DEUTZ AG

XETRA:DEZ

Q1-2025 Earnings Call

[Operator]

Good morning, and a warm welcome to today's earnings call of DEUTZ AG, following the publication of the Q1 figures of 2025. The CEO, Dr. Sebastian Schulte; and CFO, Oliver Neu, will speak in a moment and guide us through the presentation and the results. [Operator Instructions]

Ladies and gentlemen, please note that this call is being recorded, and a replay will be available on the DEUTZ's website at deutz.com later today. Your participation in the call implies your consent with this. So we're looking forward to the presentation.

And with this, I hand over to Head of Investor Relations, Communications and Marketing, Mark Schneider. So Mark, the stage is yours.

[Mark Schneider, executive]

Good morning from Cologne. Thank you, Sarah, and I thank all of you for joining our Q1 2025 conference call on this busy reporting day. As usual, our CEO, Sebastian Schulte, will walk you through the highlights of the first quarter and the implementation of our strategy. He then hands over to our CFO, Oliver Neu, who will provide more details on our financial figures and our new segment structure. Sebastian will close the presentation with a look on the guidance and our upcoming AGM. Afterwards, we are happy to answer your questions.

As always, please note our disclaimer, especially regarding forward-looking statements. Having said this, I'm handing over to you, Sebastian.

[Sebastian Schulte, executive]

Thank you. Thank you very much, Mark. And also from my side, good morning to our Q1 earnings call for 2025.

I'd like to start giving you an overview on where we stood, how we closed the first quarter. And like the headline says, we performed quite robustly in an environment that still provides a couple of challenges, particularly in our core business, the classic engines, core business in the sense of magnitude of our portfolio. Because the economic environment in that business hasn't significantly improved yet, but we see and I will guide you through our numbers, how we are benefiting from our significant increased resilience even more so than in the past year.

But let me guide you through the relevant key figures of the first quarter. So first of all, new orders, we recorded almost EUR 550 million. That is quite a significant increase year-on-year, 30%, and it is, of course, driven by the contribution of our recent M&A because organically, focusing very much on the classic business, we see a rather flat development. But again, this is an explanation, but also a proof point how important it has been in the last years to change, to adapt our portfolio to the demands of the market. And most notably, we're talking here about the acquisition of Blue Star. We'll talk about that later, but also the acquisition of the Daimler Truck business portfolio from Rolls-Royce Power Systems.

On the revenue aspect, we closed with almost EUR 490 million. That is also up 7.5% year-on-year and also supported by the Service business, which is still growing on a good level, and obviously, M&A as well. Organic, we have been slightly negative, bearing in mind that the first quarter '24 on the classic engine business was actually still extremely strong. The drop, which we saw in '24 in the classic business, came in a little into the second quarter or rather actually into the second half of the year.

EBIT margin, we will be close to 4.3% adjusted EBIT. That was minus 1.8 percentage points down year-over-year. The scale effects on the engine production, they hit quite significantly. But again, they were partially mitigated by our -- by the effects from our profitable acquisitions by the Service business and also by the cost discipline, which Oliver will talk about later in particular, and there is more to come in the second half in terms of effects.

Free cash flow are positive. I'm actually quite pleased with that result, EUR 23.4 million. We're up EUR 18 million year-on-year and supported by quite an exceptionally strong operating cash flow. So the cash conversion of the business is quite healthy at this point in time.

I mentioned it in my opening words, the Dual+ strategy, as we call it -- as we call our journey, is progressing well. Although, as I said, the environment remains quite volatile. But some highlights or some main points of our positive progress of the strategy. So first of all, the newly formed business unit Energy. It's actually working very, very well, and that's very much driven by Blue Star Power Systems, the acquisition, and we'll talk about that later, but this business is continuing performing well and performing above our initial expectations.

Some weeks ago, we announced the acquisition of UMS. And the closing has not yet happened, so you don't see any impact in the numbers as of yet. But on a strategic point of view, it will substantially broaden our footprint, particularly in the New Tech business, and will speed our go-to-market up here significantly.

We've got another sort of smaller acquisition, but we're also quite happy with [indiscernible] emission technology, hidden champion from the heart of Germany, Sauerland, and we have that on board since the beginning of January. That initially was the focus here, mainly actually to secure our supply chain in the very important component of after-treatment system, but the acquisition is also performing well and starting to contribute to our results.

We have -- and the picture shows that we had a, from our point of view, quite positive happening here at the bauma, at a large trade fair in Munich, where we felt a very positive customer sentiment, both on how we, as DEUTZ, are positioning and improving ourselves in this important market of construction equipment, but also with lots of positive views on the future. Although we still don't see this hugely positive sentiment yet in order behavior, but we believe we are approaching at a big point here in a positive way.

And then as I said earlier, our cost program, Future Fit, is well on track. To keep in mind that we announced to reduce significantly our cost base by EUR 50 million on an annual basis by the end of 2026. Oliver will talk about that later, but what I can already say, we're well on track with this program.

Speaking about the United States for several reasons, obviously. I mean, first of all, and that's the headline, the U.S. business is and remains a cornerstone of our Dual+ strategy for several reasons. So first of all, we do expect the business to show significant growth in the upcoming years, significant.

