hydrogen development, which is also part of then the development for the Gensets, that we've just heard where we got the 100 orders from China. So that is all going well. Looking at capital expenditure. That was, of course, a special year now as we've talked about that. After the first quarter call that we had the acquisition of the IP and license rights from Daimler Truck, that is a big portion of that. But also if we look at classical investments here, then we can see that we're at roughly EUR 48 million compared to EUR 42 million in the year before. So also on the normal CapEx investment. We are spending well for improving our future. Some of the biggest projects here are also investments in a new line here in Cologne for the bigger engines, which will, therefore, then make the production even more efficient. Working capital, of course, this might look like a very big buildup and some of you might wonder why that happened. But of course, we are now here exactly in the transition phase in the third quarter because we started our third shift beginning of August. So we, therefore, had to build up the components to produce these engines, but also there was some buildup in the final engine itself and that's the main reason for the working capital buildup. Looking at the effects all this has on the cash flow side. And the operational cash flow has a very, very big increase compared to the year before. That is mainly due to the much, much more profitable business we are making and therefore, higher EBITDA that goes into this. And then, of course, this also translates into free cash flow, even though we did spend more on the investment side, free cash flow has improved tremendously. We also know that, of course, there was a very big buildup last year in the first 3 quarters, especially in the third quarter because of all the problems we had in the supply chain. That's, of course, now normalized, as Sebastian said early on and therefore, we are now at minus EUR 13.4 million. If we look at and you will see that later on in our guidance, of course, we have quite a bit way to go, but we are very sure that after now the production has normalized, some on the third shift is up and running that we are going to reduce the net working capital, especially on the inventory side, which is going to help us with the free cash flow for the year-end closing then. Net financial position has gone up. Well, gone -- at least [ gone ] bigger now on the negative side. This is mainly due to, of course, free cash flow is still negative. It's only slightly negative, but it is negative. And then, of course, the dividend payment we did. Therefore, of course, it's always important to look how our financing situation looks like. Equity ratio is, again, we're always on a very comfortable level here, but it's even gone up a little to 45.7%. So this is really a very comfortable situation, I would say. Anyways, though even since there is a lot of volatility in the market and the economic outlook is not 100% stable, we looked at our different credit lines right now. We -- there are still EUR 185 million available, which we are not using, but we decided that we would even increase these credit lines with 2 bilateral credit lines of EUR 10 million each and prolong the other ones so that we are very, very well-financed. First of all, of course, for whatever we are up to on our Dual+ strategy, but also if the market at some point might go down that there is enough cash available. Let me now give you some very quick details looks into the Classic and the Green segment. I think the Classic segment, we don't need to talk too much about because if we looked at our overall numbers, most of these are very similar because the Classic segment is still the biggest portion, especially on the new orders, the unit sales and the revenue part. So the part that is worth looking at here is the EBIT and especially the EBIT margin. So we reached an EBIT margin after 9 months of 8.8%, which is, I think, also compared to competitors, a fairly good number, which we are quite proud of. Looking at the Green side. Most of you know that by now that this is always a little difficult to explain. If you just look at the numbers, the EBIT here with almost minus EUR 40 million is significant, but we need to separate this into 2 different parts. One is the Torqeedo business. We see that here on the sales side, on the revenue side, as well as on the unit sales side, we've seen almost 30% here decrease in these numbers. That, of course, also has an effect on the EBIT and therefore, the number here is more negative. But the other big portion of the Green segment, EBIT is always the investments we are doing here, especially in R&D because we are not capitalizing those and they go directly into the EBIT. And therefore, a bigger portion of this result here is really an investment into our future. So that's all from my side for now. And I'd like to hand over to Sebastian.

