Knorr-Bremse AG

Dear ladies and gentlemen, welcome to the call for the earnings of Q1 2020 of Knorr Bremse AT. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. If any participant has difficulty hearing the conference, please press star key followed by zero on your telephone for operator assistance. Today's conference will be led by Bernd Eulis, CEO, Dr. Jürgen Wilde, member of the board and head of RBS. Dr. Peter Leier, member of the board and head of CVS. And Andreas Spitzauer, head of Investor Relations. May I now hand you over to Andreas Spitzauer. Please go ahead, sir. Thank you, operator.

Good afternoon as well as good morning, ladies and gentlemen. My name is Andreas Spitzauer, head of Investor Relations of Knorr-Bremse AG. I want to welcome you to Knorr-Bremse conference call for the release of the first quarter 2020 results. As a reminder, the conference call will be recorded and is available on our homepage www.knorr-bremse.com in the next relation section. Here you can find today's presentation and later a transcript of the call. It is now my pleasure to hand over to our CCO of Knorr-Bremse, Jürgen Wilder, head of our rail division, and Peter Leier, head of our truck division. Please go ahead.

So, thank you, Andrea. Dear ladies and gentlemen, I warmly welcome you to our conference call for the first quarter results of Knorr-Bremse in 2020. First of all, I would like to present the highlights of the first three months of 2020. followed by a more detailed explanation, especially on a divisional level. Thereafter, my two colleagues in the executive board, Jürgen Wilder and Peter Leier, would like to give you an update on the current COVID-19 situation and its divisional effects before I conclude with a summary. Overall, Knoll-Bremse's start into 2020 was actually very sound, despite the well-known market turbulences. First and foremost, our financial results have been solid in both our rail and truck divisions. The increasing sales in the aftermarket business and its positive impact on our profitability is an important proof of our resilience. We started early with countermeasures against the impact of COVID-19 and implemented them quickly. In this respect, our European and American operations benefited greatly from the experience of our Chinese colleagues. On the financial side, Knorr Bremse is very solidly positioned. We further increased our liquidity, which enables us to maneuver the company safely and confidently through these difficult times. In addition, this solid financial basis enables us to take advantage of any opportunities as they may arise. So let me continue with chart three and our KPIs in the first quarter 2020. To not run the start into 2020 was obviously not as we or anyone would have expected considering the COVID-19 pandemic. Nevertheless, our performance was still very solid and showed a high level of resilience, especially when compared to our peers and other segments in the industry and pure play automotives. Let me take you through the most important KPIs. Orders received were at 1.6 billion euros, a decrease of 16% compared to the same quarter last year. Reasons have been first effects of the COVID-19 pandemic, especially in China, as well as the already expected weaker demand dynamics in the truck market. In addition, the timing of contract awards in the rail division influenced by the year-over-year development. You will remember he recorded a very strong order intake in Q4 2020. Having said that, with 4.7 billion euros, our order book was almost stable compared to the previous year, which gives us a good visibility for this challenging year. RVS supported this development with an increased order book. At 1.6 billion euros, revenues decreased by 7.3% or by minus 128 million euros compared to the first quarter of last year. This development was driven predominantly by CDS. Our FFDA margin, consequently, decreased from 19.0% to 17.8% in Q1 2020. Given the current adverse economic and market environment, We consider this to be a very solid level of profitability. Let me dive deeper into our results on chart four. Order intake on group level at the end of March 2020 declined by 16% to 1.59 billion euros compared to the same period in the previous year. This development was partly supported by the FX development and the integration of the Hitachi steering business last year. On the other hand, power case is not included in the Q120 figures. Our book-to-bill ratio in Q120 remained solid, reaching 0.98. The development of the order backlog in the first quarter of 2020 was particularly pleasing. Compared with the previous years and the previous quarter's figures, the development of the order backlog has been almost stable. It reached 4.65 billion euros end of March 2020. Let me continue with our revenue development on chart five. In the first three months of 2020, revenues on group level decreased by minus 7.3%, or in absolute numbers, by minus 128 million euros, to 1.63 billion euros. On an organic level, we saw a decline