Knorr-Bremse AG

Dear ladies and gentlemen, welcome to the call for the earnings Q2 2020 of Knopf Benze 18. 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 difficulties hearing the conference, please press star key followed by zero on the telephone for operator assistance. The call will be led by Frank-Marcus Weber, CFO of Knopf Benze 18. and Andreas Bittsauer, Head of Investor Relations. Followed by Q&A session together with the other two members for the Executive Board, Dr. Peter Leier, Head of CES, and Dr. Julian Wiener, Head of RES. And now I hand you over to Andreas Bittsauer. Please go ahead, sir.

Thank you, Operator. Good afternoon, as well as good morning, ladies and gentlemen. My name is Andreas Wittrauer, Head of Investigations of Knorr-Ramse 18. I want to welcome you to Knorr-Ramse's conference call for the second quarter results of 2020. As a reminder, the conference call will be recorded and is available on our homepage www.knorr-ramse.com in the Investigations sector. They can find today's presentation and later a transcript of the forum. It is now my pleasure to hand over the floor to Frank-Marcus Weber, our new CFO of Knorr Bremse. Please go ahead, Mr. Weber. Thank you very much, Andrea. Dear ladies and gentlemen, I warmly welcome you to our conference call for the second quarter results of Knorr Bremse in 2020. This conference call is very special for me, as I am speaking to you for the first time as the new CFO of Knorr Bremsen. Today's call is made up in three parts. First, I'd like to briefly introduce myself, then I will present the financial results for Q2, and later I will give you an update of our guidance for 2020. Thereafter, with my two colleagues in the Executive Board, Dr. Jürgen Wilder and Dr. Peter Leier, we look forward to your questions and comments. So, turning to Chart2. Let me quickly introduce myself. My name is Frank-Marcus Weber. I am 51 years old and I just recently moved to Munich with my wife and my two children. I have a business and financial background and studied business administration at the University of Tübingen. After a stint at an auditing company, For the past 21 years, I have held various management positions at the Daimler AG overall in the finance and controlling area. The most important tasks after several controlling positions at Mercedes-Benz during my time at Daimler were head of corporate development and strategy. I was able to gain valuable experience outside the financial sector, but at the same time, I was able to contribute important financial aspects. Head of transformation and the driving force behind the efficiency program MOVE with a scope of roughly 95 billion costs at the Mercedes-Benz AG. Last but not least, for many years I was CFO of Mitsubishi Fuso Truck and later on of Diamond Truck Asia based in Tokyo, Japan. The experience I gained in these positions supported my entry into Knorr Bremse very well. I also headed the M&A department at Daimler for the last four years. Looking back on my professional career, I have led many different finance departments in a company that has been listed on the stock exchange for decades. It is precisely this experience and knowledge that I would like to bring to Knorr Bremse to help develop the company's strong entrepreneurial culture further. My key responsibilities inside Nordbremse are finance, controlling, IT, legal affairs, investor relations and compliance. My focus will be on fostering and enhancing a culture of high performance, ensuring the continued support by the finance department for the development of Nordbremse as the global market leader for braking and other safety-critical systems. I have completed my first two months at Nordbremse and would like to share my first experiences with you. I was extremely positively impressed by the following. First, I have been able to get already into a high number of exciting projects. I have found a highly committed and very customer-focused team at Snow Wednesday. Second, the new colleagues are characterized by a high-performance culture and a strong cost focus in the two states of the world. Third, at Nordrense, there are many entrepreneurial people who are located close to the customers all over the globe and have a high level of P&L responsibility. I've also found the following topics that I have potential to improve and on which I would like to communicate going forward. Earlier reporting is a standard and is very important to me. I consider the IFRS migration so far as unstructured and will take care of this going forward. The profitable growth of the company was great so far but it has to be secured going forward. This means that we have to develop further on both aspects, growth and profitability at the same time. Our operational excellence needs to be even further enhanced by stringent standardization of processes and organizational alignment. Even more important, we have to improve our conversion rate on the cash side. Cash conversion rate is a very important topic for me. So let me continue with the finances of Nordbremse AG and the highlights of the second quarter 2020 on chart 3. Following a very sound performance at the beginning of the