Results of operations

DEUTZ Group: Revenue

DEUTZ-Group_Revenue 0 500 1000 1500 2000 2014 2015 2016 2017 2018 € million 1,260.2 1,479.1 1,778.8 1,247.4 1,530.2

Significant increase in revenue

DEUTZ generated revenue of €1,778.8 million during the reporting year. This was 20.3 per cent higher than the figure of €1,479.1 million achieved in 2017. We therefore significantly exceeded the forecast of a marked rise in revenue to more than €1.6 billion that we had published in our 2017 annual report and reiterated in July 2018.

DEUTZ Group: Revenue by quarter

DEUTZ-Group_Revenue_by_quarter Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2018 2017 € million 1,479.1 1,778.8 382.0 358.7 385.9 414.5 463.1 419.7 481.5 352.5

As with new orders, we saw year-on-year increases in revenue in all four quarters. Revenue for the fourth quarter came to €481.5 million, an increase of 24.8 per cent on the equivalent period of the prior year (Q4 2017: €385.9 million). This also made the fourth quarter of 2018 the strongest of last year in terms of revenue growth.

DEUTZ Group: Revenue by application segment

DEUTZ_Group_Revenue by application_segment € million (2017 figures) 261.1 (230.5)Agricultural Machinery 373.1 (265.6)Material Handling 55.6 (56.1)Automotive 166.3 (152.0)Stationary Equipment 545.5 (437.4)Construction Equipment 47.3 (28.3)Miscellaneous 329.9 (309.2)Service 1,778.8 (1,479.1)

The main contributors to the sharp growth in revenue in 2018 were the application segments Material Handling (up by 40.5 per cent) and Construction Equipment (up by 24.7 per cent). Increases were also reported for Agricultural Machinery (up by 13.3 per cent), Stationary Equipment (up by 9.4 per cent) and the service business (up by 6.7 per cent). Revenue in the Automotive application segment was on a par with the prior year despite a modest fall in unit sales.

DEUTZ Group: Revenue by region

DEUTZ-Group_Revenue_by_region € million (2017 figures) 147.5 (147.5)Asia-Pacific 1,277.4 (1,063.5)Europe/Middle East/Africa 337.8 (268.1)Americas 1,778.8 (1,479.1)

In the EMEA region (Europe, Middle East and Africa), revenue advanced by 20.1 per cent year on year to reach €1,277.4 million. Revenue went up by 26.0 per cent to €337.8 million in the Americas region and by 10.9 per cent to €163.6 million in the Asia-Pacific region.


Operating profit doubles

Operating profit (EBIT before exceptional items) more than doubled in 2018, going up by €42.3 million year on year to reach €82.0 million (2017: €39.7 million) 1). This was mainly due to the increase in the volume of business and the related economies of scale. It was achieved in spite of several weeks of strike action at our supplier Neue Halberg-Guss GmbH. Some of the negative effects resulting from this disruption were compensated for by reconfiguring production plans and initiating catch-up measures. We also disposed of our DEUTZ Dalian joint venture during the reporting year. The reduction in earnings attributable to this joint venture – resulting from the pro-rata share of the loss of €2.8 million reported by this equity-accounted investment for the first half of 2018 and from the write-down on its carrying amount of €11.3 million – was, as expected, slightly outweighed by cumulative positive currency translation differences totalling €15.8 million that were reclassified to profit or loss in connection with the disposal of the stake in the joint venture in the fourth quarter of 2018. The EBIT margin (before exceptional items) improved to 4.6 per cent in the reporting year (2017: 2.7 per cent) 1) owing to economies of scale as well as positive effects from the efficiency programme. At the start of 2018, we projected a moderate increase in the EBIT margin before exceptional items. The EBIT margin actually rose by 1.9 percentage points, which means that we comfortably exceeded our forecast. It also meant that we achieved the more specific forecast made in July 2018 of an EBIT margin of least 4.5 per cent.