of 7.9%. The revenue development overall was positively driven by dynamics in the APAC region, which showed a much more stable development despite early COVID-19 pandemic effects over February in China. This development was foremost driven by the truck division and the fast recovery compliance ourselves. In Europe and North America, we recorded significant declines in revenues. As expected, the reasons for this are the decline in truck production rates of the truck OEMs, which could not be offset by the positive revenue development in rail in Europe. The revenue development in April was challenging. The COVID-19 pandemic and the associated lockdowns of customer plans had a significant negative impact on our revenue development in Europe and North America. On a group level, we recorded year-on-year revenue declines of more than 40% in both regions. Fortunately, we saw a slightly positive year-on-year sales growth in APAC, including China. Overall revenues in April closed around 30% below last year. but with positive EBITDA, with positive EBIT and a positive cash flow. May should be on a similar level as most OEMs are back in production, but still at lower levels. Let me continue with the development of our profitability on chart six. In the first three months of 2020, group EBITDA was €290 million after €334 million in the previous year quarter. The FHDA margin amounted to 17.8% after 19.0% in the previous year. This decrease mainly resulted from volume effects of a declining Group OE business with corresponding impact on the operating leverage. This margin impact was mitigated by high margin earning contributions from growth in the aftermarket business. The aftermarket share increased from 31% in the first quarter of 2019 to 37% in the first quarter of 2020. In absolute figures, aftermarket increased by 11% to €603 million. This increase was supported by both operating divisions. The group EBIT of 224 million euros also saw a volume-related decline of 51 million euros. At 13.8%, the EBIT margin was below the previous year's level of 15.6%. The higher deviation compared to the EBITDA of the previous year quarter comes from higher depreciation due to increased investment activities. In summary, we consider the Q120 to be a solid proof of Knorr-Bremse's business model in the currently challenging market environment. Now turning to slide seven. Our flea cash flow in the first quarter 2020 was negative, reaching minus 61 million euros. The year-on-year decline is due to lower profitability, higher capital expenditures, and the 12 million U.S. dollar payment for the settlement agreement of a class action lawsuit in the U.S. In addition, please keep in mind that our free cash flow was quite strong in the fourth quarter of 2019. Therefore, we had a different starting point regarding cash flow at the beginning of this financial year. was impacted by lower profitability as well, but with 26.7%, well above most other companies in the capital goods sector. While we have initiated a CapEx management program, we still see an increase of 19 million euros to invest in future growth options in both divisions. For example, we continue to expand the capacity for air disc brakes in North America and invested in measures to increase the level of automation in our plants. Also, investments were made in software development for our steering business and R&D to prepare our competitiveness post-COVID-19. We are very pleased that all regulatory approvals and requirements for the acquisition of the steering system manufacturer Shepard in the U.S. have now been met. We expect the closing of the deal within the next few days. This acquisition will transform Sondremse into one of the world's leading steering system manufacturers for commercial vehicles. And together with our leadership in the brake business, we are now in an even stronger system supplier position to set new standards in the industry. Let's move on to the divisional view, starting with RVS on slide eight. In the first quarter of 2020, order intake of rail vehicle systems was down 16% to 874 million euros. This decline was no surprise as to the very strong performance in Q4 2019. I would like to remind you that development in the rail industry with its long cycles do not go well with quarterly reporting. There are always fluctuating large orders in individual quarters, which make comparisons difficult. Projects in rail are generally independent of seasonality or cyclicality. In addition, the COVID-19 pandemic also led to a limited decline in RVS order intake in Q120, as the first effects were felt in China. In the current discussions on economic support programs to counter the negative financial consequences of the pandemic, we are seeing initial government considerations to promote the rail industry. Should these become more tangible, RVS will certainly benefit. Overall, we believe that the existing long-term trends in the rail industry holds true despite the current uncertainty. While the order intake level in the