DEUTZ Aktiengesellschaft (DEZD.XC) Earnings Call Transcript & Summary

Good morning, and welcome to DEUTZ's conference call on the acquisition of Frerk Aggregatebau GmbH. 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. And now I am pleased to welcome DEUTZ's CEO, Sebastian Schulte, who will provide an overview of the acquired company, Frerk Aggregatebau GmbH and the transaction. Afterwards, we will open the floor for your questions. And for your information, we are planning this call to last 30 minutes. As always, please note the disclaimer, especially regarding forward-looking statements. And with this, I'm handing over to you, Sebastian.

Yes. Thank you very much. And also from my side, good morning, in the last week before Christmas to our analysts and investors call. Because yesterday, we signed an SPA to acquire Frerk Aggregatebau in Northern Germany. And Frerk, as I will point out later, is an established German system integrator. And the rationale, and again, I will point that out later in more detail, is to really build up or strengthen our position as DEUTZ in an extremely fast-growing market for backup power solutions, particularly in the field of data centers, critical infrastructure. So all verticals which are growing strongly and where we have a very, very strong right to play and right to win. What I will cover in this morning's short presentation is the market perspective, tell you a bit about the growth in that market, obviously, with a focus on data centers and critical infrastructure. I'll tell a bit more about what is -- who is Frerk actually, what's their footprint, their technology, their positioning. And of course, what's the strategic rationale why we picked Frerk as a company to be acquired and how Frerk fits into our growth strategy. Let me start with a few words on Frerk. I said it before, it's a German-based system integrator of diesel, gas, gensets, and we're talking about an output -- output/revenue in 2025 of a bit above EUR 80 million. They also have -- Frerk also has a service share of roughly 10%. The remaining 90% is actually new build. So the activities, the core activities is obviously they design, they engineer and then they package, as we say, in the field of power gen turnkey genset systems that includes containerized solutions. They do the project management, the installation, the commissioning and obviously also the long-term service and maintenance contract. Frerk today is owned by families. So it's private ownership. And that's why we are especially pleased to get on terms with the families currently still owning Frerk in handing that fantastic company over in our hands. The output of Frerk is currently pretty dominated by German revenue, 85% and then, let's say, by other European countries we pointed out here on the right-hand side, France, Switzerland, Norway and others, but we can see here the main focus at the moment is still in Germany. But that also gives a nice growth perspective under future DEUTZ ownership, as I will point out later. The market for gensets in general is growing. We talk here on that picture, we have got the European growth. So we see a 9% annual growth rate expected until 2030. But if you look a bit more detail, we see that sort of the general market is expected to grow around 3% to 5%, but the market for data centers -- well, gensets for data centers is expected to grow high -- well above that market CAGR of 15% to 20%. So we talk about in '25 for Europe about a total market of $3.5 billion to be expected to grow up to $5.5 billion by 2030. And the data center, obviously, the growth for the data center vertical is coming a lot from artificial intelligence and everything, and all the requirements from this market, which are currently developing. When I look at the data center segment, and we see on the left side of that chart, the current capacity in megawatts, right? And we see that Germany here is centered on that map with above 1,000 is already quite strongly implemented. However, we still expect a CAGR of 10% to 20% even in Germany despite that large installed base, but driven by the hyperscalers as well as critical infrastructure on top, there is a stable and resilient growth to be expected. If you look at other countries, in Europe, there's a bit of a mixed picture. So we still have already quite a strong capacity in France, in Spain, in the Nordics with a bit of pickup potential in Eastern Europe. I didn't mention the U.K., which is also obviously, mainly driven by data centers in London, already quite well established, but with a bit of pickup by Eastern Europe as well as Portugal. And that's actually very interesting also for the strategic rationale, which I will later point out that we do see European markets with extremely high growth potential in Southern Europe, and we see it here on the right in the bottom part. So cut a long story short, it's a lot of growth potential, growth perspectives in Europe pretty much across the continent. Frerk, once acquired by DEUTZ, will position us very well to capture that data center and AI boom in Europe. Today, Frerk, the output, this is '24 numbers, but '25 numbers are fairly similar. Roughly 50% of that gensets go into data centers. Then we've got another 25% going into critical infrastructure, 10% service, I mentioned earlier, and other sort of smaller but still interesting segments, industries and others. When we look at the customer exposure here, the data center operators, they typically have the highest requirements in terms of availability, redundancy and ultra-low latency backup power solutions. And I said it earlier, it is driven by the ever-increasing AI workloads and the cloud expansion. When you look at the second largest customer group operators of critical infrastructure, what I mean with that, hospitals, utility companies, network operators, they do have long investment cycles and the regulatory requirements are increasing. The [ critical ] is a good example, German law, which will ensure that a lot of operators of critical infrastructures, in fact, will need to install backup power capacity for situations where the prime power may be interrupted. And then, of course, we have here the third largest group, industrial energy customers. They just require reliable decentralized power solutions across a very, very wide range of applications. So the entry barriers are not that low. So they're quite high actually to enter into that market because customer relationships are typically long term and the margin profiles are also extremely attractive. That's why -- that's what -- was the reason why we