Yes. Thank you very much, Timo, for all those insights in our numbers and I will continue with a few numbers that mainly represents the outlook or the guidance for the year 2023. So yes, of course, at the end of the year and beginning of November, we have high visibility on what's ahead of us for the last not even 2 months. So what we expect now, unit sales range between 185,000 to 190,000 engines. So a lot obviously depends on how exactly are the deliveries around the year-end. Revenue, that translated in revenue are expected to be approximately EUR 2.1 billion. So constant with what we've told earlier. In terms of margin, as said initially, we up it slightly from 5% to a range between 5.3% to 5.8%. And free cash flow, we do now expect a mid-double-digit positive, of course, million euro amount. So raise the guidance, so it brings us feeling comfortable with confidence, let's put it that way towards the end of the year. Midterm targets -- medium-term targets remain unchanged. We do expect for '25, the revenue to continue to grow to EUR 2.5 billion or above. And part of that growth path is the Service business, which we continue to grow by roughly EUR 50 million on an annual basis to a level of EUR 600 million by '25. And the margin, we want to -- we want to bring it up another notch to a range between 6% to 7%, also implying, yes, that the Green business will start growing on top line, but will not, in the next couple of years become positive on bottom line. So that's still a bit of a cross-financing from the Classic and the Service business. So we do confirm our midterm targets for '25. But before finalizing and before being available for your questions, I mean, let me really summarize Classic and Green, Service, our view on, after the 9 months of this year. So earlier this year, we started a journey. We started the journey with our Dual+ strategy. We'll define the long-term targets, we'll define our mission and vision and we'll define certain milestones and what I can say now is that we are well on-track. And particularly, the numbers in Classic and Service on the line that, clearly, the Classic business is now as successful and as profitable as never been before. And that's great. That's really great. That's not the end of the journey, very clearly. But we really made progress both on sales side as well as on the operations side, of course, thanks to the new team we put in place here. And Green, yes, that's a bit of an upfront investment, right? But we clarified here our strategy. We clarified our journey. We decided that Torqeedo, in the future, will not -- no longer be part of DEUTZ, but we focus really on our core business, our core customers, but with products which go beyond just the engine. And we were like waiting until we can announce here the first milestone and with that serial order for the Gensets based on our H2 [ ICE ] to China, which we did today. That's certainly a milestone, which is both important for us, and we are incredibly proud of. And last but not least, the Service business continuing to grow in a profitable manner with inorganic parts as well like the acquisitions in Chile as well as in Northern Europe. So we're well on-track, and thanks for listening and now we are ready for questions. And I'll hand over to Christian.

Yes. Thank you very much, Sebastian. Operator, we will now be ready to take the questions.

[Operator Instructions] Our first question comes from Jorge Gonzalez with Hauck Aufhauser Investment Banking.

I would like to start a little bit with the outlook for next year. You were mentioning that at this point, you see a stable development, let's say, flattish development that in fact looks quite good, not taking into account the weaker demand. I was wondering, this is your optimistic best-case scenario and just you're seeing that it might fall slightly next year? Or what are the fundamental drivers for this taking into account that if we look to, in general, to the agricultural sector or construction, there are some regions like especially, well, Europe or Germany, now that are drawing a quite negative scenario for next year? What are the strengths that you have to see this development for next year? But maybe we can start with that, if you don't mind.

Yes, let me start with that. And typically, we don't really give a specific outlook for '24 at this time of the year because we're still compiling our internally, also our plan budget for next year. But you can imagine, and that's why your question is very relevant and very expected also. You can imagine that this drives us a lot because, obviously, we also observe what other customers and other players announce when it comes to the outlook. I mean, there have been a lot of news where we -- are we maybe too optimistic? We have to ask ourselves the question. What does help us in making the sort of flattish outlook? I would not say a bullish outlook. It's not a bullish outlook. It's a flattish outlook, but probably, we look at it a bit more optimistic than others at the moment. That's true. But what helps us here is particularly our exposure in North America because if you look at the mix, just the view we currently have, we see at the moment a bit of a stronger demand in sub-4 liter than what we have next year, but a weaker demand in larger than 4 liter. And that isn't so far not surprising because particularly the larger equipment and construction equipment, where we see a bit of a cautious development, particularly in Europe, I mean, these are typically the customers which actually source the larger engines from us. So there, we see a bit of a, let's say, less optimistic outlook, but this is compensated by the [indiscernible] particularly from the U.S. So Jorge, I would expect -- I would suggest that as we speak often in terms of the various calls or conferences, let us stay in contact on that and we'll share always the update with you. But at the moment, we really think that it's a stable outlook. And whether it's going to be a bit too -- a bit on the optimistic and on the realistic and that will work out over a couple of -- over next couple of weeks.