year, Nordbremse was able to give an impressive demonstration of its resilience, particularly in the face of the marked turbulence caused by the COVID-19 pandemic in the past quarter. First and foremost, our financial results have been solid in both our rail and truck divisions. The implemented countermeasures against the impact of COVID-19 paid off and supported our operating leverage. In this respect, our European and American operations benefited greatly from the experience of our Chinese colleagues. Our aftermarket business was also affected by the pandemic, but to a much lesser extent compared to the OE business. Accordingly, the sales mix increased significantly in favor of the aftermath. Overall, we confirm the guidance for 2020 and we feel confident enough to slightly raise the lower bandwidth of the guidance. I will give you more details later on. Chapter 4. Let me continue with the market development in the second quarter of 2020. On the rail side, global markets recovered faster than expected. It is especially important to mention that OEM customers have postponed orders in the OE segment, but we have not received any cancellations. Capacity utilization rates at the train manufacturers' plants are again almost back to pre-crisis levels, and in their latest press releases they have tended to publish rather bullish statements. In addition, numerous governments around the world have initiated stimulus packages to provide financial support to the rail industry while promoting green mobility. On the other hand, our sales development is clearly influenced by the postponement of projects, which will have an impact on the development of RBS in 2020 and 2021. Long term, however, we do not expect any negative sustainable impact on the division sales development. The COVID-19 pandemic has certainly had a greater impact on the sales markets of our truck division. Nevertheless, all relevant markets, e.g. North America, Europe and China, recovered relatively quickly, but at different speeds. In China, new records in truck production figures were already achieved in April and May. In Europe and North America, the recovery is proceeding more slowly, but continuously on an upward path. Overall, however, the last two regions I have just mentioned should face significantly lower volumes compared to last year. It was therefore important and the right decision to introduce adequate efficiency measures in the truck division at a very early stage. I will proceed on page five. A lot of things were positively driven at Northland in the past few months. At the virtual annual general shareholder meeting, end of June, Mr. Thiele, Mr. Enders and Mr. Weimar were elected as new supervisory board members with high approval rates. Thereby, the level of know-how and experience in the supervisory board increased significantly. The rail division won a major order in Egypt for brake systems with a volume in the mid-double-digit million-euro range. A total of around 1,300 passenger cars will be equipped in this populous country until year-end 2022. In addition, during the COVID pandemic, RVS was able to clearly demonstrate its modern and intelligent HVAC systems, which can significantly improve the distribution, filtering, and cleaning of the air in passenger cars. The Truck Division was able to secure the previous scope of delivery with Schmitz Cargo Bull for the future by extending grain contracts with an order volume in the upper double-digit million euro range. Norbenzi will continue to supply Schmitz Cargo Bull with the current dynamic trailer disc brakes in the coming years. The European Megasator wants to make road traffic safer. Therefore, a mandatory turning assistance for buses and trucks is planned for new vehicle types from 2022 and for all new trucks and buses from 2024. With a re-profitable turning assistance pro-feed assist plus, CVS makes an effective contribution for the truck manufacturers to meet these requirements. Let me continue with the financial highlights on chart 6. On July 16th, North Ramsey released preliminary results for the second quarter of 2020. The final results are basically in line with the preliminary figures, even slightly better. Overall, COVID-19 had a major impact on our results in the past quarter, as the pandemic mainly affected Europe and North America, where North Ramsey generated around 60-70% of its sales. Nevertheless, our performance, especially the divisional profitability, was still very solid and showed a high level of resilience. Let me take you through the most important KPIs. Autos received were at 1.1 billion, a decrease of minus 32% compared to the same quarter last year. On the other hand, with 4.4 billion, our order book was only slightly lower compared to the previous year, which is the foundation of our guidance and gives us a good visibility for these challenging times. At 1.4 billion, revenues decreased by minus 23% compared to the second quarter of last year. The development was driven predominantly by CVS. Our operating EBITDA margin consequently decreased, but only from 19.1% to 17.2% in Q2. Given the current adverse economic and market environment, we consider this to be a very