DEUTZ Aktiengesellschaft (DEZ) Earnings Call Transcript & Summary

Good morning, and welcome to DEUTZ's conference call on the acquisition of SOBEK Group. Please note that this call is being recorded, and a replay will be available on deutz.com later today. By participating in this call, you are consenting to this. I'm pleased to welcome DEUTZ's CEO, Sebastian Schulte; and CFO, Oliver Neu. So Sebastian will provide an overview of the acquired company, SOBEK and the transaction. Afterwards, we will open the floor for your questions. For your information, we are planning for this call around 30 minutes. As always, please note the disclaimer, especially with regards to forward-looking statements. And with that, I hand it over to you, Sebastian.

Yes. Thank you very much, Sarah, and good morning to everyone who has dialed in. And indeed, last night, we updated the public, the capital market with a talk release about our acquisition of SOBEK. And it's really the headline as we have it here that we, as a company, are strengthening our defense business with that acquisition. And SOBEK, and I will talk about that later, it's a drive system specialist for drones, but also for other applications. So a true sort of dual-use business, but obviously with a strong focus on military and drones. What we're going to cover today is, first of all, spend some time on the market perspectives, well, defense market, but obviously, with a focus on the UAVs, unmanned aerial vehicles. We will introduce you to SOBEK, their technology, their positioning. And of course, we will also introduce what drove us, what's the strategic rationale behind DEUTZ acquiring SOBEK and how this is going to fit to our Dual+ strategy. What I can say before going into this is that SOBEK is established and profitable business. So it's not a start-up. It's an established and profitable business. And that will help us to strategically really enter into sort of new technologies, but around what has made us strong in the past already, the drive, but utilizing in particular, this rapidly growing defense market and this one beyond the conventional ones. Let me start with a market perspective. And I think this is not a left part of that chart. It's not a surprise. I mean this is an assessment of the ramp-up of the European NATO defense budgets. And due to the change in geopolitical situation, particularly since 2022, we observed a much, much stronger CAGR of these budgets since 2022, and we expect this all to continue. Whether it's going to move into that case, which we take as a base case in a brown or whether we see a bit even more ambitious acceleration or even the ramp-up to the 3.5% budget -- purpose budget objective that we will see. But what is clear that the market is growing significantly. And why is that? Defense sovereignty is extremely important. And obviously, that leads to the need for industrial players also to locally produce, establishing new partnerships. And for companies like DEUTZ, who are trusted companies in German industry, it's important that we are able to grow very quickly. To participate not only in the budgets, but really make here a contribution. And important, and that's what brings us over to the topic of drones that the spending, the budgets we see here, there's going to be a shift from the sort of defense traditional companies towards so-called def-tech, tech companies in defense and obviously, in particular with a focus on UAVs. And just 3 examples here to use is that in Germany, of course, drone and also the loitering ammunition that's one of the top 4 priorities. And obviously, that also impacts other top priorities in these cross-domain operations using drone and counter UAV operations to just give you one example. In the U.K., the statements of the U.K. military are sort of more ambitious towards UAVs and drones and related technologies seen in the future as up to 80% of the army -- and that really means that the military doctrine is changing rapidly, obviously, based on the experiences made and currently still being made in the Ukraine. Similar but not overly relevant for us in that field in the future is the United States, but it's also a prioritized system gaining significantly more relevance besides, or top sort of the established major weapon systems. When we move on to the UAV market in particular, and we're talking about the European UAV market, we see consequently a very strong CAGR as well. We see numbers and there are many studies, which all provide more or less the same -- the same picture, the same growth phase, the same growth ambition. We see a lot of growth, particularly in the next years, 23% CAGR until 2030. And that, of course, sometimes there will be a stabilization. So that's pretty much constant. And when we look at what's behind the drones, there is a very important focus on particularly the small and midsized UAV, which are essential for modern defense strategies because that allows scalable, quickly scalable and also very flexible operations. And of course, they are faster and also cheaper to deploy than traditional platforms where partially the development and then the production takes not only months, but years and partially even decades. So what's also sort of a benefit for newcomers, for newbies in that market is that this tactical drone marketing market is opening now up to new planes. The entry barriers are lower. Innovation cycles are significantly faster and also political support is here creating space for specialized suppliers. So it's important to really have scale-up capability in order to really capture that growth. And so that's why this drone market with a focus also on small and midsized is a very interesting one. Let me give you a bit of a glance on what SOBEK is and what SOBEK is doing. I said it earlier in the introduction, it's not a start-up. It's actually an established company. It's been founded in 1975 by a company, our owner at that point, Mr. Sobek and is led by Mr. Han since 2009, who is the 100% owner nowadays before the acquisition. 