Okay. That sounds interesting. So are there any -- in U.S., you are seeing some market share gains in general? I understand that's also helping you a little bit.

Yes, we have those 2 customers, I mean JLG and Terex, these are the major customers in the U.S. and we talk to them and we talk also to their end customers, the rental companies and they look with confidence to 2024 and we'll benefit from that. And on the other hand, we have other particular in Europe, where the confidence is maybe not as high. But luckily, we have a well-structured, a well-balanced portfolio here across regions and industry. So yes, but it's driven by the U.S. And it's been certainly a good decision over the last few years to increase the business in the U.S. because that's at the moment the business which is booming.

My second question will be around your pricing power and also that in context with the service expectations. So do you think you can keep these prices next year? Well, I know the cost materials are starting to go down. So obviously that should be also putting in context now. But how do you feel about your pricing for next year? And also in terms -- in regards to the product mix, you commented in the results that the talent mix helped you also in the quarter. And it will be also interesting to have some color on this as we were expecting in general that you were positioned more compact engines. So how come that you have this better mix? Yes.

Yes. Okay. Let me start with an answer on your question on pricing power. Well, last '22 and '23, we have increased prices significantly. That is true. And we do not expect that '24 will be a year of strong price increases again. I think that's clear. So because the market moves to -- move more towards an equilibrium between supply and demand. So what we expect still to be able to adjust price positively, but on a smaller scale, much smaller scale. That's still possible. We do not expect that we will reduce prices very clearly so. We know that there may be some players in the market who think about that, but I -- we are well positioned in our customers' applications and we are reliable. So I do not expect that this is an issue for us. So we will keep prices or slowly rise prices but with a slower pace than in the last years. What will be important, yes, and that's true, and that's something we also identified as one of the priorities for next year, the landscape, the supplier landscape, because as you said, some indices, some prices are going down. So it will be -- the focus will move more on cost reduction and that's certainly an aspect which with our purchasing and supply chain teams, we are intensifying again. I mean, before we've been over the last years at least, we've always looked at keeping costs under control and reducing where possible, but clear also that in the last year, the same way like we were able to increase prices towards our customers, some of our suppliers were able to do that towards us. But that equilibrium changes a little bit. And for us, it's important that we are ahead of the wave, or at least in the front part of the wave. And that what's made us successful in '22 and '23, with being quicker on the price side and I'm convinced now with being a little quicker than others on the cost side for able to keep that edge. The second question was focused on the mix. And here we have -- we are enjoying or experience a positive effect that some of the older engines are not being discontinued, but the demand is slowing down. And the older engines are in some aspects at least the engines where our profitability levels were not as high as the newer ones because the level of competition is also a different one. So there, for example, pricing power is not that great when we look at older engines into power gen, for example. So that's something which is growing a bit in a for us healthy way.

[Operator Instructions] Our next question comes from Stefan Augustin from Warburg Research.

Actually, I'm looking a little bit first on the third shift, which you introduced. So when demand becomes more uncertain, there is obviously the risk that you need to reduce that. So when you look currently at the sub-4 liter pipeline, do you think it would be possible to keep the third shift over the full year 2024? That would be my first question.