solid level of profitability and the proof of our resilient business model. Let me dive deeper into our results in chart 7. Order intake on group level in Q2 declined by minus 33% to 1.14 billion compared to the same period in the previous year. This development was not supported by the FX development or M&A on a net base. Therefore, the organic development was slightly better with a reduction of roughly 30%. Due to the extensive lockdowns in Europe and North America in April and May, Customers of rail and trucks were very reluctant to place orders. With the easing of the curfews in June, incoming orders also improved. Our book-to-bill ratio in Q2 was impacted as well, reaching 0.8 versus 0.9 in the previous year's quarter. The development of the order backlog in the second quarter of 2020 was particularly pleasing Compared to the previous year's figures, the development of the order backlog was only significantly lower. It reached 4.36 billion end of June 2020 and increased significantly beyond Q2, 2 more August. Let me continue with our revenue development on chart shows. In the quarter of April to July 2020, revenue at the food level decreased by minus 23 billion, or in absolute numbers, by minus 418 million to 1.43 billion euro. On an organic level, we saw a decline in the same magnitude. Worth mentioning was the development in the APEC region, which entered the COVID pandemic first, but gaining most of the experience how to handle it. As a result, APEC was able to grow by more than 4% year-over-year. The recent view of North America recorded the greatest impact of the pandemic in the second quarter of 2020. Accordingly, our group revenues fell by a clear double-digit percentage. Let me continue with the development of our profitability of Chart 9. In the second quarter of 2020, Groups operating EBITDA was 245 million after 350.2 million in the previous year. The operating EBITDA margin amounted to 17.2 after 19.1% in the previous year. This decrease mainly resulted from volume effects of the declining OE business with corresponding impact on the operating leverage. This margin impact was mitigated by contributions from the accretive aftermarket business. The aftermarket share increased from 32% in the second quarter 2019 to 38% in the second quarter of 2020. In absolute figures, nevertheless, Aftermarket business was not immune to effects of the pandemic and recorded a decrease of 8% to 549 million euros. This decrease was more driven by CVS. The group's operating EBIT of 174 million also saw a decline of 112 million euros at 12.1%. The EBIT margin was below the previous year's level of 15.5%. 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 Q2 2020 to be a rock-solid proof of SnowBlamper's business model in the currently challenging market environment. Turning to slide 10. While we have initiated a CapEx management program and were spending closely, we realized an increase of CapEx in sales to 4.7% in the second quarter of 2020. Nevertheless, the level of 4.7% is very much in line with our long-term goal to spend 4 to 5% on an annual basis. A substantial amount was invested in supplier tools and future growth options for both divisions. A large part of the increase year-over-year derives from the continuous expansion of the capacity for air-disk breaks in North America to support our market-leading position in this segment. We also made strategic investments in further software development in our global steering business. Networking capital at the end of past quarter showed an increase to almost 1.2 billion euros. This development was mainly driven by measures to ensure the ability to supply our customers. Our corporate policy, customer first, is very important to us and has been a cornerstone of our business success for decades. Accordingly, we have kept a higher level of inventory to support our customers in the difficult times and prevented a potential disruption of their supply chain. As a consequence, we also accepted that working capital will be higher in the short term in order to strengthen our long-term customer relationship. Nevertheless, from CFO's perspective, I would like to clearly emphasize that this flexibility towards our customers is over time limited despite our strong balance sheet and we are working consistently to reduce working capital over time. Annualized operating royalty was impacted by lower profitability and increased working capital, but with 22.2% well above most other companies in the capital sector. On chart 11, I would like to continue with the cash flow KPIs while we're on the bottom line. Our pre-cash flow in the second quarter of 2020 was positive. reaching 48 million euro, after minus of 61 million euro in the very short quarter of this year. The year-on-year decline is predominantly due to lower profitability and at the same time slightly higher capital expenditures and increased working capital. Based on methods we started already, free cash flow will improve accordingly in half year 2 of 2020. As mentioned at the beginning, the cash conversion rate is very important to me. My definition of this KPI is free cash flow before M&A, meaning as reported in relation to