And from a technology point of view, I mean we all probably have a different view on the future of the combustion engine now than the industry had 3, 4, 5 years ago, which is much, much longer lasting, particularly in the areas of work equipment. And that probably is even more true in the United States because the geography is large, operations are partially very, very remote, particularly if we don't talk about the East and the West Coast, the use cases typically are quite heavy duty, and also the regulatory framework in the U.S. is different than in Europe, not only since the new administration is here in place.

About half of our business is locally driven, Service and Energy. I mean, Service, obviously, we do import some parts from Germany. But apart from that, that's actually working at the equipment. And Energy, with the acquisition of Blue Star, I mean that's a totally local market. But classic, obviously, engines, they remain imported out of Germany.

We see, in our classic engines, a very high share of material handling, almost 50% of that, and the rest is then mainly stationary equipment that comes, for example, in construction equipment. And obviously, and that's one of the questions we're currently -- as most of the industrial players hear day by day, the tariff situation does fuel uncertainty and certainly affects also some of the order behavior. But we are not, let's say, too negative about it because the tariffs, obviously, I mean, that's a general challenge for everyone in the market, also for our competitors.

We do not see our competitors in the fields we are active with a heavy sort of advantage completely by local production. So that's why our assumption is and continues to be that the tariffs, which are currently at least at the 10%, at least for the first 90 days period, and we're obviously interested to see what happens afterwards. But what we expect is that this will lead to prices to inflationary pressure in the customer industry. So that's the current view on that. But important is the U.S., for the reasons just outlined, remains extremely important for us. And we are totally -- we are very well positioned there. So that's our take on the United States.

Let me move on New Tech, the acquisition of UMS, Urban Mobility Systems, in the Netherlands. So UMS can truly claim to be an innovation leader in battery electric drives, particularly for the off-highway sector, and in particular, as also the pictures on the right part of that chart indicate, in the area of construction equipment.

So UMS, has in the past, already successfully retrofitted a couple of hundred applications like excavators, also like heavy excavators, not only the light excavators, heavy cranes, asphalt rollers and very, very specialized equipment. We announced to purchase 100% of that stake on April 6, and we do expect the closing to happen throughout the second quarter. And meanwhile, all regulatory approvals have been granted very, very quickly. So we're just preparing the closing. And as I said, during the second quarter, we're going to conclude that acquisition.

The UMS was founded in 2016 by a gentleman called Lars Kool, a very energetic and competent individual. It's fun to work with him. It's really -- we're really excited to develop this company in the future together because he's also going to stay with us to approach the market together. Because one of the things is, I mean, they brought, UMS brings in a lot of sort of entrepreneurial spirit, great products, a great way of doing business. And we, as a much, much larger partner, bring -- will bring in, obviously, the scale up -- complex scale-up capabilities, including also using our plants or facilities, but also our access to the core customer. So it's a truly win-win situation, and feel very excited to enjoy the first day and everything following after the closing.

Some of the topics I mentioned already, particularly the 200 machines which have been retrofitted by UMS in the past, one of the things which UMS has done actually pretty greatly and different than what we have attempted in the past, they learned pretty quickly that electrification in this business is obviously not pressing, not pushing forward as much as in automotive, for example. And so that's why some of the OEMs have been, for good reasons, reluctant because the customers of the OEMs or the customers of our customers have still been reluctant as long as there's no TCO benefit in using electric equipment in that field.

So UMS went via the distributors and via the distributors in the Netherlands and in also sort of rather Nordic countries where, obviously, the regulatory environment means very differently than in Southern Europe or in the United States. And that's how they secured this very good position in the value chain. And that's certainly a learning that sometimes it's more than just having the right products. It's also very important to have the right go-to-market. And I think that's something we can learn from going forward.

UMS is still small. And last year, it's been a little below EUR 10 million revenue. UMS has a fairly positive, fairly large order book and actually a lot of LOIs, so we're talking about a high double-digit million euro range, which now we want to jointly convert into order intake and then obviously into revenue and profit at a later stage. So very excited about that.

Last point in terms of UMS. Originally, we approached it for the purpose -- with a purpose of battery electrifying construction equipment. But almost sort of a side effect, a very welcome side effect was that UMS also offers opportunities in the defense sector. We're showing here a picture of the Bushmaster, a military vehicle, which currently, obviously, as any other comparable vehicles, mainly driven -- mainly powered by combustion engines.

But the idea is here to retrofit, in the first place, vehicles like that, with a hybrid solution. So that includes them as a hybrid solution, as the name suggests, it includes a small combustion engine, but also battery electric drivetrain. And then in the end, you have an electric drive, which is much, much more silent than in the combustion engine. So that allows, like you speak in the defense context, lower noise signature. But obviously, there is no compromise on the range because of the combustion engine to recharge the battery. And by the way, almost as a side effect, you created a gen set on wheels.

So these are very interesting possibilities going forward. UMS has done a feasibility study with the partners, both the OEM as well as the military uses, and that's also something where we believe there is a lot of potential going forward.

With that -- having said that, I would then hand over to Oliver, who will guide you in more details to the numbers as well as provide some details on the cost program, before I will come back to give an outlook.

[Oliver Neu, executive]

Thanks, Sebastian. Good morning also from my side. So let's go straight to the numbers, and I would like to start with an update on our Future Fit program. So as Sebastian mentioned, we put the target to achieve sustainable cost reduction -- structural cost reduction of EUR 50 million in 2026 fully -- full impact. So we are well on track there. A bit of half of it is related to headcount-related measures, so we are planning to reduce roughly 400 -- 300 FTEs globally, 50 outside Germany, that correspondingly means 250 inside Germany at our Cologne facility.

