Edited Transcript of DEZG.DE earnings conference call or presentation 11-Aug-20 9:00am GMT

Starting on the next page and give you a little bit more insight on our Transform for Growth program. So we started that activities already in the beginning of the year, and we are in very intense discussion with the worker council. So the target of this program is to achieve an efficiency cost reduction of EUR 100 million 2022 onwards. Main areas of actions are the optimization of the global production network. It goes on automatization, digitalization of operating and administration processes. And also group-wide streamlining of the organizational structure is in focus. So this goes also on the operating costs, but the bulk of the savings are to be achieved by reducing staff costs, and this ends up in a reduction of 1,000 head counts by the year 2022, in comparison to the end of 2019. So in the first half year, we have already reduced 380 jobs by natural attrition and reduction of the number of temporary workers. We are right now in final discussions with the worker councils about a voluntary program encompassing 350 jobs, and this is focused on Germany. And in the next 1.5 years, so we want to also reduce another 270 jobs by natural attrition.

So the focus of this program is really to reduce the operating and staff costs significantly by EUR 100 million.

Turning on the next page and have a little look on our China activities. So this is running very well. The JV with SANY, which is the main activity in China, of our new strategy, is running profitable since the beginning of the year. We expect to double the sales figures in 2020. This is still on a low level. We are talking about a number of around 20,000 engines by the year 2020. For the year 2022, we have increased our forecast of another EUR 300 million. This is because of new projects with SANY and gaining market share of volume which is already existing in the market. So DEUTZ is positioning itself very well in the Chinese market, and it’s the biggest market for our products in the world.

Having a look at the sales figures on Page 7, you see that, new orders, we have a decline of nearly 35%. So new orders is on a level of EUR 623 million. Unit sales dropped by more than 27% and revenue even more by minus 33%. This comes out of the negative product mix. Looking at Torqeedo, we have a number of more than 16,000 units. That’s more than doubling the numbers of last year’s orders on hand, is through this development by the coronavirus on a very low level of EUR 250 million in comparison to more than EUR 460 million last year.

Revenue by the regions. You see that Germany has a decline of more than 23%. And this is the market I will say which is — the relevant market which is the most stable so far. We have a very sharp decline in Americas. Here the [implifications] of the coronavirus is even stronger, and also the end customer structure is quite difficult here right now because here we have a lot of rental companies in place who really reduced their orders dramatically. Asia Pacific, minus 36% (sic) [30.6%]. Here not included is all the activities with SANY because this is at-equity consolidated and you don’t see it here in the revenue.

Revenue by application segments. Also related to the U.S. is a sharp decline in material handling. This is very much an American business, minus 60%. In construction equipment, we have a decline of nearly 33%, agricultural machinery minus 42%. Some of the customers are in crisis areas of the coronavirus. They had to shut down their factories for several weeks, so here also the [implification] is quite high. What is quite positive is our activities on the service side. You see that service is quite stable even in these tough times. Here adjusted decline of minus 4.5% means that all the activities and measures we have taken on the service side are running quite well. And this leads to share of revenue now to 27%, so an increase from 19%. 8% to 27%.

Maybe so far from my side. And I’m handing now over to Andreas Strecker for the key financials in detail.

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [4]

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Good morning, everybody. I continue on Page 11 of the presentation.

The EBIT before exceptional item, we came in at EUR 49.9 million negative, which is a return on sales of minus 8% driven by the shortfall in revenue with the related diseconomies of scale due to the coronavirus crisis. Also included are payments made under continuation agreements with suppliers that are going through insolvency proceedings, EUR 10 million. That included companies like Gusswerke, [Vivo] and [Fim], as you have heard from past calls. We have also demand-related impairment losses recognized on capitalized development projects with the amount of around EUR 5 million.

On the positive side, we initiated severe cost-cutting measures and also had an extensive use short term (sic) [short-time working] in the second quarter and we continue to do so. The Board of Management [on top] waived its 1-year variable remuneration for 2020, and also the senior managers waived a substantial part of their variable remuneration for 2020. Reduction in net income goes in line with the decrease in EBIT.

