Knorr-Bremse AG

My name is Andreas Spitzauer and I'm Head of Investor Relations of Knorr Bremse. I want to welcome you to Knorr Bremse's webcast and conference call for the full year preliminary results for 2020. The webcast as well as the conference call will be recorded and are later available on our homepage www.knorr-bremse.com in the Investor Relations section. Here you can find today's presentation and later a transcript of the call. It is now my pleasure to hand over to Dr. Jan Michael Mosig, our CEO, and Frank Markus Weber, our CFO. Please go ahead, Dr. Mosig.

Thank you, Andreas. Before I start with the formal presentation today, I would first like to talk about a tragic incident that happened last week. With the deepest sadness, we had to inform you that Mr. Heinz Hermann Thiele passed away unexpectedly at the age of 79, surrounded by his family last week. He was one of the greatest industrial leaders in Germany, dedicating his entire life to the service of our company with tireless personal commitment. He always set high standards for himself as well as for his employees. As a far-sighted entrepreneur, Hans-Hermann Thiele had already placed the management of the company in the hands of external managers almost 15 years ago. A further step towards securing the future of Knorr Bremse was the IPO in 2018. Mr. Thiele always combined entrepreneurial and personal success with social responsibility. We will continue Knorr Bremse AG's successful growth path in the spirit of Mr. Thiele. Our deepest sympathy and sincere condolences go to his family. Dear ladies and gentlemen, let me continue now with the presentation. My name is Jan Rosig and I warmly welcome you. to our conference call for our preliminary results of 2020. I highly appreciate you joining us today and hope that you and your families remain healthy and safe. This conference call is special for me as I'm speaking to you for the first time as the new CEO of Knorr Bremse. Today's call is made up of three parts. First, I'd like to introduce myself and want to present the highlights of last year. Then my colleague, CFO Frank-Marcus Weber, will present the details of last year's financial results, including the guidance for 2021. And finally, I would like to share with you my first impressions of Knorr Bremse and the top priorities of the executive team. Afterwards, we look forward to your questions and comments. Before I start with the highlights of 2020, I would like to say a few words about our employees at Knorr Bremse. The whole executive board is very proud of the strong engagement, motivation and execution by the team in the past challenging year. Everyone remains very focused and is highly committed to serve our customers and Knorr Bremse as a company. We think that this is outstanding and worth mentioning. However, health and safety of our colleagues, our customers and business partners has been and will be our number one priority at Knorr Bremse and our guiding principle. So now, let me introduce myself. I've been CEO of Knorr Bremse AG since January 1st, 2021. I'm 56 years old and I've recently moved to Munich with my wife and our two children. I studied electrical engineering at RWTH Aachen and also got my PhD in the subject of electrical engineering. On top, I studied business administration to complete my university education. For more than 20 years, I've held various management positions at Siemens. Most recently, I was chief operating officer in the digital industries division which employs 76,000 people, generating an annual turnover of around 16 billion euros. When I look back on my professional career, I can say that it was often characterized by managing complex international businesses with a focus on digitalization. In the past, I've had a lot of contact already with customers of Knorr Bremse. Electrification of rail networks, software management of energy networks for rail operators, automation of production lines for automotive and truck manufacturers, and digitalization of product lifecycle management. These are valuable experiences that I now bring to Knorr Bremse. Out of my perspective, Knorr Bremse is a very exceptional, innovative, and global company with a consistently successful track record. and an amazing technology portfolio well positioned for the global megatrends. The whole management team has been a great support in helping me during my onboarding at Knorr Bremse so far. As CEO and Chairman of the Executive Board, I'm looking forward to represent Knorr Bremse towards our stakeholders, customers, employees, investors, press, and the public in general. My key responsibilities inside Knorr Bremse are strategy, HR, IT, audit, communications, digitalization, as well as marketing. I have completed eight weeks at Knorr Bremse today and have been able to get a very good introduction into numerous exciting projects. I have found highly committed and very technology-oriented teams in various centers of competence, where we manage our different technologies at Knorr Bremse. Let me start with a group's full year highlights of 2020 on chart 4. Allow me to walk you through the most interesting events and activities at group level. Corporate governance is a very important topic at Knorr Bremse. Last year, we were able to make further improvements in this area and, for example, were able to gain some strong additions to our supervisory board. Dr. Weimar, CEO