Where do we stand? Well, as of now, we are well on track. We have signed already roughly 75 termination contracts. Another 30 abroad are signed or at least clearly agreed. We're going to see 75 fluctuation by our natural fluctuation, not replacing positions. So that brings us already to 180, which are either signed or agreed. Part of that are already out the rest, waste majority of that to leave the company throughout the current calendar year. On the remaining 120, there are advanced discussions so that we are going to achieve the 300 FTEs as planned.

In terms of total costs, we managed to bring down the total expected cost to EUR 25 million. Provisions fully booked in our Q1 figures, as you saw. And it brings us an especially attractive payback period. So the majority, almost all of the expected -- the expected cost is related to redundancy payments on the voluntary program, and we're going to see the attractive payback period of 2, rather 1.5 years for the employees leaving the company.

Talking about DEUTZ Group figures Q1 in a bit more detail. We saw already the new orders. They jumped by 30% to EUR 546.1 million in Q1. That is driven by M&A effects. Blue Star contributed very positively here with around EUR 65 million order intake. So it was a very strong order intake quarter on the Energy side.

On the organic side, taking out all the M&A effects, also taking out HJS first consolidation effect, EUR 25 million, we see a rather flat development there.

On the revenue side, increase of 7.5%. If you look in the segments with construction and material handling, rather going down; stationary equipment reflecting, especially the M&A activities around Blue Star, significantly going up more than doubled; agriculture, rather flat; and nice to see the Service business, it grew by 12% on a group level. So partially driven by the Daimler Truck business, which is now fully reflected in our figures on the Service side also from the beginning of the year, but also organically still in the growth models.

On the EBIT side, well, we went slightly down a few millions to 21 million compared to last year Q1. What is the main reason? We say here lack of fixed cost absorption. So if you remember, Q1 2024, we had a 3-shift operations in our Cologne facility in the line #5, where we are producing the lower 4-liter engines. Due to market reasons, we went back to a 2-shift pattern. And that, of course, in the quarter-over-quarter comparison is reducing the fixed cost absorption. This negative impact has, of course, been mitigated.

Profitable M&A. We talked about it, the growth in the Service business organically and inorganically, and of course, also our Future Fit program, where we now see the first effects in our P&L.

Net income, we ended up at minus EUR 10 million, but that is driven by the Future Fit provision of EUR 25 million.

Having a look on the segment view, segment DEUTZ Engines and Services. Just as a reminder, because it's the first time we are officially reporting the new segments, this comprises the business unit Classic or a classical combustion engine business and also the Service business related to those Classic engines. We sold here 30,600 units. That's a 20% reduction in sales volume compared to Q1 last year. And especially here, the effect I mentioned on the production side, almost 26% year-over-year down, resulting in the negative economies of scale that were then compensated on the EBIT side partially.

HJS consolidated from the beginning of '25. We own 50%, but have the full control. That's why it's also fully consolidated.

On the Service business, we see here purely on the Engines & Service segment, almost 11% growth. And as I mentioned before, Daimler Truck off-highway engines are now fully in our accounts, also from the Service side.

Talking about solutions. We see a big jump in the new orders to EUR 70 million. As mentioned earlier, that's mainly driven by Blue Star or basically entirely driven by Blue Star with almost EUR 65 million order intake, which we saw in Q1.

On the revenue side, due to the Blue Star effect also coming up to almost EUR 40 million for the EUR 39 million, that's a significant jump in revenue. The adjusted EBIT on a solutions segment basis is minus EUR 7.5 million. However, here, we need to keep in mind the complete different profile of the 2 businesses we are consolidating here.

We have, on the one hand, our Energy business. We ended up at EUR 3.5 million here. It's important to understand that, that figure is driven down by purchase price allocation effects or complete accounting effects, which we typically have after the acquisition, which is going to reduce over time. And that has drove down the figures by EUR 3.0 million. So adjusted for that would have been at EUR 6.5 million, and therefore at an attractive margin level in our Energy business.

On the New Technology side, we see small revenue still EUR 2 million, EBIT minus EUR 11 million. This is, however, front-loaded, so we cannot simply take that times 4. It's especially front-loaded due to R&D spending. There are EUR 8 million R&D spendings in Q1, also partially related to our hydrogen engine with the last R&D activities there ongoing. So that's going to be reduced going forward.

Having a look on some more KPIs. They all went in the right direction. R&D spending, down 11% on a quarter-over-quarter basis. So we clearly see here the positive effects of our Future Fit program and the clear cost discipline on the R&D side. The split, EUR 14.6 million on the Classic segment or Engines & Service segment, EUR 8 million on the Solutions side. So also clearly investing in the future.

CapEx side, also here, reduction of 18%. This is also a direct consequence for a very strict cost discipline, CapEx discipline, cash discipline. So we are well on track here as well.

Working capital, it went down 2%, closed around 20.3% in the working capital. Ratio inventories, trade receivables slightly increased on the inventory side, that's a typical effect we see in the Q1 after a typically good year-end really. And in this case here, it was offset mainly by the trade payables which were on a higher level due to some material purchases at the end of the quarter.

This brings us to some further KPIs on the next slide. We see here cash flow, operating cash flow, basically reflecting the good operational development, but also the just mentioned working capital effects that directly relates to a free cash flow of EUR 23.4 million in Q1, so that's rather strong. On the free cash flow side, we see a good cash conversion here from our business in Q1.