If you look at the segments, there you can see that compact engines was hit way, way harder, driven by the reduction in sales to the material handling business in North America, among others. New orders minus 41%, unit sales minus 40% and revenue minus 37%. And the EBIT took a big swing to negative of EUR 49.8 million, [overall] volume related, but also the continuation agreements were recorded in that segment. Customized solutions fared a little bit better on the new orders with minus 8%. Revenue was minus 20%, but the segment remained in black figures with an EBIT of EUR 6.6 million.

If we look at segment others, there you can see that the unit sales more than doubled. Torqeedo was quite well underway with new products. We’ve seen that also in the increase in revenue. EBIT is still negative but improved compared to last year where we also had a negative effect through the deconsolidation of DAMSA in the first half of 2019.

If we continue to R&D and capital expenditure. We did not stop important projects. Therefore, R&D spending with EUR 46.2 million was more or less on previous year’s level. Due to the reduction of revenue, then the ratio went up to 7.5%. On the capital expenditure, same thing. We had — saw the localization of engines in China, tooling costs and then other things. So the expenditure is still sizable with EUR 38.9 million, but it’s below first half of 2019. On the working capital side, we see a reduction in absolute amount to EUR 309 million. The ratio was 20.2%. We had several occasions where we had to forward material. With the corona crisis, we wanted to make sure that we get parts out of Italy, Spain, China to be able to produce, so we ordered more than what we really needed. The same thing with the suppliers in insolvency, we pulled in enough parts to put again sufficient time to find a second source which is looking okay, but again working capital is a little bit inflated by these effects.

Based on that results and investment, we have a cash flow from operating activities from EUR 43.7 million. And if we go to the next page. There we have to include the investment, of course. Then we are at a free cash flow of minus EUR 85.7 million. Net financial position is also driven by the free cash flow, the negative one that we had in the first half.

If we look at equity ratio and funding. We are still close to 50% with EUR 596 million in equity. We had applied for and received an additional credit line of EUR 150 million, so the total amount of lines stand at EUR 310 million. EUR 160 million of these are maturing in June 2024, and the EUR 150 million maturing in November 2021. As of June 30, we have drawn EUR 49 million of these lines.

What we have to acknowledge is that — the payment for the sale of the property in Cologne, we achieve through 2021, as we are relying on the city of Cologne to get all the approvals. And that is expected now in the first half of 2021.

And so I will hand back now, for the guidance, to Frank Hiller.

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Frank Hiller, DEUTZ Aktiengesellschaft – Chairman of Management Board [5]

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So guidance for 2020, for this year; and the midterm target is still very difficult to predict. The market development, also order intake, in these days is very much influenced by the seasonal holiday, so it’s not feasible right now to give a guidance for this year. What we see for the next 3 months, quarter 3, for this year is also this quarter will be a challenging quarter affected heavily by the coronavirus, but I think we have reached now in the second quarter a bottom line so that there will be an improvement.

The outlook for 2022. We are convinced that we can stick to our targets, EUR 2 billion revenue and EBIT margin 7% to 8%. So China activities will pay off, also our E-DEUTZ activities. And there will be also the effects out of our efficiency program transfer for growth (sic) [Transform for Growth]. And hopefully, the market situation in 2022 is better than this year. So we are still convinced that our outlook for 2022 is valid and in place.

Maybe so far from our side, and we are now open for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from the line of Richard Schramm from HSBC.

