Chief Financial Officer (CFO) and Labour Director, DEUTZ AG
DEUTZ AG Deep Dive CMD 2024 | Financial Strategy and Outlook for Sustainable Growth
DEUTZ AG CMD 2024: Key Takeaways
During the CFO perspective segment of DEUTZ AG’s Capital Market Day
Oliver Neu outlined the financial roadmap that aligns with the company’s Dual+ strategy. He focused on how DEUTZ aims to achieve sustainable growth while maintaining financial discipline. The primary goals are to support the ambitious revenue target of €4 billion by 2030 and ensure that by 2028, the company reaches €3.2 to €3.4 billion in revenue with an adjusted EBIT margin of 8-9%.
Key Highlights from Neu’s Presentation:
1. Growth and Revenue Targets
DEUTZ has set a path for revenue growth i...
Transcript (30 segments)
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Oliver Neu0:09
Welcome back after lunch. I hope you had a good lunch and good side discussions. I'm super happy to give you now the CFO perspective. Let me start quickly by recapping what we showed you in the morning. We had good presentations from colleagues introducing our new dual plus strategy. We introduced Deutz Solutions consisting of our Energy business and the former, now New Tech business. We presented you an ambitious but realistic top-line growth path towards 4 billion revenue by the end of the decade.
I put here also the 2028 figures on the top line, which is 3.2 to 3.4 billion. I on purpose put the 28 because that's going to be our new midterm outlook. Looking into my CFO perspective and CFO contribution on that, I would summarize it in two blocks. First block: going to ensure execution and performance, and I'll show you in a bit what that means more specifically. Second part: as you saw, M&A is an integrated part of our growth strategy, so I'm going to finance that growth.
Well, we see here again summarized how we come from the 1.8 billion guidance for 2024 to the 3.2 to 3.4 billion by the midterm period 2028. You heard from Marcos Lot how we will grow in the classic business. It sounds like a huge block, the 700 million, but on the other hand we have the full-year impact of the Rolls-Royce Power Systems business in it. We see a recovery of the market to normalized levels, and some shifts in the product portfolio. So the recovery and growth in the classic business is not driven by M&A. M&A might come on top as part of our consolidation strategy.
On the service side, we also heard a lot from Marcos. We see 300 million growth under 2028, roughly 200 of that organic, 100 million inorganic. On the Solutions side, David introduced it. We also had a great video from Duck from the US showing us our new acquisition Blue Star. I like to see the spirit, I like to see the dynamics, and I trust that guy that he can continue the strong organic growth which he has delivered over the past years as well.
Besides that, we also showed a perspective on the New Tech, the green business, and there we are prepared with our products. We will not waste money, but we are there once the market demand is there, bringing us here to another growth contribution.
So, CFO focus on ensuring execution and performance. If we talk about ensuring execution, I would cluster that by the area of activities we are in. On the classic side, ensuring execution is very much driving our structural cost down. I'm going to show you in a second what that means, summarizing our cost reduction program. That is implementation of the cost reduction program we announced today. That is bringing structural cost down in a sustainable way. Sustainability is important there, so that we are perfectly prepared to benefit from economies of scale once the market picks up again.
Ensuring execution on the classic side also means putting into reality the great recent transactions and partnerships we announced. Thinking or talking for example about TAHA, and Petra mentioned that quite well, or the medium-duty and heavy-duty engine business from Daimler Truck. I'm going to make sure as a CFO that we are on time and on budget so that we capture the full potential behind those partnerships.
Ensuring execution on the service side: I fully trust our sales guys that they can deliver the growth, and I fully trust, and you can fully trust, that the CFO will ensure they are not denting the margins. We want to have stable margins, we want to safeguard our margins and grow the business, and also of course monetize whatever positive effects from the new business models we see there, from digitalization for example.