Overview of the DEUTZ Group’s results of operations

€ million      
  2018 2017 1) Change (%)
Revenue 1,778.8 1,479.1 20.3
Cost of sales –1,468.3 –1,222.9 20.1
Research and development costs –92.0 –94.8 –3.0
Selling and administrative expenses –145.7 –120.3 21.1
Other operating income 40.6 144.1 –71.8
Other operating expenses –17.7 –41.9 –57.8
Write-down of financial assets –0.7 –0.2 250.0
Profit/loss on equity-accounted investments –2.2 –0.2
Write-down of equity-accounted investments –11.3 0.0
Other net investment income 0.5 0.9 –44.4
Operating profit (EBIT) 82.0 143.8 –43.0
thereof exceptional items 0.0 104.1 –100.0
EBIT (before exceptional items) 82.0 39.7 106.5
Interest expenses, net –1.9 –2.4 –20.8
Income taxes –10.2 –22.9 –55.5
Net income 69.9 118.5 –41.0
thereof exceptional items after taxes 0.0 85.5 –100.0
Net income (before exceptional items) 69.9 33.0 111.8
1) Adjusted as a result of the write-downs on the DEUTZ Dalian joint venture.

The higher operating profit resulted in a substantially improved return on capital employed (ROCE before exceptional items) 2), our internal KPI, which rose from 5.3 per cent 3) in 2017 to 10.3 per cent in the reporting year and meant that we fully achieved our forecast made at the beginning of the year.

DEUTZ Group: Operating profit and EBIT margin
(before exeptional items)

DEUTZ-Group_Operating_profit_and_EBIT_margin_(before exeptional items) 0 20 40 60 80 100 2014 2015 2016 2017 1) 2018 € million (EBIT margin in %) 23.4 (1.9) 39.7 (2.7) 82.0 (4.6) 4.9 (0.4) 31.7 (2.1) 1) Adjusted as a result of the write-downs on the DEUTZ Dalian joint venture.

DEUTZ Group: Operating profit (EBIT) by quarter
(before exceptional items)

DEUTZ-Group_Operating_profit_(EBIT)_by_quarter_(before exceptional items) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2018 2017 1) € million (EBIT margin in %) 1) Adjusted as a result of the write-downs on the DEUTZ Dalian joint venture. 39.7 82.0 14.1(3.7) 5.0(1.4) 13.0(3.4) 21.7(5,2) 11.7(2.5) 12.5(3.0) 36.1(7.5) 7.6(2.2)

Cost of sales

The cost of sales went up to €1,468.3 million in 2018 as a result of the growth in the volume of business and in the production volume. This year-on-year increase of €245.4 million was mainly attributable to the rise in the cost of materials and in staff costs. Because of the aforementioned economies of scale, the gross margin 4) nudged up from 17.3 per cent in 2017 to 17.5 per cent in the year under review. This was in spite of the negative impact resulting from the periods of strike action at Neue Halberg-Guss GmbH.

Research and development costs

In the year under review, research and development costs amounted to €92.0 million. They largely comprised staff costs, the cost of materials and amortisation on completed development projects, from which investment grants received and capitalised development costs were deducted. The modest year-on-year contraction of €2.8 million was attributable, in particular, to lower amortisation.

Selling and administrative expenses

Selling and administrative expenses went up by €25.4 million to €145.7 million. This year-on-year increase was mainly due to the acquisition of Torqeedo and DEUTZ Italy (formerly IML Motori S.r.l.) with effect from 1 October 2017. In 2017, the business activities of these companies were included in the consolidated financial statements of DEUTZ AG only in the fourth quarter, whereas the consolidated financial statements for 2018 covered their business activities for the whole year.

Other operating income

Other operating income totalled €40.6 million in the reporting year. This year-on-year contraction of €103.5 million was due largely to the gains recorded in 2017 in relation to the sale of the land at our former Cologne-Deutz site and the disposal of the building lease of our subsidiary Ad. Strüver KG for a plot of land in Hamburg. The gains on these two transactions were classified as exceptional items in 2017. In 2018, an amount of just €15.8 million was recognised for the reclassification of the cumulative positive currency translation differences in relation to the disposal of our shares in the joint venture DEUTZ (Dalian) Engine Co., Ltd., Dalian, China.