of Deutsche Börse, is one of the most reputable advocates of the capital market in Germany. He will support us in our cultural development as a listed company. As CEO of Airbus, Tom Enders, led one of the world's most global companies, and he brings extensive industrial experience to the table. Business expansion last year. In order to benefit from the global megatrends in mobility and autonomous driving, we have expanded our truck business by the acquisition of RH Shepard in the United States last June. This was the next step in becoming a global supplier of commercial vehicle steering systems. In addition, we have paved the way to become a global system supplier of integrated steering and braking systems at the same time. This will be the basis for further driver assistance and highly automated driving systems following the acquisition of the Hitachi steering business in early 2019. Let me continue with Charge 5 and the highlights of our rail division in 2020. RVS won major international contracts in this year. Siemens, for example, awarded us a large contract for entrance systems of 94 underground trains in London. In April 2020, at the peak of the first pandemic wave, we received an order from the Russian train manufacturer Transnationale Link in Egypt for brake systems with a volume in the mid-double-digit million-euro range. Until year-end 2022, we will equip a total of around 1,300 passenger cars in this populous country. Knobremse also announced in April 2020 to supply Siemens Mobility with braking, entrance and A-track systems, windscreen wipers and power electrics for 13 high-speed trains in Russia. The Velaro Russia trains require very high-quality components due to difficult weather conditions, which we are able to deliver. Together with the Israeli startup Railvision, we will equip multiple shunting locomotives with a remote-controlled maneuvering system for obstacle detection. After successfully completing the prototype tests at the end of the first quarter of 2021, we are examining further business opportunities for integrating the systems into rail freight vehicles. This is a good example of the high focus of Knorr Bremse in terms of innovation. As we have almost completed quarter one 2021, let me say a few words about recent order wins. In January 2021, our rail division announced that it will equip 23 high-speed ECX trains of Talgo with brakes, door and HVAC systems which will be operated by Deutsche Bahn. Additionally, as announced today, Knau Bremse was able to secure a major order to equip more than 600 new subway cars for the Berliner Verkehrsbetriebe, BWG, in collaboration with Stadler Rail. We will deliver again brakes, door and HVAC systems. In addition, our rail division will be responsible for spare parts supply and digital maintenance services for more than 32 years. Let me proceed to chart 6 with the highlights of our commercial vehicle division in 2020. In November 2020, Knorr Bremse and Schmitz Cargobull signed a multi-year supply agreement for trailer brake and chassis control solutions. This underlines our long-standing partnership in terms of future technologies as the order covers the next generation trailer EDS and new universal trailer HMI. In order to meet the strong demand in China, the Truck Division expanded manufacturing capacities in China. We are market leader there, and by building a new plant, we continue the strategic cooperation on automated manual transmission, advanced driver assistance, and highly automated driving with Dongfang. With a new retrofitable turning assistance introduced, Knorr Bremse aims to increase safety for all road users and reduce situations with a high risk of accidents. ProFleet Assist Plus combines proven technology from Mobileye with Knorr Bremses know-how in the development of safety-critical products for major OEM and aftermarket customers. I would also like to mention the expansion of our compressor product portfolio with regard to e-mobility. This vane compressor technology, called Rotary Vane, is scalable to variable e-truck air requirements. As a young listed company on the capital market, it is particularly important for Knorr Bremse to continuously increase the confidence of our shareholders. Accordingly, it is important to keep promises. At the IPO, we highlighted two important cornerstones of our equity story or why investors should have confidence in our business model. Growing faster than the respective markets and high resilience of profitability. We were able to prove both topics last year. Knob Ramsey gained market share during crisis and reached a strong EVSDA margin of 18%. Last year, effective countermeasures were implemented to fight the COVID-19 pandemic and these measures have fulfilled the expected goals, namely to safeguard the margins and the business development in both divisions. The high focus on cash and cash conversion rate has paid off as well. We achieved a free cash flow of €729 million and a cash conversion rate of 137%. On chart 8, I would like to give you an update on the impact of COVID-19 on both divisions. Knorr Bremse is very closely monitoring the situation and is prepared to act quickly if necessary. Let me briefly summarize the situation. In the rail sector, our suppliers have completely recovered from the crisis and we are not experiencing any shortage of components today. All plants of RVS are experiencing good capacity