DEUTZ 2008 financial year: investing in the future during difficult times

Following the decline in key performance indicators in 2008, DEUTZ AG is expecting unit sales, new orders and revenue in the 2009 financial year to come in well below the level recorded in the previous year. This is attributable to the global recession, with persistent weak demand from key customer  sectors. The MOVE package of measures as well as structural adjustments means that operating profit is expected to remain moderately positive, even with slightly lower unit sales. A tangible revival in demand is not expected to materialise before 2010. Despite the need to impose greater cost-cutting measures, the Company is continuing to invest substantial sums in the tens of millions in the development of advanced engine generations with integrated exhaust gas technology. Further strengths include the high level of liquidity and equity ratio, long-term, bank-independent finance as well as the global presence of a market-compliant product programme. For this reason, the Management Board is confident that DEUTZ AG will be able to continue its path of profitable growth once the economic crisis has been overcome.
 

New orders, unit sales and revenue hurt by sharp economic downturn 
Following a very positive start to the 2008 financial year, DEUTZ AG recorded a marked decline in demand during the second half as a consequence of the global economic downturn. This had a
corresponding impact on the key performance indicators for the year as a whole. 
 
While new orders during the first half of 2008 matched the level recorded in the previous year, for the year as a whole the total of €1,363.5 million represented a decline of 13.9% (2007: €1,584.5
million). 
 
In line with the figures for new orders, unit sales for the year 2008 as a whole reached 252,359 engines, which was 11.7% below the record figure of 285,861 units posted in the previous year. The decline affected both segments, i.e. Compact Engines and DEUTZ Customised Solutions. The drop in overall unit sales was particularly pronounced in the Compact Engines segment, due to the collapse in orders seen in the second half of 2008. The performance of this segment was characterised by weak demand from the construction machinery market. 
 
Consolidated revenue declined by a modest 1.9% to reach €1,495.0 million (2007: €1,524.2 million). In Germany, DEUTZ saw revenue grow 8.7% to reach €364.7 million; the reason for this was in particular the positive performance in the agricultural technology field. The non-domestic share of revenue declined correspondingly to 75.6% (2007: 78.0%). DEUTZ generated the largest part of its revenue in other parts of Europe; this accounted for €744.6 million (2007: € 769.0 million), followed by America with €180.7 million (2007: €207.2 million) and the Asia/Pacific region with €118.6 million (2007: €123.8 million). Following in the wake of the US and South-Western Europe, increasing signs of weakness also began to appear in Eastern Europe and China during
the course of the year.
 
Earnings squeezed by costs and a decline in volumes
Operating profit EBIT (before one-off items, including mostly provisions for personnel restructuring) totalled €31.8 million (2007: €95.5 million), equivalent to a drop of 66.7%. As a consequence, the EBIT margin in the past financial year was 2.1% before one-off items. (2007: 6.3%). The sharp decline in volumes recorded in the second half of the year was a particularly important factor here, along with the rising cost of materials as well as start-up losses for the Chinese joint-venture DEUTZ Dalian amounting to €11.1 million (2007: €6.0 million).
 
If one-off items totalling €14.3 million are taken into account, profit from continuing operations before tax reached €2.7 million, after €76.1 million in the previous year. After tax, the Group in 2008 recorded a net loss from continuing operations of €4.2 million (2007: net income of
€59.4 million).
 
At the Annual General Meeting on 30 April 2009, the Management Board will propose that the distribution of a dividend shall be waived.
 
R&D activities significantly expanded 
Activities in the field of research and development (R&D) were significantly expanded during the 2008 financial year by 61,8% against previous year to a total of €90.3 million (2007: €55.8 million). The new and further development of engines accounted for around 80% of this. Top priority was hereof placed on exhaust gas aftertreatment technologies; these are to be used to comply with the significantly lower emissions rating Tier 4i for important industrial and agricultural machinery engines which are set to come into force in the year 2011. As a consequence, R&D accounted for 6% of Group  revenue in the 2008 financial year (2007: 3,7 %). 
 

Planned investment in expansion has been postponed 
Capital expenditure totalled €118.3 million (2007: €167.8 million). The significant reduction in capital expenditure was attributable above all to the decision to postpone the investment in expansion which had originally been planned for the year 2008 –due to the decline in demand recorded during the second half of the year. The relatively high prior-year figure resulted mainly on a 50 per cent stake which was spent in the DEUTZ Dalian joint venture in China.
 
Solid liquidity and balance sheet structure
Cash-flow from operating activities during the year under review reached €89.7 million (2007: minus €38.7 million). The rise resulted mainly from the reduced need for financial resources for working capital, as well as from severance payments for occupational pension claims in 2007 that did not affect 2008. 
 
 
With an equity ratio of 42.4 % (2007: 40.4 %) and liquidity holdings of around €208 million at year end 2008, DEUTZ is in a solid position within the current difficult economic environment. Following the US private placement (USPP) of US$274 million which was concluded in 2007, DEUTZ has secured a long-term, bank-independent source of finance.
 
Workforce adjusted during the course of the year 
On account of the favourable economic performance during the first half of the year, the headcount rose to 4,930 during the period to 30 June 2008. Due to the subsequent deterioration in demand, however, during the 2nd half of the year DEUTZ found itself obliged to bring its personnel capacity into line with the decline in production.
 