70 to 80 employees, so not a large company, but as we will explain later, highly specialized. And it's -- SOBEK is an established drive specialist. I mean their focus in the past has been really developing high-performance electric drive and hydraulic systems for drones, but where they come from, particularly for motor sports and not for driving motor sports cars, but for auxiliary systems around pumps, as I will explain later, and also for aerospace. It's all German made, high-tech made in Germany. So that's why it's very -- it's a very important component in the military drone supply chain for the future, 3 production sites in the south and west of Germany in Kassel, Hirschberg, near Heidelberg and Rottenburg near Stuttgart. And also that's why it's fitting pretty well to the DEUTZ setup. And the product portfolio SOBEK is offering, I used the word quite a lot already scalable, high-quality manufacturing across the core products. That's brushless DC motors, so small but powerful electromotors, control electronics, pumps and valves, whereas the pumps and valves include these highly specialized BLDC motors and the control electronics is own development and also own produced, very important for this resilience in the supply chain, particularly in the field of military. The performance -- or company is performing very well. Revenue, so between low and mid-double-digit million euro range. EBITDA, approximately EUR 10 million to EUR 12 million on an annual basis. And we don't disclose the margin in detail, but it is double digit and is actually quite significant double digit. When we look at '24, and I'm just providing here the view of the past, products and applications, product side, it's pretty much 1/3, 1/3, 1/3 between motors and control electronics, pumps and valves. And the applications, and that's where they come from in 2024 is with more than 60% for motorsports, defense, a growing field and aviation, but also some very niche applications like robotics, metrics and others. This year, the focus has already shifted quite significantly because '24, the top line was also lower, '25 top line has gone up significantly and the growth is very much coming from defense from selling these components to a number of pretty known European-based def-techs where we do not disclose the names here for confidential reasons, but they are very well known. And going forward, where -- what is the sort of growth we expect? So I said it already earlier, we expect a CAGR of 16%, maybe 15%, maybe 20%. I mean this is very difficult to predict, but we're all in agreement that we see a significant growth. We do not see a significant growth coming out of the motorsports business. It's a very niche application. Having said that, the produce providing today to Formula 1, Formula E and also [ Le More ]. And there is still growth potential outside Europe, some series in Japan, some series in the United States, but that's not the focus as of now, but it provides additional growth potential. So we have a very strong starting point here given the foundations in the high-end motors, but the expanding into military drones and that what we see with the red bar, I mean, that's underway and driven already by strong orders from, as I said earlier, had picked def techs that you see the 12% share in '24, increasing significantly, almost 50% in '25, and we expect in the future the share be at or above 50%. And additional potential like in aviation, robotics and medtech, that is there, but it is something which SOBEK has not very actively pursued in the past, but what we also see as on top growth potential in the future. To explain a bit the role of components within the drone. As I said, there are 2 products. It's the brushless DC e-motor. And DCEs are electromagnetic motors to power the propellers. And they're often obviously combined with control electronics to ensure redundancy. It's extremely important. You have between 1, but rather 4 or even 8 of these engines per drone because the drone needs to be steered very accurately with no margin for error literally but no margin for error. And that's why you also have in a drone like that between 1 and 8 control electronics. Both of them produced in Germany and are using very, very few components imported from outside the country, which makes these products very qualified for the military market where obviously, independency and resilience of the supply chain is key. Maximum power of these motors is 10,000 watts from the controller electronics, we see up to 200 amperes, but again, as I said earlier, on the motor side, superior power density is extremely important, energy efficiency, precise controllability. So power to weight is an extremely important aspect because you can imagine these drones, they need to be light, they need to be fast and they need to be able to carry a very effective payload when they are in military use. I mentioned it already earlier, but I would like to highlight, SOBEK is already a trusted partner to European def techs, and not only trusted but an early partner to these future defense primes. I said today's defense techs turning into future defense primes. So SOBEK already supplies electric drive systems, a system comprising as shown on the previous page of the motor control elements and the software to these leading European drone manufacturers. And it's obviously a key component supplier for this new sort of European defense ecosystem, which we are currently