Deutz Ag Akt

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the Deutz AG conference call on its full year 2023 results. Throughout today's recorded presentation, all participants will be in the listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Please press the star key followed by zero for operator assistance. 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, operator. You all are very well welcome from my side to our fiscal year 2023 earnings 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 Schulze, as well as our CFO, Timo Kuttow, and our Head of Finance, Oliver Neu. Also on board today is my successor, Marc Schneider, as this is going to be our last earnings call for Deutz. As usual, Sebastian will walk you through the highlights of the performance of the group and then head over to Timo, who will provide some more details on our financial figures. Sebastian will close the presentation with our current market outlook and our guidance. After this introduction, we will be happy to answer your questions. Please note that management comments during this call will include forward-looking statements which involve risks and uncertainties. For discussion of risk factors, I encourage you to review the disclaimer contained in your annual report and this presentation. All documents relating to our full year 2023 reporting are also available on our website. And without much further ado, I'll hand over to Sebastian.

Thank you very much, Christian. And also from my side, welcome to 2023 full year earnings call. And well, as the picture here, the initial picture shows, obviously 2024 is for Deutz an important year as we're celebrating our 160 year anniversary. But today we want to focus obviously looking back on the numbers and the results we achieved in 2023. because the 23 was again a year of a very profitable growth for Deutz. Let me walk you through some of the highlights before going into details. So in terms of growth, we grew on many, many fronts and the growth in numbers of engines sold was 3%. So in a classic segment, we sold eventually 186,718 engines. What we're particularly pleased with is that we managed to further grow our service business, our very profitable service business, by 7.6% to an end-year figure of 484 million euros. So that's a really, really solid development of this important business segment for us. And the group revenue grew again by almost 8% to a level of 2.1 billion euro. We'll hear later, particularly when Timo is running you through the numbers, that these 2.1 billion includes also the discontinued operations Takedo, but we'll show later on the numbers also for continued operations in more detail. But one thing is growing top line. The other thing, much more important, is growing bottom line as well. And on the group level, so including discontinued operations, we achieved an EBIT margin of 5.7%, which translates into 120 million euro EBIT, which is an increase of 35% over the already successful numbers of 2022. And if we look at our continued operations business, so excluding Tokido, we achieved a level of 7% EBIT margin, translating into 144 million euro EBIT. And let's bear in mind that a couple of years ago, we introduced our 2025 midterm targets, where we said in terms of profitability, We would expect by 2025 an EBIT margin level between 6% and 7%. So in terms of continued operations, we are already there in 2023, which is a great success at this for the time being. Classic business, our profitable sort of bread and butter business, we achieved an EBIT margin of 8.8% in the year 2023. Also very important, if you're looking back on the last years, 21, 22, and now also 23, we delivered what we promised. So we are very proud of that, that we build up credibility towards the capital market as well. So in 21, the guidance we gave in terms of unit sales, revenue, EBIT margin, free cash flow, we gave a guidance, we delivered. In 22, we gave a guidance, we delivered. And in 23, the latest guidance we gave was in unit sales, a range of 185,000 to 190,000. We achieved 186,718,000 engines. We promised a revenue level of roughly €2.1 billion. We delivered €2.1 billion. We promised an EBIT margin range between 5.3% and 5.8%. We delivered at the upper end 5.7%. And bear in mind, continued operations, we delivered 7.0%. And last but certainly not least, Free cash flow, we promised a mid double-digit million euro amount. We delivered 56 million euro free cash flow before M&A. So we know and we have always been convinced that Deutz as a company has a lot of potential and now we are able to show that we are able to use it, to utilize it and to unleash it. Looking now on the development of auto-intake. That has been, to be frank, in Q2 and Q3 a little bit of a point of concern because order intake has decreased. Book-to-bill went down, went down particularly in Q3 and also still in Q4. But we see a positive trend moving now into Q1. Order intake goes up again. And now we've explained that several times in actually all of our capital market communications. We had some, let's say, special effects, special developments in the last years, you may remember. When the market demand was so strong, particularly for our business SAP 4.0 Litter, we introduced the so-called fixed volume program, where customers were able to reserve limited capacity against