Results of operations
DEUTZ Group: Revenue
Strong revenue growth
DEUTZ generated revenue of €1,479.1 million in 2017, an increase of 17.4 per cent on the previous year (2016: €1,260.2 million). We therefore fully achieved the forecast of a marked rise in revenue that we had published in our 2016 annual report. Contrary to our planning, the average price of the engines sold fell slightly because we sold a larger proportion of engines in the lower power output range.
DEUTZ Group: Revenue by quarter
As with new orders, we saw year-on-year increases in all four quarters. Our revenue in the fourth quarter amounted to €385.9 million, which was 22.6 per cent more than in the fourth quarter of 2016 and 7.6 per cent more than in the third quarter of 2017. The final quarter of 2017 was thus the strongest of the reporting year.
DEUTZ Group: Revenue by application segment
The breakdown by application segment presents a slightly more disparate picture. The Material Handling, Agricultural Machinery and Construction Equipment application segments saw sharp rises of 40.5 per cent, 30.6 per cent and 25.0 per cent respectively. Revenue in the service business was up by 7.6 per cent and that of the Stationary Equipment application segment by 3.2 per cent. By contrast, revenue in the Automotive application segment fell by 27.3 per cent.
DEUTZ Group: Revenue by region
Broken down by region, revenue in EMEA (Europe, Middle East and Africa) advanced by 21.9 per cent year on year to €1,063.5 million. Revenue in the Americas region increased by 11.9 per cent to €268.1 million. However, the Asia-Pacific region’s revenue at €147.5 million was slightly lower, by 0.3 per cent, than in the previous year; the licensing income received in 2016 was not repeated in 2017.
Operating profit before depreciation and amortisation (EBITDA before exceptional items) came to €135.9 million in 2017, up by €21.7 million on the prior-year figure of €114.2 million. The EBITDA margin (before exceptional items) improved slightly to reach 9.2 per cent (2016: 9.1 per cent). However, the EBITDA margin in 2016 had been boosted by a licensing transaction that had contributed €5.5 million to profits.
Operating profit after depreciation and amortisation (EBIT before exceptional items) came to €42.4 million in 2017 (2016: €23.4 million). This significant increase of €19.0 million was attributable to the larger volume of business and the improvement in the share of profit (loss) of equity-accounted investments. Countervailing effects to these positive factors were the higher level of research and development costs (including an impairment loss in the fourth quarter of 2017), negative currency effects and a temporary increase in costs caused by the rapid ramping up of capacities due to the surge in demand last year, especially in logistics. The EBIT margin (before exceptional items) improved to 2.9 per cent in the reporting year (2016: 1.9 per cent). At the start of the year, we had expected a moderate increase in the EBIT margin before exceptional items. As the EBIT margin rose by 1 percentage point, we fully achieved our forecast.
In the fourth quarter of 2017, operating profit (before exceptional items) amounted to €14.6 million. It therefore increased significantly compared with the previous quarter (by €9.6 million; Q3 2017: €5.0 million) and with the fourth quarter of the previous year (by €10.9 million; Q4 2016: €3.7 million) due to the sharp rise in the volume of business. The EBIT margin (before exceptional items) for the fourth quarter of 2017 was 3.8 per cent (Q3 2017: 1.4 per cent; Q4 2016: 1.2 per cent).
DEUTZ Group: Operating profit and EBIT margin (before exeptional items)
DEUTZ Group: Operating profit (EBIT) by quarter (before exeptional items)
The higher operating profit resulted in a substantially improved return on capital employed (ROCE before exceptional items) 1), our internal KPI, which rose from 3.1 per cent in 2016 to 5.5 per cent in the reporting year. At the start of the year, we had expected ROCE to rise slightly compared with 2016. We exceeded this forecast for the reasons outlined above.
Unlike in 2016, substantial positive exceptional items totalling €104.1 million arose in 2017. Operating profit (EBIT) after these exceptional items came to €146.5 million, a year-on-year rise of €123.1 million (2016: €23.4 million). The exceptional items included a gain of €98.8 million (after deduction of transaction costs and before the final instalment of the purchase consideration) resulting from the sale of the land at our former Cologne-Deutz site. There was also a €10.0 million gain relating to the disposal of the building lease of our subsidiary Ad. Strüver for a plot of land in Hamburg that was no longer being used for production purposes. These positive exceptional items were partly offset by negative exceptional items of €4.7 million in the year under review. Legal and consultancy costs of €4.7 million arose in connection with the acquisition of Torqeedo GmbH, Gilching, and IML Motori S.r.l., Milan, Italy, which were completed in the fourth quarter of 2017.