Net debt went down as corresponding effect, EUR 15 million. So we had EUR 210 million on the net debt, EUR 83 million of that related to leasing. So that still means we have significant and sufficient headroom in our credit lines where we have EUR 450 million to EUR 500 million credit lines available, so completely solidly financed for that net debt level we see.

Talking about balance sheet, while the total equity ratio remains high at 47.4%, slightly reduced due to a bit higher asset base, but also the negative net income, but still very high and solid level. Leverage remains with a slight improvement at a level of 1.3. And the dividend per share, we're going to propose as Supervisory Board and Board of Management to our AGM next week is EUR 0.17 per share.

Thanks a lot. And with that, I hand over to Sebastian.

[Sebastian Schulte, executive]

Thank you, Oliver. Yes. How do we look at the rest of '25 now? First of all, we did -- well, we do not change the guidance. We confirm what we announced with the annual result presentation, and that means we see revenue in the range between EUR 2.1 billion and EUR 2.3 billion, which is still the majority dominated sort of by Engine and Services and EUR 150 million to EUR 200 million out of solutions.

We see the EBIT margin in the range between 5.0% and 6.0%, and we'll see Engine and Services at 6% to 7% and Solutions at minus 10%, where between -- sorry, between minus 10% and breakeven. And as Oliver just outlined, obviously, we have a very different margin profile of Energy and New Tech. Free cash flow, we see a mid-double-digit million euro amount going forward.

So I mean there are obviously -- there's some improvement estimated considered for the second half of the year, and that is supported by quite some important factors. So first of all, like Oliver explained, the cost cutting, our Future Fit program, that will support significantly the second half of the year because that's when the first groups of expensive staff is also then leaving and releasing the personnel costs.

Secondly, obviously, growth in Energy, our continuous growth in Energy. And with all uncertainties are there on the market in general, what we can say is that our Energy business is rather actually looking at further improvement in the second half. That's very new information for us, very positive information. And obviously, the service growth has also continued to support us. New Tech, after the acquisition of UMS, we expect some first -- but these are still small, but first positive effects as well.

So yes, so that's supporting our view on the second half, and we still expect some sort of economic recovery in the second half of the year. But obviously, that's most likely rather influencing in the fourth quarter and certainly not kicking in much earlier. So that's why we feel very confident and comfortable to confirm our guidance as outlined here on that chart.

Last but not least, I want to also announce a little bit our AGM, which happens next week. We just heard it from Oliver, our dividend proposal is like the one in the last year with EUR 0.17 per share. We want to -- we want that our shareholders participate also in this -- or throughout this important transformation of the company on a decent level. So we want to continue paying the dividends always at least from the level of the previous year.

Other than that, we don't expect the sort of major topics for the AGM. I mean, mainly, we are proposing the typical sort of market-based capital authorizations pretty much to renew the status which we had before the capital increase in 2024, where we successfully placed 10% new shares. The AGM '26 will be held here again, as an in-person meeting in Cologne, but that's a bit of a mid- or long-term announcement.

Having said that, yes, thank you very much for your attention, and we are available for questions.

[Operator]

Thank you so much, Sebastian and Oliver for the dive into your first quarter and the presentation. So as mentioned, we will now move over to our Q&A session. [Operator Instructions] And we already received first virtual hand from Jorge.

[Jorge González Sadornil, analyst]

Can you hear me?

[Oliver Neu, executive]

Loud and clear.

[Jorge González Sadornil, analyst]

Perfect. I'm going to go through the web this time. So three questions, if I may. Thank you, again, Oliver and Sebastian. My first question is on the mood of the customers. You mentioned that demand is still -- has still stabilized in the quarter and that the mood was positive in bauma. But in relation to previous comments on some concerns of your clients regarding a possible bottleneck in the second part of the year, is this still this kind of thinking in the sector or the tariffs have a little bit cooled this super strong momentum at the beginning of the year? That will be my first question, please.

[Sebastian Schulte, executive]

Yes. I mean, yes, on the mood of the customers. The good thing at a trade fair like bauma is you talk to pretty much every customer at least in the field of construction. And we see here quite a few European customers who are definitely hopeful and optimistic also because these were the ones driving down demand first and some of them really feel now that their stock is emptying. And we have, particularly in Europe, I mean mentioning Germany, mentioning Nordic countries, mentioning France, for example, we feel -- not we feel, we see first increase in orders, but that's we're talking each about -- each always about couple of hundred engines. But that's sort of the general theme for Europe.

America, we see a bit of uncertainty. It's not a meltdown or die down or anything like that. It's rather uncertainty because it's not clear for the customers to which prices they order best. And you see at the moment, one of our large customers in the U.S., GE, they've got still quite a large stock because they continue to order. And in hindsight, that was, for them, certainly the right decision given the tariff situation. So they're, for the couple -- for the next couple of months a bit reluctant, obviously, to see -- first see what happens.

On the other hand, we have other customers in the U.S. who are still sort of ordering on the typical level. So here, I think it's really the question, what happens after the 90 days of the pause, sort of after the tariff topic expires and what's in the call for the future. So this is pretty much a picture right now. That's what we try to summarize with saying we hear good -- we feel good mood, but it's not translating in orders.