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Richard Schramm, HSBC, Research Division – Analyst [2]

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Yes. So 2 questions, if I may, just on this outlook statement you gave. So does this mean that Q3 will definitely be less worse, to put it that way, in respect of sales and EBIT than Q2, also in absolute terms? Or should we still be prepared for the usual seasonal pattern which calls for Q3 being the weakest one in a year, and thus in absolute terms Q3 runs the risk of being even below the Q2 development here? That will be my first question. And second question, concerning the Other segment, where you mentioned that the reduced EBIT would be mainly a result of this deconsolidation effect from DAMSA in first half last year, which at first times looks a bit disappointing to me as I would have expected that the growth in Torqeedo should also have made a clear contribution to the reduced loss here. Can you comment a bit why this obviously did not happen here?

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Frank Hiller, DEUTZ Aktiengesellschaft – Chairman of Management Board [3]

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Yes. Mr. Schramm, maybe on Q3. There will be still heavy effects by the coronavirus in Q3. And to be honest, it’s for us very difficult to predict on the top line side, but what is now I would say much better and better in place are our cost-reduction measures. So we expect that the loss in Q3, and I’m talking about a loss, will be less than in Q2, but it’s — as you mentioned, it’s difficult to predict.

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [4]

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When it comes to the other segment. You said correctly that, in the first half, the improvement in EBIT is mainly driven by the effects that did not happen at DAMSA this year. Nevertheless, Torqeedo is doing much better now after a very difficult first quarter. We’ll see now order intake and revenue going up the last 2 months in June. June and July looked pretty good. And then also what we see on the Futavis side, that now some delayed orders are coming to fruition. And so we will see an improvement in the Other segment in the second half. So that’s going quite in the right direction.

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Richard Schramm, HSBC, Research Division – Analyst [5]

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So will that mean that we can hope to see a reduction in this segment compared to the 2019 level, where we had, I think, minus EUR 22 million…

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [6]

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Yes, yes, absolutely, yes, sure.

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Operator [7]

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(Operator Instructions) Next question comes from the line of Frederik Bitter from Hauck & Aufhäuser.

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Frederik Bitter, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [8]

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Allow me to ask a few questions. The first one will be if you could indicate and talk a bit about the monthly order intake from April to, well, say, early August just to get — that we get a better feeling of how demand has really developed in the last couple of months.

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Frank Hiller, DEUTZ Aktiengesellschaft – Chairman of Management Board [9]

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Yes. You see the order intake of the second quarter, Mr. Bitter. And this is now, I will say, ongoing on the same level, but it’s now — it’s difficult to evaluate if this is now a recovery or not because right now, nearly all our customers, they are in summer holiday. And I think in September you will have a different effect. You will have some effects by not ordering in August. So I think to be really — yes, to have the first visible months again about order intake and how the market is development — developing, that will be October, I think. So right now, it’s more or less on the same low level which we have seen in quarter 2.

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Frederik Bitter, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [10]

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Okay. That’s helpful really. And then the second one I had is on your, call — let’s call it, restructuring program or efficiency program. Just if you could provide a bit more details as to where you see the associated costs with that program. Say it’s consultancy. Say it’s lawyers, et cetera, et cetera; and perhaps the one or the other actual costs obviously on the personnel side. And how does those costs compare to the cost savings you’re targeting? Obviously you say it’s EUR 100 million from 2022 onwards, but how is that split, the costs and also the savings, in 2020, 2021 and 2022? Could you give a bit maybe of a breakdown? That will be helpful.

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [11]

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Yes. So the situation is such that we are on the tail end of negotiating with the workers councils that will take place the next 2, 3 weeks. Then we know what the program looks like, and then we will be able to evaluate better. For the time being, we estimate that onetime was between EUR 40 million and EUR 50 million, depending on the program, who signs what and when. It’s certainly then dependent what savings we see in 2021, but the full effect we should see then in 2022. So that means that all measures need to be then implemented by the end of 2021 to have the full impact in 2022.

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Frederik Bitter, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [12]

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And the EUR 40 million to EUR 50 million one-off costs, would you say that this is something that will be mostly booked in the second half of this year? Or will there some — or will — something will shift also into next year?

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [13]

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Because I mean, when we know what the program can look, then we have an idea. And then we — once then people are signing off, then we will [double the — our] reserves accordingly. But I assume that, for the most part, this will happen in 2020.