|Overview of the DEUTZ Group’s results of operations|
|Cost of sales||–1,222.9||–1,041.6|
|Research and development costs||–94.8||–77.5|
|Selling and administrative expenses||–120.3||–104.7|
|Other operating income||144.1||17.7|
|Other operating expenses||–42.1||–26.7|
|Profit/loss on equity-accounted investments||2.5||–5.1|
|Other financial income||0.9||1.1|
|Operating profit (EBIT)||146.5||23.4|
|EBIT (before exceptional items)||42.4||23.4|
|Interest expenses, net||–2.4||–3.5|
Cost of sales
In 2017, the cost of sales amounted to €1,222.9 million (2016: €1,041.6 million). This year-on-year rise of €181.3 million was largely attributable to the much higher volume of business and the resultant increase in the cost of materials. The gross margin 2) of 17.3 per cent was at the same level as the previous year (2016: 17.3 per cent). Whereas the gross margin had been boosted by the contribution to earnings from the licensing transaction in 2016, it was squeezed by the capacity-related increase in logistics costs during the reporting year.
Research and development costs
In the year under review, research and development costs totalled €94.8 million (2016: €77.5 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 rise of €17.3 million compared with 2016 was due not only to the increase in research and development activities but also to an impairment loss of €8.8 million recognised on an uncompleted development project. The much improved market outlook for the engine series in the 4 to 6 litre capacity range, which have already achieved Stage V certification, led to a sharp drop in the expected demand for the 5.0 series. Consequently the development project was written off in full for reasons of commercial viability. It will not be pursued further for the time being. The useful life of the 4.1 and 6.1 engine series was extended as a result. Please also refer to the notes on internally generated intangible assets in the notes to the consolidated financial statements.
In 2017, selling expenses amounted to €78.8 million (2016: €68.0 million). The year-on-year increase of €10.8 million was mainly attributable to the intensification of sales activities and the accompanying growth in headcount. Furthermore, the selling expenses for the reporting year included the selling expenses incurred in the fourth quarter by Torqeedo and DEUTZ Italy (formerly IML S.r.l.), which were consolidated for the first time as at 1 October 2017.
Other operating income
Other operating income totalled €144.1 million in the reporting year, equating to a rise of €126.4 million compared with the prior year (2016: €17.7 million). This was due, in particular, to the gains resulting from the sale of the land at our former Cologne-Deutz site (€114.6 million) and the disposal of the building lease of our subsidiary Ad. Strüver KG for a plot of land in Hamburg (€10.5 million). The gains on these two transactions were classified as exceptional items. If these exceptional items are excluded, there was a slight increase in other operating income that was mainly attributable to income from the charging on of costs.
Other operating expenses
Other operating expenses totalled €42.1 million in the reporting year, a year-on-year rise of €15.4 million (2016: €26.7 million). This increase was primarily due to three exceptional items. Firstly, transaction costs totalling €13.5 million – mainly expenses for services provided by agents and consultants, plus real estate transfer tax – arose in connection with the sale of the land at our former Cologne-Deutz site. Secondly, the provision recognised in 2015 in connection with optimisation of the site network was increased by the costs of €2.3 million still expected for the clearance of the Cologne-Deutz site. Thirdly, legal and consultancy costs of €4.7 million arose in connection with the acquisition of Torqeedo GmbH and DEUTZ Italy (formerly IML Motori S.r.l.), which were completed in the fourth quarter of 2017. Excluding these exceptional items, other operating expenses fell by €5.6 million despite significantly higher foreign currency losses. This is primarily due to smaller additions to other provisions, provisions for pensions and other post-retirement benefits and impairment losses on receivables.
Profit/loss on equity-accounted investments
In 2017, there was a profit on equity-accounted investments of €2.5 million, a significant improvement of €7.6 million compared with the previous year (2016: loss of €5.1 million). This change is attributable to the greatly improved contribution to earnings from our Chinese joint venture DEUTZ (Dalian) Engine Co., Ltd. Further information can be found in the ‘DEUTZ Dalian Joint Venture’ section.
Net interest expense
Net interest expense amounted to €2.4 million (2016: €3.5 million). This year-on-year improvement of €1.1 million was attributable to lower utilisation of credit lines, better terms and increased capitalisation of borrowing costs.
The income tax expense amounted to €22.9 million in the year under review (2016: €3.9 million). Current tax expenses came to €23.3 million, a year-on-year rise of €14.0 million (2016: €9.3 million). This increase was mainly the result of improved earnings at DEUTZ AG. The current tax expenses were partly offset by deferred tax income of €0.4 million (2016: €5.4 million).
Earnings per share
Net income advanced by €105.2 million to €121.2 million in the reporting period (2016: €16.0 million). This led to a significant improvement in earnings per share, which came to €1.00 (2016: €0.14).
1) 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.
2) Gross margin: ratio of revenue less cost of sales to revenue (excluding amortisation relating to capitalised development expenditure).