seeing emerging pretty quickly in the def tech sector. I also said it earlier, local supply chains are a key differentiator. ITAR-free sourcing is extremely important. Not only that, it's actually mission-critical. SOBEK, with their setup in Germany, offers the local to local sourcing and very, very resilient European manufacturing. And with that drone business, I mean, the first prototypes or even the first series that were relying a lot on Asian, sometimes Chinese components. And obviously, that for obvious reasons, is no longer possible. So that's where a company like SOBEK comes into play. And the preconditions for drone OEM, particularly the certifications, and these are fairly high entry barriers. They are already fulfilled to technical performance. So everything is set to grow and -- but as I said earlier, on a very solid basis. When we put two companies together, I mean, SOBEK is obviously still a small company. But when we -- after we acquire or why we acquire SOBEK as a company, first of all, and it's the headline and I keep repeating, it's profitable and it's ideally positioned in defense, 2 extremely important preconditions. When you look at SOBEK from a stand-alone perspective, it's already extremely strong case because technology leadership in these advanced drive systems and a strong market position. So purely on a stand-alone, it's already attractive. But we as, DEUTZ will contribute in digitalization scale. So manufacturing, sourcing, service infrastructure, homologation capabilities, but also access to markets outside the country. So that's where we come into play. And on the other hand, we benefit a lot from SOBEK as well because it's our aim to develop ourselves from a sort of pure product supplier to system integrator. And SOBEK brings here knowledge products and business models, which help us doing that. We are expecting to gain quite some technological edge. We also see the perspective to be able to jointly develop modular system platforms, for example, powertrain kits tailored to defense, but also to adjacent markets. And with SOBEK as an established supplier -- drivetrain supplier, we are also expecting to gain -- fast gain the strategic access to these new defense ecosystems because it's one of our imperatives to actually quickly expand into that business, in particular, in the business where we can apply a fast entry where the development cycles are short or fast to be precise, to really participate here from the growth. And I mean, to round it up, right, it's an additional milestone in our Dual+ strategy. You all know that. We're coming from a very, very ICE-focused business, internal combustion engine, our classic business. We're working on that to make it better, stronger, and we are well on the way. But it's still a business which is fairly dependent or very dependent actually on economic cycles. And obviously, there is, at least in the mid and long term, there is the need to transform, right? And so we have, as with Dual+ set ourselves up to make ourselves less dependent on this still very volatile combustion engine business. We want to move from this sort of one product, the engine and the service to a multi-business company, which acts also as a system integrator. We've done that. We've kicked that off in the last years with our market entrants in energy with the acquisition of Blue Star. So that's all worked pretty well. We also want to boost our defense business unit, which we founded very recently. We want to boost it in a market where obviously trust, experience, commitment are differentiators. And we are also expecting some cross-selling opportunities with the products which we now consider sort of our traditional customers. And high-tech made in Germany, I mean, that sums it also up. It's a claim, it's an important claim, and we want to utilize that claim where it makes sense. And with all the discussions in this very, very intense due diligence we've undertaken, we learned how important that is to be a high-tech player made in Germany or made in Europe, but in this case, made in Germany because as I said, resilience in the supply chain is a must. How we proceed in terms of next steps and also some details on the on the transaction is the M&A deal has been negotiated and signed based on an EBITDA multiple of 11x, which is for an asset in that space, we consider pretty favorable. Given that it's a German company -- acquiring a German company and not with a high overlap in business, we expect the transaction to close imminently. Financing is secured through credit lines with our banks. And we also put in the talk release that depending on the market conditions, we're also intending or considering financing the transaction with a capital increase from an ABB procedure, no more than 10% of the current share capital, depending on market conditions. Moving on, we have made very good experiences in the last 3 years with acquiring successful niche players. And part of that is obviously selecting the right targets, but another part is also selecting the right integration approach. And when I say that, I mean a low-touch integration approach because we consider or we appreciate very, very clearly what made that company fantastic. And that's the scalability, that's entrepreneurial dynamics and also the tax expertise of the team. And this is why integration only where it's necessary. I want to do it the same way we did it with Blue Star and UMS, which both has worked so far pretty, pretty well. So that's pretty much the next steps. And yes, I wanted to take the time to give you a brief quick first glance into what we've done with that acquisition, why we've done that and what to expect on that. Now we've got a couple of minutes left for questions.

