Results of operations
DEUTZ Group: Revenue
Revenue decline low relative to fall in unit sales
In 2015, DEUTZ generated revenue of €1,247.4 million, 18.5 per cent less than in the previous year when revenue amounted to €1,530.2 million. This meant that we did not achieve the forecast published in the 2014 annual report, in which we predicted a decline in revenue of around 10 per cent. In September 2015, we revised our forecast to an approximately 20 per cent decrease in revenue, and we surpassed the revised revenue target. The decline in revenue is due partly to the changes to emissions standards for engines under 130kW that came into force in the European Union on 1 October 2014 and the resulting effects from the advance production of engines. Furthermore, the end customers for our engines showed a pronounced reluctance to invest in the second half of 2015, which is why we updated our forecast. The fall in revenue was, in percentage terms, not as substantial as the drop in unit sales.
DEUTZ Group: Revenue by quarter
Revenue levels were very uneven over the course of the year. After €318.1 million in the first quarter, revenue increased to €352.1 million in the second quarter before falling again to €268.6 million in the third. In the fourth quarter, we generated revenue of €308.6 million, which was 14.9 per cent more than in the previous quarter but 12.4 per cent less than in the fourth quarter of 2014. The second quarter was thus the strongest of the year, but all four quarters registered year-on-year falls.
DEUTZ Group: Revenue by application segment
Our largest application segment, Mobile Machinery, fell short of the significantly increased revenue figure reported in 2014. Its revenue was down by 26.9 per cent to €523.2 million in the reporting year. Revenue also decreased significantly in the Agricultural Machinery application segment, falling by 38.1 per cent to €159.3 million. However, revenue in the Stationary Equipment application segment was on a par with 2014 at €178.1 million, while the Automotive application segment’s revenue was up by 7.2 per cent to €87.9 million and that of the service business rose by 7.4 per cent to €278.4 million.
DEUTZ Group: Revenue by regions
Broken down by region, revenue in EMEA (Europe, Middle East and Africa) dropped by 27.6 per cent to €844.5 million. By contrast, revenue in the Americas region increased by 7.3 per cent to €275.3 million although, taken in isolation, the second half of 2015 was considerably worse than both the first half of 2015 and the second half of 2014. Moreover, revenue in the Asia-Pacific region climbed by an impressive 18.8 per cent to €127.6 million.
DEUTZ Group: Operating profit/EBIT margin before one-off items
DEUTZ Group: Operating profit/EBIT margin by quarter
Operating profit before depreciation and amortisation (EBITDA before one-off items) amounted to €112.2 million in 2015, a year-on-year decrease of €25.2 million (2014: €137.4 million). This trend was mainly attributable to the decline in the volume of business in the DEUTZ Compact Engines segment and a smaller contribution to earnings from our Chinese joint venture DEUTZ (Dalian) Engine Co., Ltd. caused by China’s current economic slowdown. Earnings were boosted, however, by lower production costs and warranty costs, currency effects and increased revenue in the high-margin DEUTZ Customised Solutions segment. Despite low capacity utilisation, the EBITDA margin (before one-off-items) held steady at 9.0 per cent.
EBITDA before one-off items amounted to €26.6 million in the fourth quarter of 2015, a decrease of €16.3 million year on year (Q4 2014: €42.9 million) but an increase of €11.4 million compared with the previous quarter (Q3 2015: €15.2 million). This was due, in particular, to the change in the volume of business.
Operating profit after depreciation and amortisation (EBIT before one-off items) came to €4.9 million in 2015, a year on year reduction of €26.8 million (2014: €31.7 million). Before one-off items, the EBIT margin for the reporting year was 0.4 per cent (2014: 2.1 per cent). We were thus unable to match the forecast for 2015 of around 3 per cent that we had published at the start of the year. This was mainly due to the very sharp fall in the volume of business during the second half of the year. However, we did fully meet the revised forecast, issued in September 2015, for operating profit at around break-even level. Depreciation and amortisation included impairment losses totalling €9.7 million on intangible assets and on property, plant and equipment. In 2014, there had been impairment losses before one-off items of €9.5 million. The impairment losses were recognised in the year under review because of the market situation and mainly related to capitalised development expenditure. In the fourth quarter of 2015, the operating loss before one-off items amounted to €5.7 million (Q3 2015: loss of €9.7 million; Q4 2014: profit of €8.9 million), giving an EBIT margin of minus 1.8 per cent (Q3 2015: minus 3.6 per cent; Q4 2014: 2.5 per cent).
After one-off items, operating profit (EBIT) deteriorated by €7.9 million (2014: €12.8 million). In the previous year, EBIT had been reduced by one-off items of €18.9 million relating mainly to expenses connected with the measures to optimise the network of sites. There were no one-off items in the year under review.
There was a deterioration in return on capital employed (ROCE) 1), our internal KPI, from 3.9 per cent in 2014 to 0.6 per cent in 2015. This was due to the unexpectedly strong contraction in the volume of orders and to the impairment losses recognised on intangible assets and on property, plant and equipment. At the start of the year, we expected ROCE to rise slightly compared with 2014. However, we were unable to achieve this forecast due to the reasons outlined above.