And the other thing in that context is, of course, related to Germany. I mean, everyone was extremely excited when we all learned about the infrastructure spending programs. And we're still excited, and we believe that this will have an impact. The question is which time, as we all know, the German government is now being formed. And so we're all seeing how quickly they -- these sort of programs are being launched. And important -- and that's what we feel from conversations with customers. Everyone wants to be ready, particularly rental companies because the rental companies and construction equipments, they are the ones who then are immediately approach by the customers to fill sort of lack of demand -- or lack of equipment, sorry. So that's on construction.

And agriculture is still fairly cautious, but agriculture is always a bit heavy, a bit more front-loaded in the first half of the year. Yes. So short and the long of it, that's what I can say at the moment on your first question.

[Jorge González Sadornil, analyst]

Very interesting. In fact, one follow-up on this one. So you already saw some decline in North America, and thus, the mix has been compensated by Europe or not really?

[Sebastian Schulte, executive]

I see now, it's not a significant decline. I mean we are -- we see -- we are looking always in our sort of consensus demand for the next 12 months. And we see like -- I think it's less than 1,000 engines down at Americas, but on the other hand, it's always a couple of hundred up for several customers in Europe. So at the moment, it's fairly stable, I would say.

[Jorge González Sadornil, analyst]

Okay. So we might see, before order intake, jump with the cycle -- with the turnaround in the cycle, we might see maybe a weaker quarter in order intake is possible because North America is still not reflecting the tariffs at this point because of...

[Sebastian Schulte, executive]

No. In terms of top line, the second quarter is actually, we expect to be fairly stable for sure. What I think, as much we can say right now, is from a top line point of view and that's also obviously as a consequence from the bottom line point of view, we expect the second quarter to be above the first quarter. It's a bit the question what happens towards the third and particularly fourth quarter.

[Jorge González Sadornil, analyst]

Yes. Understood. And my second question and last question is on the PPAs for Blue Star. So should we consider EUR 6.5 million as a run rate in the future per quarter? And how many years are you expecting this to continue?

[Oliver Neu, executive]

The PPA on Blue Star -- the effect of PPA on the Blue Star in the first quarter was EUR 3 million, right? So -- and that effect is prospectively going down. So we took over, as you saw also last year, a significant portion of order intake or orders -- existing orders that impacted technically also the PPA. So the PPA effect is going down in the second half of the year compared to the first half of the year. So it's been reduced by like EUR 1.5 million or so. So actually, the run rate purely impacted by PPA effect should even be higher by EUR 1.5 million or so going forward.

[Jorge González Sadornil, analyst]

Okay. And we also...

[Oliver Neu, executive]

Yes, per quarter then. Yes.

[Jorge González Sadornil, analyst]

Okay. EUR 1.5 million per quarter, and we should expect this to continue in '25, and '26 and '27?

[Oliver Neu, executive]

So the EUR 3 million PPA is going to reduce by like half for the second half of the year, not per quarter. That's to be clear precise. So that's prospectively phasing out, but there's a bit of impact next year.

[Operator]

[Operator Instructions] So then, we move on with [ Dario Dickmann ], not anymore. So with the Stefan Augustin. Mr. Augustin, you should be able to speak now, to unmute yourself.

[Stefan Augustin, analyst]

Hello?

[Operator]

Yes. Now we can hear you.

[Stefan Augustin, analyst]

Great. I have a question on the -- your expected capacity planning on Blue Star and the Energy business. You had a very strong order intake from the statements that even the second half could be better than the first half. Do you have plans to ramp up the capacity in Blue Star in North America significantly?

[Sebastian Schulte, executive]

Stefan, in principle, of course, we have the plans. Blue Star currently operates in a 1-shift operation. And we see currently a potential for output increase within the 1-shift operation, probably around 10% to 15%. And that's at the moment also the year-over-year growth rate we see. It's above 10%, slightly above 10%. So we are really on the edge of needing to increase capacity. And that's something we're currently evaluating because obviously, we want to participate and enjoy the growth.

Currently, we're seeing, as I indicated earlier, the growth year-over-year and also growth like from our current estimates compared to estimates we had when we entered into the year '25. Is it already the point in time that we're adding a second shift? Not yet, but obviously, we're preparing ourselves for that. But I think it's clear why not yet. We are currently at Blue Star around EUR 150 million to EUR 160 million revenue. And if you double capacity, I mean you're holding capacity to also double revenue. And that's a huge step. So we're investigating what's necessary, but we are well prepared, and that's actually -- that's a positive thing because we're talking about 1-shift operations. So it's adding a second shift or a partial second shift is always easier than to jump from 2 shifts to 3 shifts. That's much more difficult as we know from our home base here in Cologne.

[Stefan Augustin, analyst]

Sebastian, on the New Tech, let's say, R&D costs, which have been quite high in Q1. How quickly is that going to go down? Is there -- could you give us a rough idea?

[Sebastian Schulte, executive]

Quickly, very quickly, because, Oliver, I think indicated it, and as you know, our R&D efforts in New Tech, historically, in the past 3, 4 years, they've always been roughly 50% on battery electric and 50% on the hydrogen combustion engine. And with the current assessment of the market, I mean, first of all, that fairly huge development project under TCG 7.8 hydrogen combustion engine, that's consumed a lot of money in the last 3 years, but we now brought these engines to serial readiness. I mean, as always, there are always improvements and further development needed, but not significant or not incurring significant costs anymore in the future.