said we want to invest here. We want to purchase in order to then jointly with Frerk, and I will point that out later, build that business even larger and more successful in the future. When I look at Frerk in particular, we're talking about -- we showed you about the output. It's a growth story, '24, '25, solid growth rate. We expect '26 to be well above '25. Frerk has a stable order backlog, good order book right now. And the momentum in data center growth, which I pointed out earlier, will drive here the output also going forward. Revenue currently is expected to be around 10% of total output because typically, when you install such a backup genset, it goes along with a long-term service contract. So that is a very stable relationship between new installation and service. So when we put Frerk together with DEUTZ, we are really creating synergies. We're really creating something attractive, something very attractive. So first of all, Frerk comes or joins DEUTZ -- will join DEUTZ with a strong underlying business, has a leading position in high-end backup power systems for data center and critical infrastructures. We understand and we believe that Frerk is extremely well positioned in these structurally growing markets, as I said earlier, which are benefiting from that AI-driven expansion of data centers. And DEUTZ and now it's becoming actually very interesting. Frerk on a stand-alone basis, I would never say has reached sort of the peak of what they could do in terms of growing. They would grow on a stand-alone basis also grow going forward. But we believe with what DEUTZ can bring to the table, we can jointly certainly accelerate the growth because we bring scale, we bring industrialization, we bring global reach. So we, as a company at DEUTZ, we have -- we know the engine. We know all about the engine. We have system expertise. We do also bring manufacturing and sourcing capabilities to the table with our facilities in Germany, but also in Spain. And remember earlier, the Spanish and Portuguese market is also quite interesting. And that may be the strongest bit we bring to the table here is our globally, but in the case of Frerk, particularly the European service and dealer network. And typically, when you want to win a contract, let's say, with a data center operator for the backup power, one of the questions they will ask is, all right, do you have the capabilities in that region where the data center is being operated to provide like 24/7 technical customer support. And when you're based in Germany, like Frerk is today, obviously, very strong in Germany with 7 service points. The answer for Germany is yes. But the answer for other countries in Europe at the moment without using our network would probably be still no. And with our particular European footprint all across the continent, we will be able to immediately answer all these questions with yes. And -- that's actually where really 1&1 adds up to more than 2. So that's the European perspective, the DEUTZ scale and digitalization and reach perspective. We also will now be able to combine the platforms we have already in the field of power generation because you may remember a bit more than a year ago, DEUTZ acquired Blue Star Power Systems in the United States, a company also in the field of gensets, which is running extremely successful in their sort of -- in their niche and their strong niche. But now with the competency we acquired via Frerk, fully integrated turnkey backup power solutions, we're bringing in competency into the group, which we currently at Blue Star do not have yet. That includes advanced control and switching systems and these critical requirements for data centers, that's something which we now bring into the group via Frerk. So we can here transfer the knowledge, technology and the products from our European setup future going always -- going over the Atlantic also to our U.S. part. So all in all, when we add these puzzle pieces together, Blue Star Power Systems, Frerk, our Magirus-Deutz, also our Chinese sourcing opportunities or options in our group. We are now really creating a globally scalable energy platform. We've got strong manufacturing and market presence in the U.S. We've got the capabilities now in Europe. So now we are actually putting pieces together to become a very relevant player in that field. And that's why -- yes, that's the reason why we acquired Frerk. That's the reason why we are excited, very excited about Frerk. And that's the reason why we call all of you this morning to walk you through our rationale and the details. And our business unit Energy, I mentioned it already. We've announced when we started it 2 years ago that by 2030, we want to build a business with EUR 500 million revenue. We're moving well towards that number now. This platform, I said it earlier, Magirus-Deutz, cost-efficient production in North Africa, Blue Star in the U.S. and Frerk in Europe. And with all these pieces together, we are on a full year basis in '26, we expect already a revenue of a bit shy of EUR 300 million, EUR 280 million. And so we are well on track with further growth, organic and inorganic to achieve that EUR 500 million number by 2030. Blue Star is working very well, top line and bottom line. You know that from our regular earnings calls. Frerk adds the capabilities and also profitable business. And when I look ahead with our business unit energy, we are really entering now the other or the structurally growing market driven by data centers. The EUR 500 million, just said it, we're well on track. And DEUTZ business unit Energy, yes, becomes relevant in that market. So we're extremely pleased with that. And in terms of process, yesterday was the signing of the agreement. Now we will have to wait for the regulatory approvals, which is not expected to take too much time. So we expect a closing of the transaction somewhere, let's say, early or first half of the first quarter 2026. And with that, I thank you for listening. And obviously, we are very much looking forward to receiving and answering your questions.

Thank you for the update, Sebastian. We will now move on to our Q&A session. [Operator Instructions] And the first question coming in from Stefan Augustin.

And I have just a question, Sebastian. Can you outline a little bit how the product ranges of Frerk and Blue Star fit together? And is there actually an easy point of cross-selling Frerk into the U.S. So is that usually working with the dealership structure that you have in the U.S.? Or is that something you would need to build up a direct sales for the larger products?