Cost of sales
In 2015, the cost of sales amounted to €1,054.8 million (2014: €1,327.6 million). This year-on-year decrease of 20.5 per cent was mainly attributable to lower costs for materials, staff and contract workers resulting from the decline in the volume of unit sales. There was also a substantial decrease in warranty costs. Accordingly, the ratio of cost of sales to revenue fell from 86.8 per cent in 2014 to 84.6 per cent in 2015. The gross margin therefore improved markedly – despite the smaller volume of business.
1) Return on capital employed (ROCE before one-off items): ratio of EBIT before one-off items 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.
|Overview of the DEUTZ Group’s results of operationse|
|Cost of sales||–1,054.8||–1,327.6|
|Research and development costs||–76.3||–74.3|
|Selling and administrative expenses||–104.8||–100.0|
|Other operating income||29.3||22.9|
|Other operating expenses||–30.6||–41.4|
|Profit/loss on equity-accounted investments||–6.3||1.9|
|Other financial income||1.0||1.1|
|Operating profit (EBIT)||4.9||12.8|
|EBIT (before one-off items)||4.9||31.7|
|Interest expenses, net||–4.0||–6.1|
Research and development costs
In the year under review, research and development costs totalled €76.3 million (2014: €74.3 million). Although R&D expenditure, which is a metric relevant to liquidity, was reduced as planned, R&D costs increased slightly (by €2.0 million) because of the far lower capitalisation rate. Research and development costs largely comprised staff costs, cost of materials and amortisation on completed development projects, from which investment grants received and capitalised development expenditure were deducted.
Selling and administrative expenses
There was a small rise in selling expenses, which advanced to €68.3 million in 2015 (2014: €65.7 million), and in administrative expenses, which went up to €36.5 million (2014: €34.3 million). Administrative expenses included transition costs in connection with the switch of IT service provider at the end of the year under review. Without this one-off cost item, there would have been a moderate decline in administrative expenses. As a proportion of revenue, selling and administrative expenses rose to 5.5 per cent (2014: 4.3 per cent) and 2.9 per cent (2014: 2.2 per cent) respectively, due to the greatly reduced volume of business.
Other operating income
The reporting year saw an increase of €6.4 million in other operating income to €29.3 million (2014: €22.9 million). This rise was primarily attributable to effects arising on the translation of foreign currency positions. However, foreign currency gains were offset by a similar level of foreign currency losses, which are reported in other operating expenses. Furthermore, a gain on disposal of €2.9 million was recognised following the disposal of the shares in WEIFANG WEICHAI-DEUTZ DIESEL ENGINE CO., LTD., Weifang, China, in 2015. Other operating income also included a gain of €1.0 million arising from the deconsolidation of DEUTZ Engine (China) Co. Ltd., Linyi, China.
Other operating expenses
Other operating expenses totalled €30.6 million in the reporting year, a year-on-year decrease of €10.8 million (2014: €41.4 million). The prior-year figure had included restructuring costs of €17.1 million. Excluding this one-off effect in the prior-year figure, other operating expenses increased by €6.3 million in 2015 as a result of higher losses arising on the translation of foreign currency positions.
Profit/loss on equity-accounted investments
In 2015, there was a loss on equity-accounted investments of €6.3 million, a deterioration of €8.2 million compared with the profit on equity-accounted investments reported for 2014 of €1.9 million. This change is primarily attributable to the contribution to earnings from our Chinese joint venture DEUTZ (Dalian) Engine Co., Ltd. on the back of China’s pronounced economic slowdown. Further information can be found in the ‘International joint ventures’ section on page 36.
Net interest expense
Net interest expense amounted to €4.0 million (2014: €6.1 million). This significant year-on-year improvement of €2.1 million was attributable to lower utilisation of credit lines.
In 2015, there was overall tax income of €2.6 million (2014: €12.8 million). This amount included the current tax expense of €5.7 million, which was €3.4 million lower than in the previous year (2014: €9.1 million). The main factors in this decrease were the drop in earnings at DEUTZ Corporation, Atlanta, USA, and the reversal of provisions for income taxes relating to the tax audit conducted at DEUTZ AG for the years 2009 to 2011. The current tax expense was offset by deferred tax income of €8.3 million. This mainly resulted from the reversal of deferred tax liabilities arising in connection with the capitalisation of development expenditure under IFRS. The year-on-year decrease was €13.6 million (2014: €21.9 million). The deferred tax income reported in 2014 was largely influenced by effects from the tax audit carried out at DEUTZ AG for the years 2009 to 2011.
Earnings per share
As a result of weaker operating profit and lower deferred tax income, net income dropped to €3.5 million in 2015, a year-on-year decrease of €16.0 million (2014: €19.5 million). This resulted in earnings per share of €0.04 (2014: €0.18).