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Frederik Bitter, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [14]

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Okay, fair enough, yes. And then obviously you expect something at the end of 2022, EUR 100 million in savings. Is it fair to assume that basically the savings this year will be fairly limited? Obviously you have reduced some of the head count already, as you mentioned, but I would — because as I would assume that the bulk of savings will obviously be from 2022 and maybe some, let’s say 1/3 or so maybe, in 2021. Is that the right thinking, or am I way off?

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [15]

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Yes, I think that’s feasible, yes.

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Frederik Bitter, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [16]

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Yes. That makes sense. Perfect. And then just 2 on the guidance, 1 for CapEx and 1 for working capital this year. What are you — what are your expectations? What you’re planning for this year?

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [17]

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You could say, as we said, at the moment, we are very, very conservative. So then we’ll be below the initial guidance that we put out. And on the working capital, we have now reached the top of the prebuy, so to speak, of inventory. So we don’t get anything anymore from Gusswerke, for example, so we will consume now the material that we have in our warehouses now. So for the second half, we will certainly be aggressive in reducing the inventories. I would think there’s another at least 10% that we can come down in working capital, yes.

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Leslie Isabelle Iltgen, DEUTZ Aktiengesellschaft – SVP Communications & IR [18]

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R&D (inaudible).

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [19]

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And then also, on the R&D side, of course, all the important projects remain in place, but nevertheless, also there we have some short-time work, so we will be below the initial plan.

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Frederik Bitter, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [20]

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Yes, absolutely understood. I mean obviously you have a guidance in terms of CapEx. If I just can follow up on this one by looking at what you’ve spent so far in H1. I mean it’s something around of, let’s say, EUR 40 million, rounded up. Is it fair to assume that you’ll spend another EUR 40 million in the second half so we end up with something around EUR 80 million, EUR 85 million? [Or will you increase and it will be much more]?

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [21]

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No. I think it will be less.

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Frederik Bitter, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [22]

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It will be less, okay. So in fact you’re going to reduce a bit more in Q3 and perhaps also in Q4, of course, then…

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [23]

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Correct, yes, because the first half was driven by tooling for China localization.

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Frederik Bitter, Hauck & Aufhäuser Privatbankiers AG, Research Division – Analyst [24]

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Okay, fair enough. So we end up, say, something around EUR 70 million, EUR 75 million mark or even lower.

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [25]

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Yes, I think that sounds accurate, yes.

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Operator [26]

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We have a follow-up question from the line of Richard Schramm from HSBC.

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Richard Schramm, HSBC, Research Division – Analyst [27]

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Yes. I would be interested in this strong decline you mentioned in material handling [and agricultural product], especially toward the U.S. and the rental business there. Has there been also a structural change in this business? As I could imagine that maybe one or the other of your customers might also face insolvency risk and then might drop out of the market. So is there the risk that the customer base will be eroding through this crisis? Or is this just really a cyclical issue and you would expect this to be able to recover over the next 2 to 3 years or so?

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Frank Hiller, DEUTZ Aktiengesellschaft – Chairman of Management Board [28]

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No, no, Mr. Schramm. These products, these are aerial work platforms. And this product is becoming overall more and more popular, especially now also in Asia. I think this is a product which has developed within the last years very well and will also go on in the future. And we are not losing market share, but this is a very strong product for the U.S. market. And here we have the situation that, the construction companies, they don’t own these equipment by themselves. So the aerial work platforms, they normally have it through or are leasing it through rental companies. And those rental companies, they are now really stopping new orders completely. And this ends up, for example, that some of our customers who produce these aerial work platforms, they close until the end of the year. We have one of the customer who has already taken the decision to close completely the factory until the end of the year. I think this business will come back even stronger, but this is very volatile to — I would say, through the sales channel of the rental companies.