paying a premium. And that program was actually taken very, very strongly from our major customers in that range. And obviously that led to a bit of an early booking effect at the beginning of this program. And now this has been normalized, normalizing over the last over the last month. And also 22 and first half of 23, we still saw a lot of instability in the supply chain. The supply chain is now, despite ongoing crisis at the Suez Canal, is getting much, much more stable. So obviously we have not yet, we don't have the situation anymore that customers order significantly more than they actually need and use. So orders on hand. are now in the level of three to four months. We were much higher before, six to eight months, but three to four months is a level which we also saw prior to the various crises of the last three years. So that's again showing a level of normalization. And what's a very important observation, wouldn't surprise most of us, the U.S. remains the most dynamic region also going forward, and I will elaborate on that later when I talk about the Outlook 24. And it's very important that we as Deutz are growing strongly in the U.S., that we decided actively to put a lot of our focus on the U.S. rather than other geographic regions which are not developing that well. And last but not least, we see now a positive trend in new orders for the first quarter. Let me now give a bit of a recap when it comes to our strategy, the Deutz-Stewart strategy. We introduced that January 23 and just walk you through briefly. Most of you know us pretty well, so I'll keep it short. We introduced the pillars Deutz Classic, Deutz Green and Deutz Service with all with very relevant significance for us. Deutz Classic, it's really important that we're growing that business, that we're making it performing stronger, performing higher and we achieve growth also by market consolidation. So here the focus is both profitability and growth. When I move on to build to Deutz Green, here the focus is very clear to build the green ecosystems with products and technologies, which may focus on the drive frame, but will may also go into ecosystems around the drive frame. So here we're talking about investments, growth, and particular long-term profitability. Here we're building the long-term future of the company. And last but certainly not least, our Deutz Service business, where we are already strong, They are already highly profitable, but because we are that strong and because we are that profitable, we decided actively to further and stronger push the growth with a particular focus on the US and Europe. So here it's about really increasing the absolute profitability via growth, organic as well as unorganic. If we look at, you know, one thing is developing a strategy. painting it, bringing it on some nice PowerPoint charts. The other thing is really the consistent implementation, the consistent execution of the strategy. And here on all aspects, classic green on service. And what we show when looking back at the results 23, how our strategy execution begins to pay off very nicely. So we started with an adjusted EBIT in 22 at the level of 89 million euros, which in the grand scheme of Deutz performances over the last decade was already a very, very good year, a very good starting point. It was in fact one of the top results of the company's history. So now if we walk through what was achieved last year, and Timo will go through that in more detail later in the financial part, but we grew the classic business, we grew the classic EBIT, by margin as well as growth. We grew the service business by margin as well as growth through the acquisitions as well. In terms of EBIT, we had an adverse effect of green because we did spend more on R&D, particularly in the area of hydrogen. And by the way, we do not capitalize our green R&D. We put it all in the P&L to be fully transparent on what we do here. But that's our investment in the long-term viability of the company. And we've signed an agreement to sell our loss-making Tokido business here. and when we bridge it here from adjusted EBIT 22 to adjusted EBIT continued operations 23 we already take this result out in that bridge. So coming up summing all that up together says in terms of continuous operations we were able to improve EBIT by more than 60 percent to 144 million euro which equals a margin of seven percent. But even without that torpedo effect we would have achieved 120 million adjusted EBIT 23, which even without that effect, it would have been the most successful EBIT of Deutz in recent history. Let me start now with walking through the individual segments. Let me start with highlights in the classic segment. So in classic, we're focusing on both partnerships and also focusing on improving performance. And in both aspects, we made progress, significant progress. When I talk about strategic partnership, we did clearly initiate an active role, playing an active role in market consolidation. And it's not just a statement, it's actually showing that we're showing actions here. We want to establish Deutz as one of the top three independent engine producers by 2030. And we did initiate the first partnerships, one with Daimler Truck for the heavy-duty and medium-duty engines for the off-highway use for the Focus. And that's a bit of a longer shot