utilization and they are performing well. Rail operators are currently running fewer trains on the tracks, which is having a negative impact on our service and spare parts business. But please let me emphasize on a few positive aspects that should not be forgotten here. Some rail operators report a train load factor of only 20%, but the number of trains on the tracks is still high, approximately 80% as the availability of mobility is an essential task of governments and cities. Trains that run on tracks or return to service after breaks must meet all regulatory obligations. Therefore, trains must be maintained regularly. Countries that have lower numbers of people newly infected with COVID again see a significant improvement in train utilizations. Furthermore, we have signed an interesting framework agreement with Deutsche Bahn that addresses the opportunities related to condition-based maintenance and the use of data in the field of aftermarket. Last but not least, there are no cancellations of contracts, but postponements and shifts of tenders are ongoing. This is a clear signal for us that future demand of rail mobility is unchanged. but still volatile at this moment. On the truck side, the market shows encouraging signs. Truck mileage has recovered and truck demand is developing very strongly. In our own facilities, the COVID-19 related impacts are under control and all plants of CVS are reporting quite good capacity utilization. The issue in the truck segment is rather on the supply side. We are currently concerned about the noticeable shortage of semiconductor products and tighter supply of other components, which is having a negative impact on truck manufacturers' production. At this point in time, we assume that these shortages will not lead to reversal of the positive momentum in the industry, but growth rates should be definitely lower. Let me continue with an overview of the market's development on chart 9. Overall, we see ongoing good market recovery, both in the rail, but even more so in the truck industry. Major rail markets in Europe and APEC have further recovered, even though pre-COVID-19 levels in some sub-segments have not yet been reached again. We have not faced any cancellations of projects, but many projects are still subject to shifts and postponements. This ongoing trend will also have an impact, for example, on order intake in the individual quarters in 2021, especially in quarter one. Frank will go into more details later. The North American freight and transit markets are still heavily impacted and projects are still subject to delays. Please keep in mind that RVS' top line depends only 10% on the North American market. So, what do we expect until year-end for our rail division? Market development in the OE segment should be generally positive and in the AM segment stable, depending on the development of the COVID-19 pandemic. Our positive assessment regarding the OE business is also reflected by our customers, the rail OEMs, which expect growing order intakes in the coming months. Overall, we expect the OE business of RVS to increase more strongly than the AM business in 2021. The key sales markets of our truck division in Europe and North America have recovered significantly. from the lows and are still showing continuous improvements. The Chinese truck market remains a class of its own with a very strong market development supported by good underlying demand and pulling effects from 2021 into 2020. In 2021, this will lead to a pullback in market demand, especially driven by the introduction of the new emission standard CN6 in the second half and safety standards like electronic brake systems for trucks loading dangerous goods. Japan and India further recover on a good level. The main drivers for the aftermarket business will be the development of mileage of trucks and the inventory situation of workshops. The development of the global truck production rate until year end 2021 will depend heavily on how the shortage on the supply side will develop. In general, however, we expect a positive trend, especially in Europe and North America. Furthermore, the ongoing COVID-19 pandemic continues to create uncertainty and can still lead to additional restrictions that could impact us, our business partners and our customers. Innovation is the major cornerstone for every company to successfully manage the future. On chart 10, I put together some examples for innovative products and systems at KV. Overall, we kept our spending on research and development at a constant level in absolute terms in 2020, investing around 400 million euros. In 2020, we've focused, for example, on the following R&D activities. In the rail business, our innovative EP2002 3.0 brake control system enables precise braking and is a basic prerequisite for smooth train operation. Our HVAC systems support passenger safety on trains through intelligent air distribution as well as filter and purification systems. Here we use, for example, high intensity UV radiation in the air flow to kill viruses and bacteria. In our truck business, the latest generation of global scalable brake control, GSBC, is the successor to our well-known AVS and EVS solutions. To prepare our truck division for the coming generations of e-vehicles, we have launched the group's internal e-cubator as an agile think tank. With this, I would like to hand over to my colleague Frank Rieber.