the respective net income. The level of slightly above 40% achieved in Q2 2020, which we deliberately accepted to cope with the pandemic, is not a satisfactory level going forward in normal times. In the long term, I expect Nordbremse should be able to achieve a cash conversion rate of roughly 70-80% during a normal growth phase. On chart 12, I would like to give you an update on the impact of COVID-19 on our two divisions. Compared to the quarter 1 2020 presentation, in which we needed a total of 5 charts for explaining this topic, this time we believe only one chart is necessary. This should also be seen as a sign that we know very well how to deal with the pandemic. Nevertheless, we continue to monitor the situation very closely and are prepared to act quickly if necessary. With the exception of India, demand in the global rain market segment has recovered significantly and our customers on the train manufacturing sites have almost returned to pre-crisis levels. although the important customer segment of train operators have not yet reached normal levels again. We see continuous and steady improvements regarding trains in operation and no cancellations of contracts, only postponements so far. What does this mean for our rail division? Our suppliers have also almost returned to pre-crisis levels, which also applies to our own facilities. For example, we have ended short-time work at RBS in Europe. I would now like to move on to the truck situation. The key sales markets have recovered significantly from the lows and are also showing a steady improvement month after month. This assessment has been confirmed even after the summer break. Our customers have kept their commitment. Similar to the rain side, only India is still strongly affected by the pandemic. This has a corresponding impact on our suppliers and our own plants, which are also experiencing improved capacity utilization or base significantly below the prior year levels overall. Let's move on to the divisional review, starting with RBS on site 13. In the second quarter of 2020, all the intake of rail vehicle assistance was at 790,000 of a decrease of 11% in total and 7% on an organic basis. This development can be attributed primarily to the lockdowns at our customers as sales activities were significantly restricted. This led to postponements of meetings and contract awards as well as costs from framework agreements affecting the OE and aftermarket business. In July and August the situation eased considerably again. Next to it, I would like to remind you that developments 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 cyclicity. All regional markets experience postponements and lower demand, which could not be compensated by the development in China. The book-to-bill ratio was developed accordingly to the lower order index, but it was flat compared on an annual basis. It moved from 0.92 in the second quarter of 2019 to 0.93 in the second quarter of 2020. The order book, on the other hand, increased by 7% compared to the same period in the previous year to 3.5 billion euros. which provides good visibility for the rest of the year and shows the confidence of our customers in the long-term trends in the rail industry. We assess the order backlog of our rail division as a very solid and do not expect any order cancellations going forward. Nevertheless, we do see selected shifts of tender biddings. I am now moving on to the revenue and profitability for the rail division chart 14. In the second quarter of 2020, RBS recorded revenues of €849 million, which decreased by minus 10% year after year and only minus 9% on an organic basis. which was affected by the pandemic mainly in the past quarter, contributed about 70% of the year-on-year decline in the division segment. Both the OE and aftermarket business were affected by weeks of closures of customer plans and depots. In the OE segment, only the locomotives and passenger business were growing. In North America, we recorded an overall decline. Lower revenues, predominantly in freight, could not be mitigated by the almost stable development in the service business. APEC, including China, also declined overall. The lockdown had a negative impact on most countries outside China and revenue segments like high-speed locomotives and the aftermarket business. The very positive growth of the Chinese metro business which more than compensated for the development in other customer areas, led to an overall growth in China, but not in the entire A-package. On RBS2's level, noticeably, lockdowns of depots and a significantly lower number of trains on the tracks in the second quarter had a bigger impact than the full effect from the second half of 2020. Overall, this led to a decline in the after-market business in the past quarter, but this was significantly less than the decline in the OE business. The profitability of RBS in the past quarter was certainly the most remarkable KPI of all of KPIs. EBITDA of RBS came in at €204 million in the second quarter and was down only minus 6% compared to last year. The EBITDA margin increased from 20.5% to 24.0%. This margin improvement is based on the following topics. COVID-19 