Yes. On the question of the third shift. So we introduced it by the end of July. It's running stable -- in a stable way now. At the moment, I mean, when I say we are looking at a flat development of our order book, of our sales and production revenue, that means purely by mathematics, we would not need the third shift for the full year because when we are on the same level roughly or a bit below maybe like current year, I mean, we did not run the year '23 with 3 shifts on 12 months. So what we do expect at the moment is that at some point in the course of '24, we will not need the third shift in full force anymore, whether this is going to be in the second half, a bit earlier, a bit later, that will depend then on the exact mix of engines. But in any case, that is not so much of a concern for us because what we managed when we're building up the third shift, I mean, operationally, it has 2 main implications. First of all, we need to source more material to meet the increased demand. And secondly, we need to source more staff to operate the assembly lines. And yes, the material planning is directly connected by the way, through enough optimized and were completely redone S&OP process now to the sales signal. So here we are now in a better position to react more quickly than we've ever been before. So that's a positive sign. And on the HR side, we were able to ramp up the capacity needed for the third shift. We talk about roughly 200 FTEs. So we did that completely based on temporary workers. So not to -- that doesn't mean that the third shift runs totally with temp workers. It means we use temp workers to then blend them with fixed contract workers in the 2 existing shifts. But the advantage here of the temp workers is that if needed, we can reduce with a very, very short announcement time.

Is it right to conclude from everything so far that we should expect rather you to go with a more efficient, more loaded production into the beginning of 2024 and then will be, say, then make [indiscernible] works. Is that a way of thinking?

It is right to assume, but it's also right based on, let's say, our long-term experience because typically, the first couple of quarters are the stronger quarters, in particular, the second quarter. When you look at our numbers in the long run, you will always see the second quarter is the strongest. And then the first quarter starts a bit slowly in January until everyone is up and running again. And the fourth quarter is typically due to the Christmas period, a little weaker in terms of occupation, right? So yes, that's why it's fair to assume what you did. We have to say that in the last couple of years, this was a little out of order because the limitations were in capacity and supply chain. So that's why this golden rule didn't really apply in the years of the supply chain crisis '21, '22 up to including '23. But at the moment, we would say, yes, it's fair to assume that the first half will be a bit stronger in terms of volume than the second half. But we'll see what -- how the economy develops throughout the next year, of course.

And the next one is actually on the Green business or Torqeedo. So we have expanded the loss in Q3 and really that part of that is Torqeedo. So when we would be successful in selling that business in 2024, obviously, the loss to Green would reduce. And you, let's say, outlined conference calls, a general expectation about, say, low level -- low-double-digit loss as a normal run rate and to be in prospect with a EUR 100 million investment into the Green business. So let's say, if you sell Torqeedo, we will be back around that investment level. Is that a fair conclusion? And second, connected to that, if you would be selling Torqeedo, you ruled out so far that there would be an asset write-down or something like that. The next question is, can you also make a statement about if Torqeedo could lead to cash drain? So Torqeedo.

Sorry, the last bit was cut down. If Torqeedo would lead to a cash and then I didn't get it.

If you sell Torqeedo, if then it could lead to a cash drain?

Cash drain? Oh, no.

Yes.

The opposite. So let me start with the last question. So as we said before, the sale of Torqeedo according to what we currently see in the process would neither leads to a cash drain nor to an asset write-down. You will understand that we will not provide more information on that because it's a competitive, but also highly confidential process, but that is clearly the current view. And why is that because a buyer or a potential buyer for Torqeedo probably sees more potential in it than what we could easily do given our positioning in the market and also our site. So that would be one aspect. The other aspect, yes, of course, if Torqeedo is out of our portfolio, that would change both top line and bottom line. That's very clear. Bottom line, I mean we do not -- as when I said earlier, we expect a conclusion of that process throughout '24, we would not expect the closing to happen, let's say, early '24. It will take some time even if we have an agreement and the signed contract and everything, it will take a couple of months to run through governmental approvals, et cetera. So we will not see the full effect fairly early in the year. We will then evaluate when -- if and when we disclose the discontinued operations, but that's questions to be answered not at this point in time. So then you mentioned -- I'm not 100% sure I understood, but I think you raised a question on the EUR 100 million investment in Green. And we continue to invest EUR 100 million in Green very clearly. I mean, if you look at where this number comes from in our heads, in our minds, in our plans, we are spending a certain share of R&D. Timo mentioned it earlier in our greenfields, both related to hydrogen as well as to our electrification. We're talk about EUR 30 million, EUR 35 million on the full year basis right now. And we do not plan to reduce that, quite the opposite, right? And we have to allocate capital going forward, obviously, bit by bit more toward Green, in order to frontload here the development of Green. And as I said earlier, I'm actually particularly proud and fond of the situation that our large investment in the hydrogen combustion begin to pay off by securing that first serial order. So yes, Torqeedo is a strategic sort of readjustment, but more sharpening of our green strategy, by no means to stop or slowing down. We expect actually that after we divested off Torqeedo, we can even increase the pace by allocating the limited resources in a much more meaningful way than what we've done over the last years.