On the Solutions side, I think we have to differentiate. When it comes to execution, between our Energy business and our New Tech business. For New Tech, we like to call it a smart scale-up approach. Smart scale-up means from a finance perspective, we will invest what is necessary, we will invest in order to put us in a position to grow along with the market once the demand is there. But it also means we will steer it by budget. We heard from Duck that we have the products available, so the right-sizing of the investment level is one of the focus activities there. We can save quite some money next year.
On the Solutions side, again referring to the video of Duck, he mentioned the entrepreneurial spirit. David pointed that out as well. And from a finance perspective, we finance guys, we have to ensure governance, we have to ensure compliance, and all that we will do with full focus. But on the other hand, we will definitely not kill the entrepreneurial spirit that made Blue Star a successful company. So we want to integrate our new subsidiaries, Blue Star or the others that might come, and we want to do that in a way that allows us to act entrepreneurially.
CFO focus on ensuring performance. Performance is about, among others, our cost reduction program. We listed here very transparently what we are intending to do. Details will be worked out with a clear steering logic, degree of implementation, and everything we need to do that. But basically, we are expecting 50 million structural, sustainable cost reduction. 20 million out of that kicking in and ramping in 2025, the other 30 with a full-year effect in 2026.
Big part of that: classic R&D, we heard about the delay in the EU emission standards. The New Tech R&D, the right-sizing, the smart scale-up approach. Regional setup, supply chain, and also overall streamlining the organization. And I think with that we are addressing the right things at the right time.
Besides ensuring execution and performance, I'm going to finance growth. And to understand what that means, I think it's important to have a quick look on the different types of M&A transactions we are confronted with. So talking about classic business: there is not that typical one-size-fits-all M&A transaction. M&A transactions in our classic business are typically tailor-made. There are not 50 or hundreds of opportunities out there in the market you just have to select. They are tailor-made opportunities which come up and which require tailor-made transactions and tailor-made financing.
On the service side, things are in a way easier. That is what you saw in our M&A execution pipeline over the last years and the deals we implemented. They are typically more standardized transactions, with a low to mid double-digit million euro revenue, sometimes family-owned businesses, dealer networks. So where we can easily do two, three, or even four M&A transactions per year. And that is part of our strategy to grow that sustainable and strong-margin business.
On the Solutions side, we saw the growth path. There will be, we are intending, foreseeing that there is significant contribution from the M&A side. Can be both in Energy, can also be in New Tech. There we are searching for companies that have exactly this entrepreneurial spirit, that have unique selling points, that have good and healthy organic growth rates and also good margins. Valuations are different in all those areas. Of course we are not paying more than the market pays, and we are quite successful in maybe paying a little bit less than the market would pay. So we are confident that we are on a very good track with the M&A transactions we are targeting.
Talking about financing, it has two perspectives. I look here on the internal financing first. It's not a secret that in the past, Deutz talking about free cash flow generation capability was maybe lagging behind once in a while behind expectations. So I put here on the left-hand side a typical EBITDA-to-cash walk. I don't have to explain to you guys how to come from EBITDA to cash. But what I want to point out is on the right-hand side, what are the focus areas we will address.
Most importantly, it's about the operational performance reflected in our EBITDA. We see that we are entering into resilient businesses. Blue Star is a first very good proof point. We see that overall, with service growth, with pricing initiatives, we were getting more resilience. More resilience means higher and more stable EBITDA. And we are addressing on top of that also the bottom line now with the cost reduction program just announced. That will drive our EBITDA upwards and allow for more stable EBITDA development as well.
Talking about CapEx and networking capital, there were some questions in the morning. Coming to Blue Star, we are basically seeing a downward trend here, meaning less cash required for CapEx, meaning less cash required for networking capital. Why is that? The new businesses we are entering into are less CapEx-intensive. Look at the Rolls-Royce Power Systems engines which we are basically trading, there is no CapEx required. Blue Star, almost no CapEx required, they buy gears, they have few machines. And on the networking side the same. So we are structurally changing and getting a positive trend there.
On the other hand, talking about networking capital, we put here a target level towards 15%. In the past, looking back a few years, Deutz had levels of 16 or 17%. So getting down to 15% is ambitious coming from current levels of around 20%, but it's not unrealistic, and that is what we're going to address.