Thank you so much for your presentation, Sebastian. So ladies and gentlemen, we are now happy to take your questions if you may have. And like you know from previous calls from DEUTZ [Operator Instructions] so let's start with -- I think we do like ladies first. So we go with Anna. So please go ahead and ask your questions.

[Foreign Language]

Please feel free to speak to ask in German. I would answer in English, if that's okay.

[Foreign Language]

Yes. So for everyone listening and speaking English, question's about our new business unit defense since when we do have that and what's the plan with that, how we want to grow it and so on and so forth. So I mean, speaking on the business unit defense in general, -- we call it a bit of a sort of go-to-market business unit because we want to market products we have already in our portfolio, both in the traditional portfolio like our combustion engine, but also new businesses like we're speaking now about SOBEK. We want to market these products, which are in principle suitable for military as well as for civil use. We want to market them properly for military use. And that's why we founded the business unit. And we founded that business unit formally at beginning of the year. Informally, it was already working as a project beforehand. And so far, I mean, this year, and that's what we've been saying in the past months very consistently. We also -- we are expecting roughly a double-digit million euro sales volume in military business. Obviously, with that acquisition, that's adding up. So we are establishing this business unit to grow it over the next 3, 4, 5 years to be a significant but not overly sort of dominating part of DEUTZ. The teams are excited because DEUTZ is driven by sort of entrepreneurs, by committed engineers and engineers like to solve challenges. And obviously, the military business, I mean, they bring new challenges and our engineers are super excited to solve them.

[Foreign Language]

In terms of numbers of employees, it's a small sort of handpicked group of less than 50 employees. That should not look too small because, as I said, these are the teams marketing the products. They're being produced by our sort of overall workforce. And relevant, but not significant or however I phrased it, means I do not expect -- I will not -- let's put it that way. I will not set here growth targets in the triple-digit million amount for the next years. We're going to start developing this market. And what's even more important than pure top line is that this is a successful bottom line.

We will move on with Jonas Jansen.

Just one clarification question regarding the EBITDA multiple compared to the other number you said, like the EUR 10 million to EUR 12 million for this year? Or is that another range you have there? And the second one is looking at the other businesses you already bought and had an idea with -- also in the defense spending with UMS, for example, do you already see there also raising interest from customers?

Yes. Let me first -- Mr. Jansen, first answer the question on the EBIT. So there are 2 things. We explained that SOBEK generates an EBITDA between EUR 10 million and EUR 12 million. So that's an absolute number. And the multiple is the valuation, the valuation which sort of connects the EBITDA and the purchase price we paid, right? And so one is an absolute number, the other one is a relative valuation. And when I spoke about valuation earlier, the 11x is what we consider favorable because in the defense space, you see a lot of companies, particularly stock-listed companies with a higher valuation. Moving on to the second question, we do see increased interest. We have -- we're working on quite a lot of promising partnerships. But -- and unfortunately, I always -- before something is signed and announced, I always have to say this is all very highly confidential. But what I can say is that these partnerships, I mean the most interesting and promising ones are the ones where we're talking about innovation in our drive systems, where we are bringing sort of capabilities that we have around the drivetrain, sometimes combinations from the traditional ICE combustion engine, but also battery electric technologies, how we bring that into -- with new players. So there is a lot of interest, obviously, focused in Germany and Europe. But as always, once something is ready to announce like this acquisition, we're very happy to do so.

So then we move forward with the questions from Wolf from David.

German Price agency. I just have one-digit question. So what is your turnover share of your new defense unit? You said double-digit million turnover each year. So what -- so how many percent would this be of your full -- for -- of all DEUTZ? And the second question is you said that actually SOBEK is about to expand into military drones. So did I understand it correctly that right now, it has nothing to do with military drones. I mean, right now, there's no business?

No, no, no. Actually, there is significant business in military drones. Let me start with your second question. So in this year, 2025, the share of SOBEK drives going into military drones is around 50%. So it's a very important pillar already. The history of SOBEK was they came from motorsports from Formula 1, not the engines to drive the race cars, obviously. This is not done with these small electric engines, but the engines using driving pumps and valves for cooling and so on. But SOBEK successfully managed to transfer that technology into the military drones use case, and that's why they are set in a number of military drones manufacturers' products which are currently also in use in that war in the Ukraine. So it's already established there. And we expect further growth. That's what I'm saying. The other question, your first question on the share. I said, well, look, we didn't disclose the numbers very digital in detail. That's why I'm saying double-digit million euro revenue number. That's the one statement. And the other statement today, it's still a small portion. Our group revenue is above EUR 2 billion per year. And so what we can say is today before that acquisition, before the growth, it's below 5%, but we expect it to increase. That's as much as we can say on these numbers. I regret.