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Richard Schramm, HSBC, Research Division – Analyst [29]

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Okay. And then it was mentioned in the report that you got a certain boost in the small business area of railway. Is this really a onetime thing we have seen here in first half? Or is there more to come for you [and this general trend] which might also drive that business forward in the years ahead?

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Frank Hiller, DEUTZ Aktiengesellschaft – Chairman of Management Board [30]

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Yes, this is ongoing, but to be honest, this is a small segment in our business. But the railway business is running more or less without, yes, effects through the corona crisis. Also your new solutions are coming up, all the things like, for example, hydrogen engines. These are topics now which are coming up in the railway business, and this business is stable. Unfortunately, it’s just a small amount of our business, so yes. A lot of project business, long-term project business, so a stable business.

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Operator [31]

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Next question is from the line of Peter Rothenaicher from Baader Bank AG.

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Peter Rothenaicher, Baader-Helvea Equity Research – Analyst [32]

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Yes. Firstly, on potential restructuring charges you have included in the first half of the year. You mentioned you have reduced the number of employees already. Was there some kind of one-off expenses for restructuring charges?

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [33]

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No, no, there wasn’t.

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Frank Hiller, DEUTZ Aktiengesellschaft – Chairman of Management Board [34]

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No, none so far.

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [35]

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What we’ve done on the reduction side is temporary workers and natural attrition. So we had not any restructuring charges because we haven’t signed any agreements yet. So no, nothing in there.

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Peter Rothenaicher, Baader-Helvea Equity Research – Analyst [36]

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Okay. Then you mentioned that the income from the property sales will be shifted to 2021, but you did not repeat a EUR 60 million potential income. Is this still an amount you are calculating with? Or do we have to expect that this amount will be, let’s say, considerably lower or perhaps even higher?

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [37]

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We — the EUR 60 million is still the number we expect.

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Peter Rothenaicher, Baader-Helvea Equity Research – Analyst [38]

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Okay. Then could you please comment on the contribution of your E-DEUTZ strategy? Did you already include here some sales? Or when do you now expect here its first significant sales contribution?

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Frank Hiller, DEUTZ Aktiengesellschaft – Chairman of Management Board [39]

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In general. So we really stick to the E-DEUTZ strategy because also this will now boosted by some programs of the government, but now in the crisis, and that’s normally — normal for new technologies, everybody is saving money. So a lot of the E-DEUTZ activities goes into ground support for airports, for example. They are now quite restrictive in investing in new equipment. So my expectation is that we will have a certain drop of the demand on E-DEUTZ and also a drop of demand in interest because nobody will now afford to go into new technology, but after the crisis, this will come back even stronger because of the need of being CO2 neutral and, on the other side, government programs and so on. So — and this is a clear strategy within DEUTZ to go on with these activities. Also the reduction of personnel is not related to our E-DEUTZ activities and our staff in E-DEUTZ.

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Peter Rothenaicher, Baader-Helvea Equity Research – Analyst [40]

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And then housekeeping again with prebuy machines. So clearly this has affected your business considerably in the first half of the year. Do you expect here some lower negative impacts already in the second half this year and 2021 it should be over?

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Frank Hiller, DEUTZ Aktiengesellschaft – Chairman of Management Board [41]

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Yes, this is difficult now to mention. So there is, for sure, a negative effect by the prebuy engines, and it’s now really difficult to find out. We have a lot of discussions with our customers how many engines they still have on stock. There is now also an initiative ongoing that they can prolong these to build in these engines, which will also have some — I would say, some negative effects. But I think it — this will be mainly related to the year 2020. So ’21 will be a limited influence of the effect of prebuy engines.

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Peter Rothenaicher, Baader-Helvea Equity Research – Analyst [42]

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Okay. And my last question is on your guidance for 2022. To be honest, I’m a little bit surprised that you are still confident to reach these margin targets despite this corona crisis and the big drop in volume you have seen now in 2020. Perhaps this new guidance or this guidance for 2022 includes the sales volume of more than EUR 2 billion. To reach this 7% to 8% margin, what sales volume do you need, excluding your Chinese business? Because this is a major driver for your sales.

