OUTLOOK

The global economy is likely to continue to grow in nearly all regions of the world in 2011, albeit at a slightly more moderate rate than in 2010. Economic experts at Deutsche Bank are forecasting expansion of 4.0 per cent (2010: 4.8 per cent).

Growth of 2.3 per cent is expected for the G7 group of industrialised nations in 2011. The forecast for the US economy is 3.2 per cent, which is significantly higher than the 1.2 per cent anticipated for the euro zone. Germany will be the main engine of growth in Europe: Deutsche Bank expects the economy there to grow by 2 per cent, while the German government has in fact raised its latest estimates from 1.8 per cent to 2.3 per cent. Japan's GDP will continue to contract during the first quarter of 2011 and will increase by only 0.8 per cent over the year as a whole.

The emerging markets will drive the global economy. GDP will increase by 7.6 per cent in Asia (excluding Japan), with China and India seeing very similar levels of growth at 8.7 per cent and 8.2 per cent respectively. The growth engine in South America will continue to be Brazil at 4.5 per cent.

Although economic experts still believe there are threats to growth, the future is looking more and more optimistic and positive signs are increasingly emerging from the economy. US consumers are starting to spend more, while the manufacturing sector is steering a course of stable growth. The potential insolvency of euro-zone countries with high debt levels continues to pose a problem, and tensions remain in the financial markets. Decisive action from politicians is required here. Central banks in the emerging markets have begun to tighten their monetary policy in order to prevent the economy from overheating.

In Germany, exports remain the main driving force behind the recovery, which is now increasingly being supported by domestic demand as well. Interest rates remain low, providing favourable conditions for capital expenditure on equipment and construction, while rising employment and higher wages are boosting personal consumption.

Diesel engine market continues its strong recovery

The forecasts of Power Systems Research (PSR), an international market research organisation, suggest that the global diesel engine market²⁾ will continue to recover significantly,with demand for engines in the market segments relevant to DEUTZ anticipated to rise by more than 9 per cent in 2011. Stringent emissions standards in Europe and the USA, coupled with worldwide economic recovery, will generate strong growth in these markets, which are critical to DEUTZ: the 2011 growth forecast is 11 per cent for the European market and 10 per cent for the North American market.The Asian market, in which DEUTZ occupies a strong position, will continue its upward trend with growth of 7 per cent. Starting from a low level, the Automotive application segment will achieve the strongest growth of around 15 per cent, followed by Marine Equipment at 10 per cent and Mobile Machinery at over 9 per cent. The Stationary Equipment segment will also expand by a significant 9 per cent. With growth of more than 5 per cent forecast, the less volatile Agricultural Machinery segment, which holds out promising growth opportunities for DEUTZ, should continue to perform well. The positive trend across all regions and segments will extend into 2012; PSR is forecasting growth of approximately 17 per cent for 2012.

In 2011, our activities will focus above all on helping suppliers to adjust to the increase in demand as we step up our production programme. However, we do not anticipate any bottlenecks because we identified critical areas in terms of demand and secured additional suppliers in 2010.

Although the continued recovery of the global economy is still threatened by a number of risks, our customers' demand for our engines is stable and very encouraging across all segments. We therefore expect unit sales of significantly more than 200,000 engines and year-on-year revenue growth of 25 per cent for 2011.

The excellent growth in unit sales and revenue, combined with the cost savings that we have achieved, will continue to boost our profitability. Moreover, DEUTZ (Dalian) Engine Co. Ltd., our Chinese joint venture, will make a significant contribution to earnings for the first time.

Overall, therefore, we expect to generate an operating profit (EBIT before one-off items) in the high double-digit millions of at least €80 million.

Despite the higher demands placed on working capital during an economic upturn, we still aim to sustain a working capital ratio of less than 13 per cent at the end of the financial year. We intend to permanently maintain our equity ratio above 30 per cent.

Capital spending will be slightly higher in 2011 than in 2010, with almost half of investment being made in connection with the development of new products. We will be investing to a similar extent in our joint venture with Bosch and Eberspächer – “Bosch Emission Systems GmbH & Co. KG” – in 2011. This joint venture will be producing fully integrated exhaust aftertreatment systems for DEUTZ and the global market in time for the introduction of the Tier 4 Final exhaust emissions standard.

Continued increase in commodity prices

As in 2010, we expect commodity prices to rise further in 2011 because the global economy is continuing to grow rapidly, particularly in commodity-intensive sectors. We have factored this into our planning.

Moderate rise in collectively agreed pay

The current collective pay agreement, which does not expire until 31 March 2012, provides for a rise in collectively agreed pay of 2.7 per cent with effect from 1 April 2011. This creates planning certainty as far as staff costs are concerned. The parties to the collective pay agreement are expected to hold initial exploratory talks about future pay adjustments and other collective bargaining issues in late 2011.

Flexible headcount adjustment

Where we take on new staff because of rising unit sales, we will conclude employment contracts with a flexible term so that we can quickly respond to future employment fluctuations. We will also introduce site-specific shift models in this context.

We will maintain a high level of staffing in research and development in order to launch new series of engines on the market as scheduled.

Collective agreement on preretirement part-time employment

As in 2010, we will again use the “Collective agreement concerning the flexible transition into retirement” in 2011, which will give employees who meet the necessary requirements the opportunity – within the collectively agreed quotas – to retire early by switching to preretirement part-time employment.

On 1 January 2011 the exhaust emissions standard COM III B came into force in the European Union and the corresponding EPA Tier 4 Interim standard came into force in the USA. Both standards apply to diesel engines of between 130kW and 560kW used in non-road applications. Similar standards for smaller engines in the power output range of 56kW to 130kW will be introduced on 1 January 2012, and even more stringent exhaust emissions limits will be introduced in 2013 and 2014. The regulations for these limits, which are the final ones currently planned, require nitrogen oxide (NO_x) emissions to be reduced by 95.7 per cent and soot particles by 96.5 per cent relative to the first limits, which were introduced in 1999.

It will no longer be possible to satisfy the emissions regulations that are due to come into force in stages from 2011 by making internal engine refinements alone; instead, sophisticated additional exhaust aftertreatment systems will be necessary.

Because development of the two new engines with capacities of less than four litres and the adjustment of engines to the new emissions standards are at an advanced stage, research and development expenditure will fall from 2011 onwards.

Although the 2012 economic forecasts for the euro zone, especially Germany, are somewhat more cautious, buoyant growth is expected to continue worldwide in 2012.

This will also have a positive impact on DEUTZ’s revenue and operating profit. The EBIT margin will climb to approximately 7 per cent as a result of the cost savings generated by the MOVE programme as well as other improvements achieved by the MOVE FAST programme, especially as far as our top-line growth is concerned.