And is it fair to assume a positive contribution margin from the order in China? Likewise, orders that you might achieve in the near future?

Yes, that is fair.

Our next question comes from Roland Konen from Value-Holdings. Looks like we don't have Mr. Konen. We move with another follow-up from Jorge Gonzalez.

Yes, I wanted to ask again about Service. So your target for '25 is quite strong, EUR 600 million. And I was wondering how you see '24 in this regard. You acquired a couple of businesses this year that in my numbers are adding around EUR 20 million, something like that. So I was wondering if we should expect a slight growth for Service next year? Or if there is any driver that we should take into account for faster growth? And obviously, in this regard, how you see the Service sales jump into the EUR 600 million until '25?

Yes. I mean in '25, we want to target the EUR 600 million. This year, we're going to be shy of EUR 500 million, maybe EUR 490 million, something around that. And I think it's fair to assume that next year we're going to be somewhere halfway, maybe a little bit low, but not much. So yes, it's always -- it's a combination of organic growth and one other M&A. The 2 M&As we did this year, it's not 100 -- the revenue numbers you mentioned were quite correct, but it's not 100% Service because there's some trade -- some engine sales as well, but majority is Service. And obviously, this year, they didn't hit the P&L on a full year basis, but only on a couple of quarters, or in the sense -- in the case of Diesel Motor Nordic only in the last quarter. So obviously, we'll enjoy the full run rate next year. And there's going to be a couple or 3 more acquisitions to come. Not all of them we know already of, but we're working on that. So that's, yes, I would safely assume something around halfway.

I remember you mentioned in the second quarter that U.S. Service is around EUR 50 million per year. And you were opening new retail workshops. Should we expect faster growth in North America in other regions for Service?

No, I would not say that. We would not say that. I mean, as you correctly said, we have opened a ninth DPC in the U.S. this year. By the way, we're going to open a 10th in the course of next year. So the growth is on a comparable basis yet. But if you really look at the number for '24, I would assume a good halfway between the numbers, '23 and the guidance for '25.

And my last question, regarding Green, we learned this week that Cummins is together with Daimler Trucks, another players, developing some batteries in U.S. in the future. I was wondering if this is not a good solution for you to join Daimler Trucks or Volvo, some of your clients to continue developing your Green business and especially for the electrification?

Yes. We are -- of course, we also saw the development of Cummins and we have a very good and very, sort of, amicable constructive relationship with Daimler Trucks. We are obviously always in talks what we can do together, focusing both on hydrogen because, as you know, with our partnership on the medium-duty and the heavy-duty engines, which we concluded earlier this year, our engineers are pretty much working on a daily basis with Daimler. So on the fuel of hydrogen is certainly of interest for both parties. But also in terms of battery, I mean, I'm not talking specifically about Daimler Trucks right now. But in principle, one challenge in the field of battery-electric vehicles in our area of highway where you don't have the huge scale effects, or you do scale potential like in the on-highway business is that you get access to competitive -- to competitively priced batteries. And certainly, they are partnering up with a large-scale producer is helpful. So let me keep it like that, more I'm unable to say right now.

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

Thank you very much. Thank you all for listening and for your questions. If there are any additional questions after the call, please contact the DEUTZ IR department. We will be at your service. And for all the rest, if we do not see you during one of our road trips or conference in the next couple of weeks or months, the latest, we'll talk to you again on March 19 when we'll present our full year figures and the outlook for 2024. Have a great day, and goodbye.

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