Financing has a second perspective, that is the external financing. I know there are a lot of bankers here, I see the smile already when it comes to additional debt financing. So we have the capacity for more debt, definitely. I put the equity ratio on the left side. This is strong. Traditionally Deutz had a strong equity ratio, we had recently in the H1 quarter closing around 50%. We remain the target to stay above 40%. However, that target is not set in stone. If good M&A transactions come, with the financing structure we have in place and with a strong balance sheet, we can also go lower.
More important: the financial leverage, so net financial debt divided by EBITDA. Traditionally we have been there most of the time below one, meaning a comparatively low financial leverage. From a finance perspective, with the current uncertainties in the market, I feel comfortable on that level. Increasing leverage is not a self-purpose. On the other hand, I think we have good opportunities to optimize our capital structure along the path of getting increased resilience in our business model, getting a more stable operational performance. That path will allow us to increase also to levels of one to two.
I put that here on a slide to explain that with an increased leverage level, an optimized capital structure, we would get enhanced freedom for further M&A transactions or alternatively for increased payouts to all shareholders. And I think that is an important point as well, the payouts to shareholders. We slightly adjust our dividend policy because basically we are now targeting towards stable or ideally increased dividends compared to the previous year. With increased resilience, I think that is possible, and the management team is committed to that.
Well, as a CFO you always have to be a bit formal as well. My formal slide is this one here. Formal means: how do we report our figures from 1st of January 2025? We're going to change following the revised dual plus strategy. We're going to change our segment reporting. Today we are reporting the classic business and the green business. Going forward, first segment will be named Deutz Engines and Services, covering our classic engines and our services. And the second segment will be Deutz Solutions, following what we heard today: Energy and New Tech will form our Solutions segment.
Coming to margins or EBIT levels: our current 2024 guidance brings us at 4 to 5% adjusted EBIT margin at 1.8 billion revenue level. Targeted as a new outlook for the 2028 midterm period is 8 to 9% adjusted EBIT margin, which is roughly 300 million with the sales targets we saw earlier. Out of the absolute increase, two-thirds are coming from Engines and Services segment. That's not a surprise considering we will benefit from the recovery of the engine market, the classic business benefiting significantly from the intended cost reduction initiatives, and of course our service business with good growth at a stable, constant margin.
On the Solutions side, we will continue the positive, strong growth on the Energy side and follow that path with good double-digit EBIT margins. But we will also strive towards break-even on the New Tech side, and that is before potential upsides from M&A transactions which might drive us positive there.
When understanding the midterm targets, going forward from beginning of 2025, we will no longer give a guidance on unit sales. I know for some colleagues of you, unit sales are always an important input in your financial models. So don't worry, we will still communicate how much is our unit sales in the classic business, but it will not be part of our financial guidance anymore. I can tell you why: because it's simply not that important anymore. We are driving our business model towards higher resilience. We are increasing the share of our Solutions business. We have an absolute higher service business with a 25% share. So unit sales are not that important anymore as they were in the Deutz of the past.
Sales target, I mentioned it just to put it here clearly: 3.2 to 3.4 billion with the 8 to 9% EBIT adjusted margin.
Well, giving the key messages and to sum it up from my perspective on Deutz and our strategy from a financial perspective: we have a clear top-line growth path defined. I think it has a healthy mix of organic and also inorganic growth. We have a business model, and we heard that several times today, which is striving towards higher resilience. We see the first proof points of that in the current financial trading, and I personally think that has a prospect of uplifting valuation multiples.
The bottom line improvements: we did a lot already, we will reinforce it now, we will push performance, and the cost reduction program is underway. With the increased resilience, we are getting the chance of optimizing our capital structure. Leverage is not a self-purpose, but leverage gives us potential and flexibility. And last but not least, as I mentioned, our management team here is fully committed for reliable dividends. We want to be a reliable dividend payer, and that means stable or increasing dividends compared to previous year.
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Narrator21:56
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