Other operating expenses

Other operating expenses totalled €17.7 million in 2018, which was €24.2 million lower than in the prior year. The exceptional items recorded in 2017 in relation to the disposal of the land occupied by our former Cologne-Deutz site were the main factor in this decrease.

Write-down on equity-accounted investments

The write-down recognised as at 30 June 2018 relates to the shares in the DEUTZ Dalian joint venture. Details of the background to the write-down can be found in the in-depth information regarding the DEUTZ Dalian joint venture in the next section.

Income taxes

The income tax expense amounted to €10.2 million in the year under review (2017: €22.9 million). Current tax expenses came to €16.0 million. The reduction in operating profit (EBIT) explains why these fell by €7.3 million compared with the prior year (2017: €23.3 million). The current tax expenses were partly offset by deferred tax income of €5.8 million (2017: €0.4 million).

Earnings per share

Net income decreased by €48.6 million to €69.9 million in the reporting year. Earnings per shares fell to €0.58 as a result (2017: €0.98) 1). When adjusted for exceptional items recorded in the prior year, which totalled €85.5 million after taxes, net income rose by €36.9 million. Adjusted earnings per shares thus improved from €0.27 in the prior year to €0.58 in 2018.

DEUTZ Dalian joint venture

As announced in April 2018, the carrying amounts for the DEUTZ (Dalian) Engine Co., Ltd. joint venture based in Dalian, China, were reviewed by an auditor as part of an overall review into strategic options in China. The audit firm engaged to conduct the review informed us on 17 April 2018 that it suspected that some items on the DEUTZ Dalian balance sheet had been overstated and that the carrying amount calculated using the equity method in DEUTZ AG’s consolidated financial statements may have to be adjusted as a result.

The subsequent thorough review of the carrying amounts for DEUTZ Dalian revealed that the carrying amount calculated using the equity method would have to be written down by €23.1 million. Of this figure, €14.9 million related to financial years prior to 2018 and, in line with the applicable IFRSs, was applied retrospectively by adjusting the carrying amount calculated using the equity method for DEUTZ Dalian and by adjusting Group equity as at 31 December 2017 and earlier. The remaining €8.2 million relates to 2018 and thus reduces the share of profit/loss under the equity method attributable to DEUTZ Dalian, which amounted to a total loss of €2.8 million up to the point that the shares were reclassified as non-current assets held for sale. The carrying amounts subject to correction for DEUTZ Dalian related mainly to inventories, property, plant and equipment, own development projects and provisions for warranty costs.

Because of the write-downs carried out and the intention to dispose of our stake in DEUTZ Dalian, the carrying amount for the DEUTZ Dalian shares as at 30 June 2018, calculated using the equity method, was tested for impairment in accordance with IAS 36 and written down by €11.3 million to the total proceeds of €9.7 million that are expected to be obtained from the disposal.

Following the disposal of the shares in the fourth quarter of 2018, positive currency translation differences of €15.8 million recognised in other comprehensive income were reclassified to the income statement for 2018. As expected, this slightly outweighed the total negative impact on operating profit (EBIT before exceptional items) in 2018 up to the point of disposal, which mainly resulted from the pro-rata share of the loss reported by the equity-accounted investment and from the write-down on its carrying amount as at 30 June 2018. The total contribution to operating profit generated in connection with the DEUTZ Dalian joint venture in 2018 came to €1.2 million.

1) Adjusted as a result of the write-downs on the DEUTZ Dalian joint venture.
2) Return on capital employed (ROCE): ratio of EBIT to average capital employed. Capital employed: total assets less cash and cash equivalents, trade payables and other current and non-current liabilities, based on average values from two balance sheet dates.
3) Adjusted as a result of the write-downs on the DEUTZ Dalian joint venture.
4) Gross margin: ratio of revenue less cost of sales to revenue (excluding amortisation relating to capitalised development expenditure).