first quarter of 2020 in Europe was similar to the level of the first quarter of 2019, North America showed a significantly lower demand in the freight sector, locomotives, and the aftermarket due to lower utilization rates of existing vehicles resulting from lower transport volumes. The book-to-bill ratio developed accordingly to the lower order intake. It moved from 1.14 in the first quarter of 2019 to 0.98 in the first quarter of 2020. The order book, on the other hand, increased by 6.6% compared to the same period of the previous year, which provides good visibility for the rest of the year. We assess the order backlog of our rail division as very solid and do not expect any order cancellations. We do see selected shifts of tender bidding processes. And now moving on to the revenue and profitability slide of the rail division on chart nine. In the first three months of 2020, RVS recorded revenues of 892 million euros, which decreased by 2.1% year over year and was flat on an organic basis. Europe was the growth engine of the division in the first quarter supported by the good development in the aftermarket. In North America, on the other hand, we recorded overall a decline. Lower revenues in freight and locomotives could not be mitigated by the positive trends in the service business. APAC, including China, also declined overall. The lockdowns in quarter one had a negative impact on most revenue segments like ISP and the aftermarket business. On RVS group level, noticeable growth in the aftermarket business compensated for the weaker OE business. Respectively, the aftermarket share increased further in the first quarter of 2020. The development of RVS profitability in the first quarter of 2020 was mainly affected by the lower revenue in the profitable APAC region and a less favorable project mix. The positive contribution of our implemented cost measures could mitigate some of the margin decrease. FHDA for RVF came in at 186 million euros in the first quarter 2020 and was down 7% compared with last year. The FHDA margin fell from 21.9% to 20.9%. On slide 10, I'd now like to continue with the development of our truck division. The ordering pay for CVS was 715 million euros in G120, which is a decrease of 17% year on year and of minus 22% on an organic level. This development was expected and reflects the normalization of the European and North American truck market after a period of strong growth. In addition, there were first negative effects of COVID-19 on demand in both regions. In APEC, the development of order intake in the first quarter of 2020 was stable year on year, well supported by the acquisition of the Hitachi steering business. The order book of our truck division amounted to 1.1 billion Euro at the end of the first quarter 2020, which is a decrease of 19% year on year. Compared to Q4 2019, so before the COVID-19 crisis, the order backlog decreased only by minus 1.9%, which can be called almost stable, especially under the current conditions. Let's move on to slide 11. Our key message here is that Panoramza managed to outperform the truck production rate-induced downturn across all regions. Our CDF division posted 736 million euros in revenues for the first quarter 2020, compared with last year's figures. This is a decrease of 13% and on an organic level of minus 16%. While this development is not pleasing, it also shows that we clearly outperformed the global truck production rate, which shows a 27% decline. The revenue development of CES in every major region strongly outperformed the respective truck production rate year on year in the first quarter 2020. This clearly shows our market strength as well as the support for growing content per vehicle and aftermarket as well as market share gains. Driven by a lower truck production rate in Q1 2020, customer demand was lower in the European and North American truck markets which led to lower OE revenues. Besides the mentioned expected market slowdown in March, OE revenues were already affected by COVID-19 impacts. In the APAC region, COVID-19 negatively impacted our revenue development in Q1 2020, but we gained market share in China where CDS is now the market leader. Overall, and like rail, the truck division reported a very gratifying development of its aftermarket business, which grew year-over-year 10% to €211 million in the first quarter of 2020. In the first quarter of 2020, CVS achieved an EBITDA of €108 million, which is 24% down compared to the same period of the previous year. The FHA margin amounted to 14.6% compared to 16.6% a year ago. In context to the current environment, this is a good performance of CVS, also when compared with our peers. It was supported by our sales mix, our fast implemented cost adaptation and cash measures, and in general, the quick reaction to the COVID-19 pandemic by our task force team. With this, I would like to hand over now to my colleagues. First, Juergen Wilder, member of the executive board and head of our rail division. So Juergen, please go ahead.