implementation, and thus top and bottom line is only going to start by the end of the decade, around 2028. But as a second step, with a much more immediate effect, we agreed in principle with Rolls-Royce power systems that we are already taking over the sales activity for these Daimler engines, heavy duty and medium duty for the off-highway sector much earlier. At the moment, we're looking here at the beginning of the second half of 2024. So here we are on good track in making this happen. So that's the second great puzzle piece of our market consolidation. But also in our organic business, performance improvements have taken place and begin to pay off. We have continued throughout 23, our very successful pricing campaign of 22, really fixed a lot of accounts which used to be problematic, to say the least. So here we are, we made sure that we healed the revenue quality significantly. Also in production, We enhanced efficiency significantly. We introduced more automation, particular in the main production site here in Cologne. And we also shown that we are able to flexibly manage capacity. We established a third shift, a night shift here in our Cologne site on the production line, which runs for the sub-4 liter engines in summer 23, when the demand was so incredibly strong that we had no other choice than doing that. And we managed also to reduce it swiftly in February 24, by the way, all with temp labor. So that made it actually very, very flexible to react here. So that's been a successful way of managing capacity. And in 23... Before the tide turned a little bit when it comes to the power battle between customers and suppliers, obviously our suppliers also tried to face us with partially significant price increase requests. We were very good in fighting back on a broad front. And now, in 2024, we'll actively target our suppliers to reduce material costs because, again, the tide has turned, and that's one of the important aspects of cost control for 2024. If I move on to service, And looking back the last 10 years in a way, you know, we show already that we have grown the service business significantly with a kegger of give or take 7%. But since 2020, 2021, we really increased speed here. We grew from 2020 348 million to 421 to 450 and now to 484 and we are well on track supported by specific measures to achieve our midterm target of 600 million service revenue in 2025. How are we doing that? On the one hand, we are further developing our existing business. That's going to be a key driver. We're expanding our service center network, particularly in the U.S. That's also part of the very successful growth in the United States that Deutz has achieved in the last three years. We're using particular there also innovative approaches, such as the technician in the van, so to bring the business closer to the customer and not force the customer to travel to Deutz. And there's still so much potential out there in the market, which we're actively approaching right now. But we also work here with Anorganic, with M&A. And 2023 was the first year where we saw the full year contribution of our previous acquisitions in Ireland, South Coast Diesel and the Benelux countries and AUSMA. And, as you know, last year we closed two more acquisitions in Scandinavia, Deutz Nordic, used to be Diesel Motor Nordic, now renamed as Deutz Nordic, and in South America, particularly Peru and Chile, the long-term Deutz-Dieler Hochschild. We don't see the full year numbers yet in our figures because the closings happen in the second half of the year, but they give us a solid basis for further growth in 2024. Let me move on to green. And before, you know, going on the growth area of Deutz Green, let me spend a few words on the sale, the divestiture of Tokido. so um we sold torquedo or we are in the process in the final steps i'll tell a bit more in a minute of torquedo to yamaha motors and we truly found here best owner for the company it's a very professional experienced company and we believe torquedo is in best hands with yamaha motors and we're very very happy um to have found this agreement and um the sale of torquedo has really been or is a very important step in our ongoing process of repositioning and focusing our green segment because um we want to ensure that the resources we have the resources we are willing to spend for the green transformation and that we will see that later is a substantial part of our resources but we need to ensure that we really focus them in the markets we are currently working in, and the customers we're currently serving, so that we really focus here on areas where we have a right to play and most importantly a right to win. Let me give you some key aspects of the transaction. So Torquedo in 23 lost approximately 23 million euros, so EBIT was more or less give or take minus 23 million euros. So we signed the transaction with Yamaha Motors in January 24, and we expect the closing to occur shortly after Easter. So the vast majority of preconditions have been met. There's just one merger control clearance still missing, but that's rather formality. So sometimes it takes a bit of time, but we are very optimistic that we're going to get this done shortly. We do expect as of closing or with closing a cash-in to Deutz in a high double-digit million euro range and we also do expect