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Frank Hiller, DEUTZ Aktiengesellschaft – Chairman of Management Board [43]

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I would say this way. We — if we would achieve this 7% to 8% with the EUR 2 million (sic) [EUR 2 billion] sales volume, what’s now contributing additionally is our China activities. This was not really included when we set up this strategy more or less 3 years ago. There was no China business included.and also now the efficiency program which gives us a cost reduction of EUR 100 million. So this will affect mainly our breakeven point. I think breakeven point, with this reduction of EUR 100 million on the costs side, will be somewhere in between 110 million and 120 million…

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [44]

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Thousand.

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Frank Hiller, DEUTZ Aktiengesellschaft – Chairman of Management Board [45]

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Thousand, sorry. 110,000, 120,000 engines, where we are today on a level of 150,000.

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [46]

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[150,000].

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Peter Rothenaicher, Baader-Helvea Equity Research – Analyst [47]

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But let’s come back to my question exactly. So let’s assume you come out this year with a sales volume of somewhere between EUR 1.2 billion, EUR 1.3 billion. So did I understand it correctly that your margin guidance of 7% to 8% then would really be the, let’s say, close — or EUR 2 billion, excluding the China activity? So which means that you would have from your current activities then an improvement in sales of, let’s say, EUR 700 million.

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Frank Hiller, DEUTZ Aktiengesellschaft – Chairman of Management Board [48]

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Well, so this EUR 2 billion was never including our China — so our China activity. And now if you think we will come out with EUR 1.2 billion on the top line this year, I can tell you we expect that this will recover within the next 2 years. We will not stay on this EUR 1.2 billion because, all the engines we are not producing right now, there will be also something like an effect for the future. If we will achieve 200,000 engines within the year 2022, which was always, I would say, a target to achieve this EUR 2 billion turnover, I don’t know, but on the other side, we are reducing dramatically now our cost structure by this EUR 100 million, which is around a reduction of 15% on the costs side.

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Peter Rothenaicher, Baader-Helvea Equity Research – Analyst [49]

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And to be clear: These breakeven volume of engines, 110 million to 120 million — 110,000 to 120,000 or your potential target of 200,000, this is not including Torqeedo.

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [50]

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No, of course not, no…

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Frank Hiller, DEUTZ Aktiengesellschaft – Chairman of Management Board [51]

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No, no.

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Operator [52]

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Next question is from the line of Gordon Schönell from Bankhaus Lampe KG.

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Gordon Schönell, Bankhaus Lampe KG, Research Division – Analyst [53]

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Just one question left from my side. In the first half of the year, you had nonrecurring items of EUR 15 million. Can you remind us how the split between Q1 and Q2 was?

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [54]

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The — it’s roughly half-half, as we had the continuation payments in the first and second quarter. We had — the impairment of R&D was in the second half (sic) [second quarter]. So maybe the second quarter was a little bit higher than the first one when it came to the nonrecurring items.

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Operator [55]

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(Operator Instructions) We have another follow-up question from the line of Richard Schramm from HSBC.

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Richard Schramm, HSBC, Research Division – Analyst [56]

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I’m back to what my colleague just asked about, this 2022 margin targets. I mean, if — you are including in your EBIT definition the equity results, right? And so far, the contribution from the Chinese joint venture would be in your EBIT, and therefore I wonder if this is not included in the 7% to 8% margin target.

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Frank Hiller, DEUTZ Aktiengesellschaft – Chairman of Management Board [57]

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Mr. Schramm, this is included. EBIT margin — EBIT, what comes out of our Chinese activities, is included. That’s at equity, but the top line revenue is not included in this EUR 2 billion.

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Richard Schramm, HSBC, Research Division – Analyst [58]

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Okay. So I mean, at the end of the day, we are comparing here a bit ever with peers, right? I mean you include China in your EBIT, but you exclude it from your sales.