measures had the largest share in supporting profitability in Q2 2020. Please keep in mind that the measures are predominantly of a short-term nature. We have sold the lot-making power tech unit by the end of Q3 2019. A creative after-market share increased in Q2 2020 due to OE postponements and some pull-in effects. Past recovery in China supported operating leverage in the country. Many of these positive topics rose specifically in the second quarter of 2020 and will only have a limited impact in the second half of the year. Accordingly, we expect a positive overall development of RBS profitability until year-end, but at a more normalized level. Let me finish the rail path with an overview of current market announcements on slide 15. The rail market is currently still showing a certain degree of volatility. Accordingly, it is still too early to give a longer-term outlook. However, there are some indicators in the market that should support a general positive development longer term. In contrast to the financial crisis in 2009, the rail market is now benefiting from supportive programs around the world, which are being launched by many governments to contain the pandemic. Many of these measures pursue of reducing CO2 emissions, which can be summarized very well under the term green mobility. The rail industry in particular can make a valuable contribution in this respect, as it has by far the lowest CO2 emissions per week per passenger and kilometer driven compared to air and road traffic. On the right side of the chart 15, I have summarized some examples of this. RVS will clearly benefit from the implementation of these measures, but due to the long lead times between the definition of tender details and the delivery of our product, we do not expect a significant impact on sales in the next 18 months, but generally the program will be positive for our rail division. On slide 16, I'd like to continue with the development of our truck division. The order intake for CVS was €346 million in the second quarter, which is a decrease of minus 57% year over year, more or less in line with the organic developments. This development was expected and reflects most of all the strong negative effects of COVID-19 pandemic in Europe and North America. In addition, the underlying demand in both regions further normalized after a period of strong growth in the last two years. In May and June, we saw the first signs of stabilization in both markets, which has continued to stabilize since then. The increases are rather slow but steady. In APEC, the development of order intake was very well supported by record levels in China, driven not only by recovery demand. The order book of our truck division amounted to 880 million at the end of June 2020, which is a decrease of minus 32% year-over-year. Let's move to slide 17. Our CVS division posted $579 million in revenues for the second quarter 2020. Compared with last year's figure, this is a decrease by minus 34%. Driven by a lower truck production rate in the last quarter due to the pandemic, customer demand was predominantly weak in the European and North American truck markets. Both top lines more than 40% lower compared to the previous year's levels. The APEC region again recorded revenue growth in the second quarter of 2020 year over year, well supported by China. Our Truck Division recorded aftermarket sales of €168 million in the second quarter of 2020, a decrease of only 13%. At the same time, the share of sales improved from 22% in the previous year to 29%. In the second quarter of 2020, CVS achieved and operating EBITDA of €51,000,000, which is significantly lower compared to the same period of the previous year. The operating EBITDA margin amounted to 8.7% compared to 15.9% a year ago. Considering the 34% drop in sales, this is certainly a good indication of the resilience of the Truck Division. On Shard 18, I have summarized our expectations regarding further market developments in the most important truck market. These expectations are also the basis for our outlook up to the end of the year. The key message here is that the revenue development of CVS in every major region strongly outperforms the respective truck production rate year over year in the second quarter. A repeat of the outperformance as in the first quarter of 2020. This clearly shows our market strength as well as the support from growing content per vehicle and the solid development of the aftermarket business. In the coming quarters, we expect a positive trend in truck production rates in Europe and North America, compared with the low levels in the second quarter of the year. In China, which accounted for roughly one-fourth of CV sales in the past quarter, compared with around 10% in the previous year, we expect the truck production rate to continue at a good level. Let's move on to chart 19. Northampton closed the acquisition of RH Shepherd & Co. on June 3rd of 2020. The purchase price amounted to US$150 million. Shepard is one of the two leading manufacturers of steering systems for commercial vehicles in the North American market. With this acquisition, we took the step in becoming a global supplier