 
For this reason, agency and fixed-term employment contracts were terminated, and short-time working was introduced at the Cologne site from mid December 2008 onwards. The decision to cut around 200 jobs which was taken in the autumn of 2008 is to be realised in a socially-sensitive manner, primarily by means of early retirement. At the end of 2008, the DEUTZ Group employed a total of 4,701 people (2007: 4,671). The slight increase of 1.8 % resulted primarily from additional positions within the R&D field.
 
"MOVE" package of measures to adjust costs and structures 
In view of the general economic climate, DEUTZ began responding to the decline in demand from mid 2008 onwards. “However, our measures to adjust capacities, costs and processes failed to keep pace with the rapid deterioration of the market. In view of this, at the end of 2008 we initiated "MOVE", a comprehensive programme which is designed to protect earnings and future prospects,” explains Dr. Helmut Leube, CEO of DEUTZ AG. “The "MOVE" programme focuses above all on safeguarding short-term profitability by cutting costs, adjusting capacities, appropriate pricing policies, as well as reducing material costs. In addition, though, MOVE also contains structural measures which are designed to secure long-term improvements in earnings through more efficient processes,” says Dr. Helmut Leube. 
 
Financial reporting for the Compact Engines segment
New orders declined by 14.2% to €1,032.5 million (2007: €1,203.9 million) in response to the collapse in demand during the second half of the year for engines with a displacement volume of less than 4 litres. During the fourth quarter, this development also began to affect engines in the 4-8 litre displacement volume class. Relative to the previous year, unit sales within the Compact Engines segment declined 11.8 % to 219,681 engines (2007: 248,971) during the 2008
reporting period.
 
Revenue for the Compact Engines segment declined by 3.6% to €1,143.2 million (2007: €1,186.0 million). With a rise of 37%, revenue within the agricultural machinery sector again grew strongly to reach €186.0 million (2007: €135.8 million). Service activities also developed positively, rising 8,8 % to €100.6 million (2007: €92.5 million) primarily in response to rising demand for spare parts. Revenue generated by the largest segment in terms of unit sales, engines for mobile machinery, came in significantly weaker at €454.8 million (2007: €516.8 million; minus 12,0%) as sales were hurt by the weak state of the construction sector. In the case of the automotive segment, revenue generated also declined sharply towards the end of the year.  Operating profit (EBIT before one-off items) for the Compact Engines segment at the end of the year showed a loss of €13.6 million (2007: profit of €45.3 million). Including the one-off items associated with the MOVE programme, the operating result of the Compact Engines segment came to a loss of €25.9 million. The main reasons for this decline were substantial rises in material prices, above all during the first half of the year, the sharp downturn in demand experienced during the second half of the year, as well as start-up losses associated with the joint-venture DEUTZ Dalian amounting to €11.1 million (2007: €6.0 million). During its first full year of production, DEUTZ Dalian produced a total of around 97,000 engines, generating revenue in excess of €226 million with some 2000 employees.
 
Financial reporting for the DEUTZ Customised Solutions segment
New orders reached €331.0 million (2007: €380.6 million; minus 13,0 %). During the 2008 financial year, DEUTZ Customised Solutions sold 32,678 engines (2007: 36,890; minus 11.4%). Lower demand for engines for construction machinery and mining equipment as well as the switch from air-cooled to water-cooled engines by a key customer in the agricultural machinery field contributed towards this decline. By contrast, in the case of large air-cooled engines with displacement volumes of over 8 litres, as well as liquid-cooled engines, such as e.g. those used in railway or marine applications, growth remained in the double digits. 
 
Relative to the previous year, revenue rose 4.0% to €351.8 million (2007: €338.2 million). At €111.4 million, services accounted for the largest share of segment revenue (2007: €111.0 million; plus 0.4%). Revenue generated with engines for stationary equipment rose 22.3% to €88.7 million (2007: €72.5 million). Revenue in the mobile machinery sector also developed favourably (€75.0 million; plus 16.3%), as did the automotive business with a rise of 2.1% to €43.1 million. 
 
Operating profit EBIT excluding one-off items Relative for the DEUTZ Customised Solutions segment rose 5.4% to €47.1 million (2007: €44.7 million). The strong earnings performance is attributable to higher sales revenue, the high service component as well as an improved product
mix. 
 
Outlook for 2009 against the backdrop of the global recession 
Because of the extremely uncertain state of the economy, it is not possible at the present time to make a reliable forecast for the 2009 financial year. However in view of the continuing weak level of demand, DEUTZ is assuming that new orders, units sales and revenue will all come in significantly below the respective figures recorded in the previous year. The Company is working on a variety of scenarios in order to enable it to respond structurally as well as flexibly in cost terms
to different business trends during the course of the year. The goal is to secure a moderately positive operating result in the 2009 financial year, even if unit sales decline.
 
“Rigorous cost-cutting and restructuring is the key to safeguarding our earnings and long-term prospects. In addition, we are also focusing closely on our long-term growth and internationalisation strategy, and are creating important preconditions for future success through targeted investment in powerful exhaust technologies. Employees, senior managers and the works council remain highly committed to the Company during this difficult situation. All in all, this means the prospects are very good that DEUTZ will quickly be able to return to its path of profitable growth once the economic crisis has passed,” said Dr. Helmut Leube.