Thank you, Jan, and a warm welcome from my side as well. Thank you for joining us today. I would like to echo Jan's thoughts and especially express my deepest condolences to the family of Heinz Hermann Thiele. Let us get into the numbers now. First with a look at the overall full year performance before we later look deeper into quarter four of 2020. But before I start doing so, let me express my utmost appreciation to all the great colleagues at Knorr Bremse around the world who worked with their full dedication in order to master such an extraordinary year for Knorr Bremse as well. They are all the foundation of what we can see here in terms of facts and figures. Considering the economic environment being strongly impacted by the pandemic around the world last year, Knorr Bremse's overall performance and resilience has been extraordinary. The numbers confirm the high performance culture and the special robustness of our business model. Nevertheless, KB was not truly immune to the negative impact caused by the pandemic. even though to a significantly lesser extent than compared with other companies in the industrial sector. Order intake was down by almost 9% to 6.4 billion euros. The order book on the other side grew once again by 6% to record heights of almost 5 billion euros, a very solid basis for the current fiscal year. Despite the 11% decline in revenue in 2020, we achieved an EBITDA margin of 18%. Significant cash preservation measures led to a strong free cash flow of €729 million and a cash conversion rate of 137%, which is of course not sustainable but a very welcomed contribution within the crisis. Let us proceed on chart 12 and have a look at the guidance 2020. Despite the challenging environment driven by the pandemic, we kept our promises and achieved our revenue and profitability guidance for 2020. Last year, we were one of the first companies to come out with a quantitative guidance again in summer. With better visibility around COVID-19 impacts in July, we did provide a guidance for top line and EBITDA margin. In September, together with the quarter two results, we were able to narrow down the guideline ranges and could confirm reaching the upper end in November at our quarter three results calls. With revenues of 6.16 billion Euro, we have reached the upper end. Due to our quick reaction and implementation of countermeasures at the start of the pandemic, we were able to safeguard our margins at a high level. We over-fulfilled the margin guidance of 16.5 to 17.5%, with a group margin of 18% in 2020. Other KPIs are also in line or slightly above market expectations, such as group order backlog of 4.98 billion euro, EBIT margin at 13.2%, net income of around 532 million euro, and earnings per share stand at €3.07. Let me give you a short overview about the development of Knorr Bremses balance sheet KPIs on a full year basis before diving into the details of the fourth quarter results. Considering the uncertain economic environment last year, It was very important for Knorr Bremse to maintain a high level of stability and flexibility in terms of our liquidity position. We were able to increase the liquidity by almost 25% to overall 2.3 billion euro. In this respect, Knorr Bremse also launched a 3 billion euro debt issuance program in order to increase the financial flexibility quickly if needed. At the beginning of the pandemic, we drew credit lines of €750 million in April 2020. Due to the good development of our cash flow during the year 2020, we were able to pay back €250 million of the credit line already last October, and in addition, €150 million just last month. Next month, we will be repaying the remaining €350 million. In all our efforts, we try to maintain a healthy level of equity, which stands at 1.92 billion euro and represents a relatively stable equity ratio of 26%. Despite the drawn credit lines I have just mentioned, which were extending the balance sheet. The strong resilience of our balance sheet and the good development of our business activities are also confirmed by the rating agencies. Moody's, for example, rates us at A2 and Standard & Poor's at A. Both just recently confirmed their ratings.