And we're still working on placing these engines in the larger order, but we don't see this coming anytime very, very soon to get here, to see a huge demand for hydrogen combustion engines. And that's also why we decided to remain with the one almost completely developed hydrogen combustion engine, the 7.8 in our portfolio, rather than adding another one because if we now actively decided we are -- we would add another engine in the portfolio, that would mean that we would continue spending R&D on that high run rate in New Tech for the hydrogen products, but we don't see the market as of yet. So that would not be the right allocation of capital. So that's why we're pretty much seeing the effect very, very quickly. That's why we highlighted it also in the presentation.

[Stefan Augustin, analyst]

So would it be fair to assume something like if we have the EUR 7 million R&D at Solutions in the first quarter and we take off the 50% for the hydrogen part, that we are roughly EUR 3 million, EUR 3.5 million lower on the R&D costs in Q2 already?

[Oliver Neu, executive]

In Q1, we had EUR 8 million R&D expenses, and I think it's fair to assume that going forward from Q2 onwards, it's going to be EUR 2 million to EUR 3 million lower on a quarterly basis.

[Operator]

Now then we move on with [ Dario Dickmann ].

[Unknown Analyst]

Could you comment a little bit on the agriculture sector because by looking at the order intake by application, one can see a book-to-bill ratio of roughly 0.5. And current industry assessments from CEMA, for example, the business climate index seemed to have improved significantly over Q1. Do you see some improvements going on in April or over the next month?

[Sebastian Schulte, executive]

Dario, we need to distinguish here. And first of all, we share your information or we know -- we have the same information that the business climate index is improving in agri, the climate. But agri is always -- not only this year, but always, for us as an engine supplier, cyclical that it typically favors the first half, even the first quarter because of the timing of harvesting season.

So a low book-to-bill in agri in the first half of the year is actually a principal normal because customers do not order engines now to be delivered in, let's say, February or January 2026. So typically, you would see in the first half, a low book-to-bill. Therefore, in the second half, rather larger book-to-bill in agri. And that's why we share -- we see that customers are beginning to speak positively about '26, but certainly, we don't -- in agri, we do not expect any significant uptick in '25, purely for the normal seasonality of the business.

[Unknown Analyst]

Okay. Great. And could you maybe share a rough breakdown of end market of the Rolls-Royce business you acquired? .

[Sebastian Schulte, executive]

Yes. It's -- just a second. So it is -- so we see it's -- I mean, the end market is about 30% is agri, another 30% -- well, actually about 20% is construction. We've got a bit of material handling, and we've got also some special applications in the marine context, but also in like heavy cranes. But there is a fairly high share of agri, and that relates to particular one large customer, the German company, CLAAS.

[Unknown Analyst]

Okay. Great. And maybe to get back last question to the PPA. So -- did you say that it should paid out already in '26, '27, if I understood it correctly?

[Oliver Neu, executive]

There will be some PPA effects also still in '26 and '27, but it's significantly reduced.

[Sebastian Schulte, executive]

There are 2 steps of the PPA. The one -- the first step, which will go down quickly, significantly relates to the order book, which we assume which we took over, and the remaining step relates then to plant equipment and others, which takes a bit longer.

[Operator]

So then we come back again to Jorge. So maybe he has some follow-up questions.

[Jorge González Sadornil, analyst]

I have two follow-up questions. One, on regards of the massive blackout in Spain. Do you see any potential business for you in the second part of the year coming from a special request for your stationary equipment produced here in Europe? That will be my first question, please. .

[Sebastian Schulte, executive]

Well, first of all, to be extremely transparent, obviously, as of now, we do not see any specific or concrete orders coming out of that blackout which happened early this week. We do, of course, made or we made always the experience now in the U.S. and also Blue Star has made this experience before being acquired by DEUTZ, that after a hurricane or any sort of natural disaster, which leads to blackouts and so on, typically 3, 4 weeks later, orders are being placed.

So in principle -- and I need to be careful how to phrase that because I don't want to relate blackouts or label blackouts in Spain and Portugal as something positive for us because, obviously, it's not a positive thing, but it certainly underlines that it was the right decision for DEUTZ to enter into this market with power generators, particularly for the emergency provision of electricity.

It also underlines that we are continuously scanning the market, also with a focus on Europe, in identifying potential acquisition targets such as Blue Star. I mean, it will be difficult to find, obviously, an equivalent of Blue Star, but you know what I mean. And obviously, even with the existing, still sort of low scale offering which DEUTZ has in power generation, also beyond the United States, we are positioning ourselves as a provider of solutions also for -- also in Spain and Portugal.

So sort of the answer, long -- short answer instead of a long one, yes, we see potential, and we see that we are -- that it was the right decision to go into that market. Can I tell you that this blackout translates into X million order intake? Not at this point in time. But we're working on that because we -- we're obviously also reading the news and have already instructed our sales people to go out.

[Jorge González Sadornil, analyst]

I read the news, and there were some winners as supermarkets that cut their own gensets. And I was wondering if you have an idea of the percentage of, for instance, supermarkets and other potential clients that for them is critical to keep the power in these kind of situations. If they might, yes, post some orders, but I think your answer is pretty valid.