Yes. Let me start with the second question, Stefan. So we would typically not sell products produced by Frerk in Germany. We would not produce them in Germany, ship them to the U.S. and sell them there because logistic costs, and I will not talk about tariffs, but logistics costs are obviously quite large for machinery of that size. What we would rather do is we would bring the capabilities, the designs from -- which are developed here in Germany by Frerk to Blue Star in the U.S. and do the assembly locally because in principle terms, the packaging of the genset is extremely similar, whether we talk about these -- the models here produced by Frerk or the ones produced in the U.S. So it's rather transfer of capabilities in order to be efficient in terms of logistics. And in that sense, we would use the established dealership in the U.S. plus, of course, our own dealership. So there's something we already have. And it's a bit like what I said earlier on the European footprint, which is very strong. Our U.S. footprint is equally strong. So that's actually not so much of a challenge from an operational, from a supply chain point of view. Moving on to your first question there. So Frerk provides power gensets on the larger side. Blue Star, I would say, on the lower and middle side. So there's a certain overlap. But Frerk moves -- is going up to, I believe, 3 to 4 megawatts and Blue Star currently is going up to 2 megawatts, but there -- so there is an overlap a bit in the middle, but the capabilities are very, very comparable. So these assets fit well together.

Okay. And just to clarify that both products are sold versus dealerships?

Well, in the U.S., we're using both dealerships, but we also have a couple of direct customers, very large direct customers. And Frerk sells mainly directly to -- when I talk particularly about the data center, the data center companies, they sell directly to the data center companies. So that's the dealership -- the benefit of the dealership. And the service providers in Europe, which I pointed out earlier, is more in terms of servicing, maintaining the gensets rather than selling them. But we -- in the end, I believe we will actually use various existing sales channels in order to go to the market into the right way.

One more from Jorge Gonzalez.

My first question, sorry if you already commented on this because I had a couple of issues. Can you share with us what are the profitability levels you are expecting or if the business is doing something similar to Blue Star? That will be my first one, please.

Yes, we are here on an EBITDA level in the low double digits.

Amazing. And on regards of the future growth in Europe, is this transition in Europe also helping your plans to expand outside Europe? Is this a company that also is helping you to place these products in, for instance, in Asia or other regions?

Focus for now is to use Frerk as the platform for Europe and Blue Star is the platform for the United States. We would never obviously rule out to go beyond, but similar, like I'm not sure whether you had already joined when I said that earlier. But similar like we wouldn't sell products produced in Germany into the U.S. because of logistics, we may well use the capability we acquired with Frerk also outside Europe, let's say, in Asia or other regions. But then we would require local assembly capabilities in order to be efficient. But this is sort of for us rather a second step because the market growth in Europe is extremely attractive, as I showed on that one chart. And so we see possibilities with putting DEUTZ capabilities to what Frerk has to actually ensure that the Frerk business is growing well above the general market growth purely by adding these capabilities.

And maybe last one, when you were commenting on the direct sales in Europe. So this means that you are seeing a strong potential for cross-selling with the current structure of DEUTZ and with other also verticals for the business?

Yes, it's more -- I mean, the direct sales, I mean, we know that Frerk has a very good reputation in the market, particularly with operators of data centers. So when we bring our footprint, the DEUTZ footprint to the table, it's rather adding the capabilities for service and maintenance, which fills potential white spots in the capabilities that Frerk today has because the go-to-market, they have been pretty good, right? So it's more like adding the capabilities for service and maintenance.

Okay. And very last one, Sebastian. In terms of the number of engines that you can sell from DEUTZ to the new acquisition, is there potential also to place your own engines? Or for the beginning, you plan also like with Blue Star to maintain the current lineup of engines, and this is not the priority.

Yes. Selling DEUTZ engines is not the focus for that acquisition. The issue is -- the situation is that we talk here about significantly higher power ranges than the majority of the DEUTZ engine portfolio. So that's not the main field for synergies. We also talk with Frerk, Frerk is not buying -- is not buying or is not selling thousands of gensets. These are high-value products. So we are here in the low hundreds rather than in the thousands. So establishing another distribution channel for DEUTZ engines is not driving the acquisition. The main synergy potential comes really from our global service footprint as well as from production capabilities. So it's a bit comparable to the logic we applied with Blue Star successfully.

Thank you for your questions. And ladies and gentlemen, we have a few minutes left if you have any questions on the table. We have received no further virtual hands, and therefore, we will come to the end of today's conference call. Thank you all for joining. And also a big thank you to you, Sebastian, for your presentation. I wish you all a wonderful pre-Christmas season and hand over to Sebastian for some final remarks.

Yes. Thank you very much, and also thanks for joining us this morning for listening to the rationale behind our acquisition. And I would also conclude with what you just said because it's very unlikely that we'll hear each other before Christmas again. Don't worry, we'll not have any other surprises coming up before the 24th of December. So thanks for accompanying us on that journey. Wish you a Merry Christmas, happy holidays, happy New Year. And as you said, with many moving moments, we'll try to bring some of them from the business perspective, looking forward to interact and talk -- interact with and talk to you also in 2026. Thank you very much. Happy Christmas.