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Frank Hiller, DEUTZ Aktiengesellschaft – Chairman of Management Board [59]

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Yes. Main target — to be honest, main target is to improve the performance of DEUTZ. That was always our intention. And going back into the year 2016, this was on a level of 2%, and now the target was to bring it to 7% to 8%. And also China will play an important role to that.

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [60]

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But of course, when we report results, then going forward there is always a possibility we have pro forma revenues and pro forma EBIT that you understand it better. But we always said that the China business can’t be worse than the regular business.

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Richard Schramm, HSBC, Research Division – Analyst [61]

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Yes. I mean it’s your decision to include at equity in EBIT or not. I mean it’s — well, some companies do. Others don’t. I think it would be a fair treatment to exclude it and put it below the EBIT line, but as I said, that’s up to you. But thanks for the clarification.

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Frank Hiller, DEUTZ Aktiengesellschaft – Chairman of Management Board [62]

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But that how it was also in the past when we had the JV with FAW, DDE. Also the result was — the EBIT was included in the result. And you didn’t see the turnover of the JV. So this is more or less in line with the former reporting we had the years before.

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [63]

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Maybe one additional remark, Mr. Schramm. You cannot pick and choose, yes. So it was an ongoing analysis with the auditors. So I can have an opinion, but in the end they have to approve how to do reporting. So there’s nothing Mr. Hiller or I can do what we like, yes. So they have a number of parameters where they decide what to put there.

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Richard Schramm, HSBC, Research Division – Analyst [64]

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Okay. I mean, right, as I say, some companies do it. Others don’t. And I would say it’s never too late to improve. I really wonder if you never get out of this, but it’s up to you.

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Operator [65]

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Next question is from the line of Roland Könen from Value-Holdings.

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Roland Könen, Value-Holdings Capital Partners Ag – Fund Advisor [66]

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Yes. 2 additional questions. First one is on — also on the China JV. Can you give us a rough number for sales in 2020 with SANY? As you mentioned, you will double the engines to 20,000 this year. And also could you maybe give us on unit sales? Do you expect in 2022 to reach the EUR 800 million sales in China? And the second question would be on your payments under the confirmation agreements with the suppliers in insolvency. I had in mind that these payments should stop end of May. Could you confirm? Is that in the second half there will be no further payments? Or was it just with regard to the Gusswerke, that these payments will end in end of May?

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [67]

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Maybe I can start with Gusswerke. The Gusswerke is done in Leipzig, as it is in Saarbrücken. So we are out of both locations.

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Frank Hiller, DEUTZ Aktiengesellschaft – Chairman of Management Board [68]

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Maybe on the China JV. This year will be a revenue of plus, minus EUR 100 million. And it will be around of 20,000 engines.

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Roland Könen, Value-Holdings Capital Partners Ag – Fund Advisor [69]

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Okay, then we can calculate how much engines do you need for reaching the EUR 800 million sales in 2022.

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Andreas Strecker, DEUTZ Aktiengesellschaft – CFO, Human Resource Director & Member of the Board of Management [70]

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Yes, you have to be just a little bit careful there because there’s major mix effects. At the moment, they are producing many more smaller engines, the 5 and 7 liters. And the new 12 and 14 liters are coming online early next year, and these have completely different revenue and numbers per engine. So mixed effects will play a significant role there.

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Operator [71]

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There are no further questions at this time, and I would like to hand back to Leslie Iltgen for closing comments. Please go ahead.

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Leslie Isabelle Iltgen, DEUTZ Aktiengesellschaft – SVP Communications & IR [72]

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All right, thank you, everybody, for joining the call today. Should there be any follow-up questions after this call, don’t hesitate to contact us at the investor relations department. We’ll be happy to answer any questions you may still have. Other than that, I wish you a good remainder of the day and a successful week. Cheers, and goodbye.

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Operator [73]

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Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining. Have a pleasant day. Goodbye.