[Sebastian Schulte, executive]

But Jorge, it is -- we talked so often about this in the context of the United States. And as you and probably others in this call also know, one of the most important groups of customers in the U.S. are the supermarket. It's Walmart and it's Target, which also placed the first order at Blue Star now. And the logic behind that is well known and long known in the United States, and we may see this now approaching also Europe, where this hasn't been so much of a problem in the past. But certain trends, unfortunately for the industry, but fortunately, for those who provide solutions, will develop in different parts of the world in a similar fashion.

[Jorge González Sadornil, analyst]

Very interesting. And my very last question on the guidance. So taking into account the tariffs and other developments we have been commenting, do you still believe the mid of the guidance as the most likely scenario for you? Or how do you see the year developing? Do you still think that rebound in Q4 will be quite relevant to achieve the midpoint?

[Sebastian Schulte, executive]

That's our current estimation, Jorge. And as I said earlier, we see some supporting factors, on the bottom line, the cost cutting, on the top line, the growth in Energy, on the top line, the potential in New Tech, the growth in service. This is all supporting our most top line, everything top and bottom line. But obviously, there's still a question mark, what is exactly the sort of -- when is the change, the real sort of upticking point in the Classic market development. But in principle, as of now, we see the midpoint as a very realistic assessment. And -- but of course, at this point in time, we can neither rule out that it improves or even worsens, but we'll see the line depending on the drivers, which I just mentioned.

So it's very sort of, I think, good assessment, which we can currently give in the light of everything we have. And we know it's difficult, sometimes difficult for you and everyone to put this into the financial models because typically, it's always easy to run like-for-like comparisons. But DEUTZ, at the moment, at least since the last 2, 3 years, is in a position that it is not a like-for-like. The portfolio changes, but also profitability profiles change. So that's why it's probably a bit more difficult to assess from the outside year development because the typical like-for-like comparisons don't -- well, have only limited explanatory power.

[Operator]

So now we move on with the questions from Miro Zuzak.

[Miroslav Zuzak, analyst]

Yes. Hello. Can you hear me? .

[Sebastian Schulte, executive]

Loud and clear.

[Miroslav Zuzak, analyst]

It's Miro Zuzak, JMS Invest. I have a couple of questions. I would like to take them one by one, if I may. The first one is again regarding the tariffs. You mentioned that your clients, basically, they are a bit hesitant. We know that Trump ultimately wants to have industrial capacity back in the country. And I wanted to ask what you're thinking around this is basically. How does -- do these tariffs affect your thinking about where to put production or where to increase capacity to potentially build an engine line? I don't know whether that's possible at all in the U.S. So how does -- do these tariffs affect your thinking? That's the first question.

[Sebastian Schulte, executive]

Yes, Miro, in the -- for your question, thank you very much. So I mean, first of all, our U.S. business is about 50% Engines out of Germany and then each quarter, Energy, which is very, very localized, and Service, which is also very, very localized.

So the Energy, which is the most profitable part as well with Blue Star. I mean, here, Blue Star uses engines currently not by a large extent, DEUTZ engine, some of them imported, some of them from local production, and that is very unlikely to change because even -- because we're talking about a little more than 1,000 engines for this point in time coming from several suppliers. So there's not really a point in our thinking about localizing here.

Service obviously has a very high local share via all the sort of maintenance hours, the work of technicians at the machine and the only imported elements are parts out of Germany, and these are typically, relatively speaking, low price, high margins. So that is not a huge impact on tariffs.

On the Engine side, it's obviously different. And we are assessing the potential benefits, but also costs of local assembly. But we've got a couple of challenges and also one opportunity. The challenge is, of course, we're talking about a bit above 30,000 engines, sub-4-liter, coming from Cologne to the United States, and that is not necessarily a critical number of engines justifying in our own assembly line. So we would obviously then also take this -- well, take this away from like-for-like again. Now I'm using the word like-for-like, we would take this away from the German facilities and create other challenges here. And we will only need to do that. I feel pretty much forced to do that because otherwise, competitors would gain the share, which we, in this particular field, only see in a limited fashion.

But the major challenge, of course, is we need to know what the environment is in the long term. Because you don't move an assembly line in a week or a month. It typically takes significantly more than 12 months. So in order to do that, you need -- we would need to know very, very clearly what is the situation in the next 3, 4, 5 years. And I think that's what every player in the industry currently is struggling a little bit with. So we're not -- cut a long story short, we're looking into these options, but at the moment, it doesn't look like that's the most promising alternative.

[Miroslav Zuzak, analyst]

Okay. Maybe a related question. So the dollar lost quite a bit versus the euro versus any other currency, and there are like macro guys who predict that the dollar is basically strategically going to be lower going forward. Now there are two things. I think the U.S. dollar effect was still positive in Q1, but will probably, because of the base last year, but in Q2, probably it will be negative. Could you give me a number what the impact will be on your, basically order intake or the top line like from the negative, just the translation effect of the lower U.S. dollar? That's the first question regarding U.S. dollar.

The second question regarding U.S. dollar is, is there a change in the competitive forces? So are there -- you mentioned some local production there, producing all those engines for Blue Star, but are there any U.S.-based -- U.S. locally produced engine manufacturers who compete against your 30,000 engines that you ship from Germany. So two questions regarding FX effect.

[Sebastian Schulte, executive]

Let me start with the second part of it, and then Oliver will speak more about the currency in particular. The level of the -- the competition level in our sub-4-liter segment in the U.S., well, there is competition. But the one aspect is, are we currently a single source in the applications of the customer? Or are we a dual source? Because even if there is a competition, an OEM doesn't replace an engine also overnight. Obviously, when it becomes unbearable to cover costs. So then this sort of encourage you to do that more quickly. But that also then you need to take into account R&D costs to change the application and so on and so forth.