of commercial vehicle steering systems by further strengthening our position as a global supplier of integrated steering and braking systems systems as a basis for driver assistance and highly automated driving systems, following the acquisition of Hitachi's steering business in early 2019. In 2020, we expect a revenue contribution of more than $50 million by Shepard and a target margin of EBITDA break-even. driven by the COVID-19 pandemic and the fact that the KB way of efficiency is not implemented yet. Dear analysts and investors, with all that being said, we are convinced that Nordremse has proven to be very resilient during this very extraordinary year so far. As market leader with presence in more than 30 countries and high market shares in both divisions, we feel well positioned to shape future trends and continue to set standards. We continuously focus on the extension of our product and service portfolio in order to drive the business. Based on our standards, we are always working on implementing innovative solutions that deliver clear customer benefits and meet industry-wide standards for safety, efficiency, and reliability at best quality. To continue these strengthen our position and to address the industry trends in our two main markets, we invest an above average percentage of our revenues, around 5-6% in innovation. In our rail division, we are developing solutions that follow the need for increasing the number of trains and existing rail infrastructure, especially against the background of sustainable mobility. We are clearly focusing on the mega-trends, urbanization, sustainability, digitalization, and green mobility. In the CVS division, we focus our R&D efforts on future trends such as traffic safety, emission reduction, and e-mobility, as well as automatic driving. Operationally and technology, both for RBS and CVS, we face the future with broad checks. For RVS, we believe that we can benefit from future stimulus programs, predominantly in Europe, which will drive green mobility and long-term or strong after-market business, too. For CVS, we see great potential in the area of driver assistance systems. We expect that content per vehicle will grow, will continuously grow globally. Our truck division with its innovative products is well positioned to support the truck OEM in meeting future regulatory requirements. As a result, since the IPO, Northland has clearly created value and it is our goal and duty to continue to do so. Let's move on to chart 21 by concluding slides and potentially the most interesting one for many listeners. Overall, small bremses performed strongly in the very turbulent first half of the year. Our rapidly implemented countermeasures were very well able to cushion the market downturn in both divisions. In the second half of 2020, we expect that the positive market trend will generally continue, albeit to a moderate extent. For the Chinese truck market, we expect a normalization in half year two after a very strong quarter two 2020. In Europe and in North American region, we see the market recovery ongoing, but still well below last year's level. The rail OE market is almost back at key 19 COVID levels, which should continue in the second half of 2020. Please keep in mind that there were some cooling effects in the rail aftermarket business in the first half of 2020 and therefore we could see slightly lower aftermarket sales in the second half of 2020. We also expect the positive OE aftermarket mix to change slightly with a corresponding impact on the development of revenues and profitability of the rail division in the second half of 2020. We published a new outlook for 2020 together with the preliminary figures as the half year 2020 in July. Bearing further lockdowns due to the COVID-19 pandemic and the resulting negative impact on the business up to the end of the year, we now expect revenues of €5.9 billion to €6.2 billion and an operating EBITDA margin of 16.5% to 17.5% in the full year of 2020. As you can see, we have slightly raised the lower bandwidth of both KPIs as the market environment and our expectations have continued to improve slightly since July. Last but not least, in these challenging times, we continue to focus, apart from cash flow and costs, on the people around us. The health, safety and well-being of our colleagues and our business partners remain our first priority. And I would like to acknowledge all of them for their dedicated efforts in this unprecedented quarter. With this, I would like to thank you very much for your attention. Now, Mr. Leier, Mr. Wilder and myself are looking forward to your questions.

Dear ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speaker, please dial 01 on the telephone secret now turned into the queue. Once the name has been announced, you can ask the question. If you find your questions unanswered before the turn to speak, you can dial 020 to cancel your question. If you are using speaker equipment today, please lift that before making your connection. One moment, please, for the first question. And the first question we received is from Philippe Lorrain of Barenburg. Your line is now open, sir. Please go ahead.