Okay. Great. And SOBEK will be put to this new defense unit or...

That's correct. That's correct. That's correct.

But it's not fully military, right? It's not fully defense. It is also some from the racing units.

Yes, that's correct. That is correct. But the main growth path and the main share today of that company is in defense. So that's why we decided to also allocate it to defense, obviously, without neglecting the other business verticals, but it is for us clearly considered a part of that defense growth trends. But as I said earlier, these products are obviously suitable for dual use, such as the engines DEUTZ has produced traditionally. So there's always -- and that's good in order to be resilient. There is always obviously the marketability given not only in defense but also in others, but we're doubling down here on the defense part.

And my last question, so in the Ukraine war, actually, are they using drones, which have SOBEK components?

Yes. I mean the Ukraine is using, not the Russian to be very precise, yes.

And then by now, we have the first virtual -- the last virtual hand, sorry, from Klaus.

Lost him?

Klaus, unfortunately, we cannot hear you. Okay. Maybe his questions are already answered. And then we have a question from a person who's not able to speak. So it's Klaus Schilling from M.M.Warburg. So Sebastian, can you give a bit more granularity regarding margins at the motorsports unit? And where you think defense share of SOBEK total will look like in 3 years from here?

Sure, Klaus. We've shown that on the, I think, the third or the fourth page. Maybe we're just flipping back here, give us a second. Exactly. So currently, in 2025, the share is about 50% of defense. In 3 years, the share, we expect to be a little above that. But obviously, we expect the total business to grow significantly, right? So that's the current prediction. And rationale behind that is, of course, that, as I said earlier, these UAVs, particularly the type 1, type 2, they become more -- a much more relevant component or part of the military doctrine and NATO as well. And so that's why there is growth expected, supported by a lot of market studies. We do not disclose margins in detail, in particular, not in relation to the verticals. The only thing I can say is there are attractive margins all over the business, and that's purely because it's high-tech, it's not easy to be copied. And so that's why we're buying a successful business.

Thank you so much. And the last question by now. Can you please explain your thoughts of the process, what would let you choose to do a capital increase versus keeping the related debt on your BS?

Well, we're keeping it open right now. But the thing is we are on a growth pace on the growth pace as DEUTZ. We have ambitious targets to make DEUTZ more successful to grow DEUTZ to grow not only top line, but particularly also bottom line. All of you who are following us more closely know that with our Dual+ strategy, we also announced to make DEUTZ a EUR 4 billion business by the end of the decade with a 10% margin. And that will only work as a combination of organic as well as inorganic growth. And particularly the inorganic part will require every now again, capital. That's what we've done last year in relation to the acquisition of Blue Star, where we successfully placed new shares. And I think everyone who entered is now 1 year later pretty happy about that. And that's why we're keeping it open because this has not been our last acquisition.

All right. Thank you so much. So in view of the time and in the chat or in the queue, it seems there are no further questions. So -- and then I'll just -- having said this, there is always a question. Why is the price so low, 11x EBITDA. Normally, we would expect in such a demanded sector, 15 to 20x EBITDA.

I would not consider the price is low. I would consider the price is fair. I think that's the only statement I can make. The price negotiation is obviously a result of seller and buyer negotiating and coming to a mutual agreement. And we consider this a fair agreement for both parties. And when you look at comparables, you always find businesses that may be valued higher, but also may be valued lower. So please bear with me that I would not consider the price is lower, it simply is fair.

All right. Thank you so much. And answering that question, we will come to the end of today's conference call. And we thank you for your shown interest. And yes, have all a lovely remaining Tuesday. Also a big thank you to you, Sebastian, for the presentation. And last sentence belongs to you. That concludes our call.

Thank you very much. Thank you very much for listening, for dialing in and listening and for continuing being interested in DEUTZ. I can tell you it's a lot of fun shaping the transformation, and we look forward to be in touch and remain in touch with you in the future. Thanks.