a book gain out of that transaction in the low double-digit million euro range. So, but let me conclude on Torquedo. The divestiture of Torquedo, the sale, is really an important step in refocusing our green segment. It also shows, it also proves that it'll significantly improve profitability for the company. But there are also other highlights than green than just, you know, optimizing the portfolio. We have put a lot of money and efforts and dedication in the last years into research and development in our green projects and our green technologies, both hydrogen-based as well as battery electric-based. And we can't talk about all of those projects because many of them are actually under confidentiality clauses with our customers. But let me just guide you through two projects in particular. The one, and we are particularly fond of that. is the first serial order for hydrogen engines as part of power generation, decentral power generation. We received in October 23 the first major order for 100 hydrogen engines, hydrogen gensets to be more precise, from China. And we started now the serial production of this Deutz TCG 7.8 H2 engine here in our facility in Cologne. We've been one of the first to develop a hydrogen combustion engine, and we certainly are one of the first, if not the first, who is able to produce such product on their serial production line, which obviously helps us incredibly fast in gaining scale effects and getting actually this product into the market also at competitive prices. First engines are already being shipped, so here we're well on track. Another example, another project example I'd like to share with you is the example with Kärcher. As I said, there are many other projects ongoing, but this is something we are able to talk about. And with Kärcher, we agreed to deliver in the first step Gen 2 batteries, Gen 2 ADOT batteries for sweeper vehicles, 39 kilowatt hours capacity. We're starting this year with three prototypes, but we do see the potential for more than 200 units and not only focusing on the battery, but potentially going further, including also the drive. And it's important. Green transformation takes time and also money to an extent. So we continue a high level of future investment. we continue to allocate a significant part of R&D into green, particularly into hydrogen. So to give you some numbers, in 2023, we spend a bit more than 100 million in R&D and out of which 36% on the green business. So that is a clear sign that we'll take the green transformation seriously, but we want to do it more focused and less using a scattergun approach than in the past. So that's why the sale of torpedo has been one of the fundamental basis to get that done properly now. And as I said earlier, R&D costs for green are expensed rather than capitalized. So the numbers you see, the EBIT you see with Deutz, they tell you the truth and it's not hidden somewhere in capitalized balance sheet positions, which may be of questionable nature. But before handing over to Timo to walk you in more detail through the numbers, I would like to give a first outlook on what is important for Deutz, for the Deutz management team, for the strategy implementation for 2024. Because one thing is clear, we will continue to execute our strategy with the required tenacity to be successful also in 2024 and beyond. On the classic side, that is obviously the integration of the Rolls-Royce power systems business. We do expect this to boost our earnings from mid-24 onwards. We want to continue to implement and further implement the performance focus in the organization. I mentioned some of the aspects earlier, material cost reduction, capacity optimization through more flexible shift operation, also on other assembly lines than the one for sub-4 liter. So in a volatile environment, being flexible pays off immediately. And more mid to long term, we want to continue playing an active role in the market consolidation. We do screen, we continuously screen acquisition targets to be able and to be able to be ready when there's the opportunity there. And then we will inform whenever this is the case. Very importantly as well, for our products larger than four liters, we need to win more new customers and our sales team has really done a fantastic job in repositioning themselves, getting very, very many new qualified people aboard. So sales is really the biggest change we've seen with the Deutz before 2022. On Doit's screen, important implementing the China hydrogen genset order, expanding other orders and customer projects, both in the field of hydrogen as well as battery electric products, obviously closing the sale of Torquedo, the M&A, and really then focusing stronger within Doit. organization on green. Last but certainly not least, we will continue our growth path in service organically as well as unorganically. Further M&As are in preparation. We'll work here, let's say, a little bit, not in the shadow, that is sounding too negative, but we don't want to, you know, publicize big things before they're ready. So we're working very well on service M&A. And we also want to expand into new business models like telemetrics, which opens up another revenue and thus profit pool for Deutz. Having said that, I will now hand over to Timo to give you more than a glimpse of financial year 23 in numbers.