Quarterly results at DEUTZ reflect the impact of global recession

Given the sustained crisis in the global economy, the performance of DEUTZ AG in the first quarter of 2009 was as expected with a continuation of the downward trend in new orders, unit sales, revenue and operating profit that had taken hold in the fourth quarter of 2008. The dramatic slump in demand means that DEUTZ is planning a further realignment of structures and capacity. The MOVE action programme - which has already led to cost savings in the current year of €20 million - is to be expanded and is expected to generate total savings of approximately €100 million over twelve months, thus helping to secure an operating profit for 2009. In view of the persistent and considerable uncertainty in the marketplace, it is impossible for DEUTZ to give a reliable forecast for 2009. However, key figures are expected to be very substantially down year on year.

Significant contraction in new orders, revenue and operating profit owing to global recession
New orders in Q1 2009 fell to €205.9 million, a drop of 52.5 per cent compared with the same period in 2008 (Q1 2008: €433.3 million). Unit sales of engines fell by 58.0 per cent to 30,589 engines (Q1 2008: 72,786 engines). Revenue declined by 44.4 per cent to €220.6 million (Q1 2008: €397.0 million).  Engines for mobile machinery, such as construction equipment, were particularly hit by the slump in demand. DEUTZ also experienced a significant decline in revenue from commercial vehicle engines, service operations and reconditioned exchange parts and engines. In addition, there was a marked downward trend in demand from agricultural machinery manufacturers.

As regards EBIT in the first quarter of 2009, DEUTZ incurred an operating loss of €19.9 million (Q1 2008: operating profit of €17.0 million). The main factor behind this change was the recession-induced drop in volume, which was both rapid and sharp, coupled with the fact that it was impossible to cut costs at the same speed. Because of the operating loss incurred, the DEUTZ Group reported a net loss before taxes on continuing operations of €21.9 million (Q1 2008: net income of €15.8 million); after tax, the figure was a net loss of €23.7 million (Q1 2008: net income of €13.5 million).

Number of employees adjusted in line with capacity utilisation
The necessary adjustments in the number of employees meant a reduction in the workforce to 4,555 persons as at 31 March 2009, a decrease of 7.2 per cent or 354 employees in the total workforce at the DEUTZ Group's facilities in both Germany and abroad compared with 31 March 2008 (4,909 employees). Short-term working was also used to achieve a further reduction in capacity in operating units and back-office functions at all sites in Germany. On average over Q1 2009, the short-time working was equivalent to an additional capacity reduction of approximately 500 full-time employees. 

"MOVE has already enabled us to cut some €30 million from our costs since the autumn of 2008. The drop in unit sales over the last two quarters and poor forecasts for the global economy have presented DEUTZ with significant challenges for 2009. As no marked improvement in the situation is expected in the next few months, we will respond by making decisive modifications to our cost and organizational structures to bring them into line with the new economic conditions," said Dr. Helmut Leube, Chairman of the Management Board of DEUTZ AG. By expanding the MOVE action programme we aim to contribute around €100 million to profitability over the whole of 2009.

Compact Engines segment
New orders for engines and services declined to €152.8 million in Q1 2009, 55.7 per cent down on the equivalent period in 2008 (Q1 2008: €344.6 million). Unit sales were also 59.6 per cent down on Q1 2008 at 26,159 engines (Q1 2008: 64,777 engines). The plunge in unit sales was particularly serious in the market for smaller engines with capacities of less than four litres (used primarily in compact construction equipment and mobile machinery) where the number of units sold plummeted by more than two thirds. The Compact Engines segment generated revenue of €161.5 million, which equates to a decrease of 49.2 per cent compared with the same period in 2008 (Q1 2008: €318.1 million.) The downward trend in revenue was evident in all application segments; it was particularly noticeable in Construction Equipment which was down 74.6 per cent to €34.7 million (Q1 2008: €136.6 million), but also in Automotive down 45.9 per cent to €34.4 million (Q1 2008: €63.6 million) and in Stationary Equipment down 44.3 per cent to €25.9 million (Q1 2008: €63.6 million). Only Agricultural machinery managed to achieve an increase on Q1 2008, with a rise in revenue of 7.7 per cent to €44.6 million (Q1 2008: €41.4 million).
As a consequence of the collapse in unit sales, the slowdown in the highly profitable service business and losses in connection with the DEUTZ Dalian joint venture in China, Compact Engines generated a segment operating loss (EBIT) of €22.8 million (Q1 2008: operating profit of €8.0 million).

DEUTZ Customised Solutions segment
New orders for engines and services amounted to €53.1 million (Q1 2008: €88.7 million). This equates to a decrease of 40.1 per cent on the equivalent period in 2008.  Unit sales were 4,430 engines, 44.7 per cent fewer than in Q1 2008 (8,009 engines), the drop in demand being particularly severe in air-cooled engine series. The fall in revenue was less pronounced, the decrease to €59.1 million being 25.1 per cent down on Q1 2008 (€78.9 million). The contraction in revenue was relatively moderate in Agricultural Machinery with a decrease of 4.5 per cent to €2.1 million. However, there was a serious slump of 30.0 per cent in revenue from service business to €20.1 million (Q1 2008: €28.7 million) and of 49.1 per cent in revenue from engines in the Mobile Machinery application segment to €8.1 million (Q1 2008: €15.9 million). As a result of the drop in volume and weaker performance in the service and reconditioned exchange engines businesses, segment operating profit (EBIT) in DEUTZ Customised Solutions in the quarter under review was significantly down on the equivalent period in 2008 at €3.6 million (Q1 2008: €8.8 million).

Equity ratio at 42 per cent
Despite the operating loss for the quarter, the equity ratio as at 31 March 2009 was down by only 0.5 of a percentage point at 41.9 per cent (31 December 2008: 42.4 per cent) and remained steady owing to the decline in total assets.

R&D expenditure increased - capital expenditure projects scaled back
In the first quarter of 2009, R&D expenditure rose significantly to €23.2 million, an increase of 39.8 per cent on the same quarter in 2008 (Q1 2008: €16.6 million); the R&D ratio was therefore 10.5 per cent (Q1 2008: 4.2 per cent). R&D activities focussed on integrated engine exhaust systems to meet Europe's IIIB exhaust emission standard and the US TIER 4 interim standard, both of which come into force from 2011. Engines with integrated exhaust technologies compliant with TIER 4 interim were revealed to our key customers for the first time at the end of April at the Intermat trade show held in Paris, one of the world's leading events in the construction equipment industry. The engines were very well received by our customers and the feedback was excellent.

Capital expenditure to support expansion was scaled back in line with the economic situation. The bulk of capitalised development costs (€11.4 million) were attributable to the development and refinement of engines compliant with future emission standards. Capital expenditure in the first quarter of 2009 amounted to a total of €20.1 million (Q1 2008: €22.1 million).

Outlook influenced by persistent global recession
Given the sustained global economic uncertainty, it remains difficult to make reliable forecasts for the whole of 2009. In view of the prevailing weakness in demand and the lack of any indications of a recovery during the rest of the year, the Management Board is expecting a very substantial year-on-year fall in new orders, unit sales, revenue and operating profit for 2009 as a whole. Depending on developments in the economic situation, the action taken as part of the "MOVE" programme to realign cost and organizational structures will be expanded accordingly. R&D expenditure to support future growth will however be maintained at a significant level.