We have obviously -- we looked in where our engines built into it. We see that there is -- there are competitors in there where we are not single source, and that's most of them. But if you look at them, some competitors come from -- and I don't want to go now in this sort of relatively public environment and mention names, but you see some competitors producing in the United Kingdom. You see some competitors producing in Japan. You see some competitors producing other parts of Europe. So there is not the sort of light switch effect that will change immediately because all those countries I just mentioned, I mean, they are equally facing the uncertainty on tariffs.

On the dollar, and before handing over to Oliver, we typically have agreements with the customers also on currency exchanges. Some of them be factored in euros. Others, we factor formally in dollar, but there is a currency exchange adjustment clause behind that. And let's also bear in mind that in the last years, I mean, the dollar significantly strengthened. So we are moving it back to a more long-term level. But Oliver, I think maybe you want to add something on that.

[Oliver Neu, executive]

Yes, absolutely. I mean, we see that we are in some of our long-term boundaries nowadays. So the development is not concerning at that point in time here. And also, we do some systematic hedging activities. So at least for year '25, we are hedged to a good degree, to the extent possible. Of course, translation risks remain as it is for all internationally operating companies. So that's typically translation risk you'll see. And on the -- I mean, on the top line, specifically, we also see like positive developments on the Energy business, compensating that partially. So I wouldn't see an overall big concern on that side.

[Miroslav Zuzak, analyst]

But can you give me a number? So if I just look at the dollar, which is now effective for Q2, say, $1.14, and I look at the dollar Q2 last year, it was maybe $1.09, would that be like the $0.05 times the dollar exposure that you have, say, 25%, 30%? So 1%, 2% negative impact on top line. Does that make sense?

[Oliver Neu, executive]

Well, I think what Sebastian said earlier, there are customers which we are factoring in always and the invoices in euro. We have some currency exchange clauses also in that. So that is, of course, reducing the exposure towards the dollar also on the top line. But of course, I cannot go into detail of the individual customer contracts since we have a very few big customers there. So that simple calculation, which you made is mitigated to a certain degree by the just mentioned effects.

[Miroslav Zuzak, analyst]

Okay. Okay, sure. So it's less than that. Very good. The other question is, actually I have to admit, I don't have a clear view about all the exact consolidation dates of the acquisitions. But can you give an organic growth number in orders for Q1 without the acquisition effect?

[Sebastian Schulte, executive]

Pretty much flat, very low negative, but pretty -- we would we call it flat. It's also the way we put it on the chart. So organically flat. And well, the consolidation effect drove the growth in order intake, but particular supported performance.

[Miroslav Zuzak, analyst]

Okay. Cool. Then another one. All else equal, I mean, it's a bit of a theoretical question, but if you look at your cost structure, by how much is -- or are costs going up on a like-for-like basis? And this involves obviously the personnel cost, the tariff, the agreements that you made with the labor unions, but might also have some offsetting effect with the material cost, which I think is coming down -- has come down quite significantly. Maybe you can give us like a globalized number. Again, this is more to understand the ballpark. It's not about to fill a number into my model.

[Sebastian Schulte, executive]

I mean, ballpark, I say, like-for-like -- and as I said earlier, it's very difficult at the moment to make like-for-like statements in these changes, but ballpark, like-for-like, probably without the countermeasures, the costs are increasing overall by, let's say, 2%, 2.5%, that accounts, obviously, for quite a -- for a little, relatively speaking, higher increase of personnel cost in Germany due to the union negotiations, which still again was, I think, 3-point-something, so not terrible. And then we've got, obviously, on the materials side, a development.

But that's one of the reasons, Miro, why we entered also the -- our Future Fit program to reduce costs significantly by EUR 50 million on an annual basis. So that, let's say, net, we're going to reduce costs. And as Oliver indicated earlier, we are in quite good progress.

If you just look at, obviously, the P&L, the accounts in our numbers, and you see not only on the top line, but you see then also on account by account, of course, the cost increases in personnel, in R&D -- or not so much R&D, but in G&A and so on. But like-for-like, I would pull the number 2.5% roughly.

[Miroslav Zuzak, analyst]

Okay. Well, I have two questions left.

[Operator]

Miro, unfortunately, I regret to interrupt you, but in view of the time, we need to come to an end today. But I'm quite sure, Mark from Investor Relations will be happy to assist you afterwards.

So yes, ladies and gentlemen, thank you, everyone, for joining and to show interest in DEUTZ. And also a big thank you to you, Sebastian and Oliver, for your presentation and the time you took today to answer all the questions.

From my side, it was a pleasure to be your host today, and I wish you all a lovely remaining Wednesday. Happy National Holiday tomorrow to those who are based in Germany.

And with this, I hand back to you, Mark, for some final remarks, which concludes our call.

[Mark Schneider, executive]

Thank you very much, Sarah. Thank you very much, all of you. And yes, please do reach out to Rolf, Robert and me, if you have any further questions like you have, Miro.

In any case, we are looking forward to interacting with you around our virtual AGM next week. Have a successful day also from our side. Enjoy the bank holiday in Germany tomorrow, and hope to talk to you soon. Bye-bye.